Skip to main content

Prokhorov filled arena financing gap not by buying bonds but offering a loan; he could end up owning 80% of arena operating company

Well, Russian billionaire Mikhail Prokhorov, who as of yesterday owns 80% of the Nets, also filled the financing gap for arena construction, thus leading ratings agency Standard & Poor's (S&P) to affirm its investment grade (BBB-) rating on $511 million in tax-free bonds and removing them from the potential downgrade announced in March.

Prokhorov offered a $75.8 million loan rather than, as reported, buying $106 million in taxable bonds.

And Prokhorov--who put down $200 million for 80% of the Nets and 45% of the arena, and agreed to fund some $220 million in losses and debt--apparently drove a hard bargain with Forest City Ratner and Forest City Enterprises.

With relatively little additional cash, Prokhorov, according to a report issued yesterday by S&P, could end up owning 80% of Brooklyn Arena LLC (BALLC), the company operating the Barclays Center.

If so--and S&P didn't call it likely--that would mean that the government assistance and eminent domain for the Atlantic Yards arena, the first building in the project, would have benefited most directly Russia's second-richest man.

Had that been announced during the approval process, it surely would have generated much more concern.

The financing scheme

The arena will be nominally owned by the Empire State Development Corporation and leased for a dollar to the Brooklyn Arena Local Development Corporation (BALDC). The lease to the arena operating company requires payments in lieu of taxes (PILOTs) directed not to the public coffers but to pay off construction.

In other words--and this is an issue in dispute--it's a no-risk arena or, at least, the only risk is paying for construction, not rent or taxes.

Winding road to arena financing

The tax-exempt arena bonds only go so far, so more money was needed. Last December, $146.8 million in taxable arena bonds were rated B, or "very speculative," by S&P. After the preliminary rating was withdrawn, a smaller amount of taxable bonds, $106 million, was announced in early February.

In March, S&P issued a report withdrawing its rating for the taxable bonds, citing “uncertainty” about the financing plan.

Yesterday, S&P reported that Prokhorov's $75.8 million loan to the Brooklyn Arena Holding Company (BAHC) "has certain equity like characteristics, the financing structure allows this loan and any accrued interest to be refinanced by debt."

In other words, there likely will be future debt issuance; the report estimates $96.2 million of refinancing debt. S&P reports:
FCRC stated that there is currrently no intent to incur additional indebtedness at BALLC. Should debt rise (excluding the possible refinancing debt), we may lower the rating.
Keep in mind that Forest City Ratner has often said it "intends" or "aims" to do things, but then things change. In May 2008, Bruce Ratner said in a Daily News op-ed that "Our first goal is to break ground on the Barclays Center later this year" and "We anticipate finishing all of Atlantic Yards by 2018."

Land costs are uncertain

S&P notes that BALLC (parent of BAHC) and Atlantic Yards Development Company (AYCD) are parties to the Land Acquisition Funding, Property Management and Relocation Agreement, which means exposure to non-arena costs, including compensation yet to be paid for properties in Phase 1 of the condemnation and properties in Phase 2 that have not been condemned.

Translation: Forest City Ratner and the state will drive a hard bargain for the last major pieces of property needed for Phase 1, a large building and adjacent lots owned by Henry Weinstein at the southeast corner of Pacific Street and Carlton Avenue.

Prokhorov can gain

According to S&P, in "the absence of AYDC's obligation to fund any shortfalls (in excess of the letter of credit posted to secure such obligations)," Nets Sports and Entertainment, controlled by an investor group led by Bruce Ratner, could see its 55% equity position in BALLC diluted.

Then what? Prokhorov's company, Onexim Sports and Entertainment (OSE) can fund shortfalls in exchange for equity. That could lead to a downgrade in the ratings for the tax-exempt bonds.

States S&P:
If the $75.8 million loan were to be converted to equity and OSE to cover a shortfall of about $38 million of mandatory costs, OSE could end up with 80% of the equity. Based on our analysis, the likely risk of OSE paying more than $38 million is commensurate with the rating level.
That sounds like a pretty good deal--keep in mind that Prokhorov in March lost a $53 million deposit on what is reportedly the world's most expensive home.

So there's some risk--remember, the rating level is the lowest investment grade--that Prokhorov would pay more than $38 million.

What are the chances of Prokhorov taking over? "Based on our analysis of the documents, the greatest risk of equity dilution is likely during the construction period," S&P states.

S&P doesn't clearly estimate this risk. It does say, however, that Forest City Ratner "is generally a buy and hold developer of core assets" and thus "will likely remain an interested member with blocking rights in BALLC."

That's plausible. But if FCR doesn't come up with enough cash--and can't get government partners to do so--look for the billionaire with deep pockets to come up with a check that, to him, represents little more than chump change.

Comments

Popular posts from this blog

Barclays Center/Levy Restaurants hit with suit charging discrimination on disability, race; supervisors said to use vicious slurs, pursue retaliation

The Daily News has an article today, Barclays Center hit with $5M suit claiming discrimination against disabled, while the New York Post headlined its article Barclays Center sued over taunting disabled employees.

While that's part of the lawsuit, more prominent are claims of racial discrimination and retaliation, with black employees claiming repeated abuse by white supervisors, preferential treatment toward Hispanic colleagues, and retaliation in response to complaints.

Two individual supervisors, for example, are charged with  referring to black employees as “black motherfucker,” “dumb black bitch,” “black monkey,” “piece of shit” and “nigger.”

Two have referred to an employee blind in one eye as “cyclops,” and “the one-eyed guy,” and an employee with a nose disorder as “the nose guy.”

There's been no official response yet though arena spokesman Barry Baum told the Daily News they, but take “allegations of this kind very seriously” and have "a zero tolerance policy for…

Behind the "empty railyards": 40 years of ATURA, Baruch's plan, and the city's diffidence

To supporters of Forest City Ratner's Atlantic Yards project, it's a long-awaited plan for long-overlooked land. "The Atlantic Yards area has been available for any developer in America for over 100 years,” declared Borough President Marty Markowitz at a 5/26/05 City Council hearing.

Charles Gargano, chairman of the Empire State Development Corporation, mused on 11/15/05 to WNYC's Brian Lehrer, “Isn’t it interesting that these railyards have sat for decades and decades and decades, and no one has done a thing about them.” Forest City Ratner spokesman Joe DePlasco, in a 12/19/04 New York Times article ("In a War of Words, One Has the Power to Wound") described the railyards as "an empty scar dividing the community."

But why exactly has the Metropolitan Transportation Authority’s Vanderbilt Yard never been developed? Do public officials have some responsibility?

At a hearing yesterday of the Brooklyn Borough Board Atlantic Yards Committee, Kate Suisma…

No, security guards can't ban photos. Questions remain about visibility of ID/sticker system.

The bi-monthly Atlantic Yards/Pacific Park Community Update meeting June 14, held at 55 Hanson Place, addressed multiple issues, including delays in the project, a new detente with project neighbors,concerns about traffic congestion, upcoming sewer work and demolitions, and an explanation of how high winds caused debris to fly off the under-construction 38 Sixth Avenue building. I'll have more coverage.
Security issues came up several times at the meeting.
Wayne Bailey, a resident who regularly takes photos and videos (that I often use) of construction/operations issues that impact residents, asked representatives of Tishman Construction if the security guard at the sites they're building works for them.
After Tishman Senior VP Eric Reid said yes, Bailey asked why a guard told him not to shoot video of the site, even though he was on a public street.

"I will address it with principals for that security firm," Reid said.
Forest City Ratner executive Ashley Cotton, the …

Barclays Center event June 11 to protest plans to expand Israeli draft; questions about logistics

At right is a photo of a poster spotted in Hasidic Williamsburg right. Clearly there's an event scheduled at the Barclays Center aimed at the Haredi Jewish community (strict Orthodox Jews who reject secular culture), but the lack of English text makes it cryptic.

The website Matzav.com explains, Protest Against Israeli Draft of Bnei Yeshiva Rescheduled for Barclays Center:
A large asifa to protest the drafting of bnei yeshiva in Eretz Yisroel into the Israeli army that had been set to take place this month will instead be held on Sunday, 17 Sivan/June 11, at the Barclays Center in Downtown Brooklyn, NY. So attendees at a big gathering will protest an apparent change of policy that will make it much more difficult for traditional Orthodox Jewish students--both Hasidic (who follow a rebbe) and non-Hasidic (who don't)--to get deferments from the draft. Comments on the Yeshiva World website explain some of the debate.

The logistical questions

What's unclear is how large the ev…

Atlantic Yards/Pacific Park graphic: what's built/what might be coming (post-dated pinned post)

Click on graphic to enlarge. This is post-dated to stay at the top of the blog. It will be updated as announced configurations change and buildings launch. The August 2014 tentative configurations proposed by developer Greenland Forest City Partners will change, and the project is already well behind that tentative timetable.


Not quite the pattern: Greenland selling development sites, not completed condos

Real Estate Weekly, reporting on trends in Chinese investment in New York City, on 11/18/15 quoted Jim Costello, a senior vice president at research firm Real Capital Analytics:
“They’re typically building high-end condos, build it and sell it. Capital return is in a few years. That’s something that is ingrained in the companies that have been coming here because that’s how they’ve grown in the last 35 years. It’s always been a development game for them. So they’re just repeating their business model here,” he said. When I read that last November, I didn't think it necessarily applied to Atlantic Yards/Pacific Park, now 70% owned (outside of the Barclays Center and B2 modular apartment tower), by the Greenland Group, owned significantly by the Shanghai government.
A majority of the buildings will be rentals, some 100% market, some 100% affordable, and several--the last several built--are supposed to be 50% market/50% subsidized. (See tentative timetable below.)

Selling development …

Atlanta's Atlantic Yards moves ahead

First mentioned in April, the Atlantic Yards project in Atlanta is moving ahead--and has the potential to nudge Atlantic Yards in Brooklyn further down in Google searches.

According to a 5/30/17 press release, Hines and Invesco Real Estate Announce T3 West Midtown and Atlantic Yards:
Hines, the international real estate firm, and Invesco Real Estate, a global real estate investment manager, today announced a joint venture on behalf of one of Invesco Real Estate’s institutional clients to develop two progressive office projects in Atlanta totalling 700,000 square feet. T3 West Midtown will be a 200,000-square-foot heavy timber office development and Atlantic Yards will consist of 500,000 square feet of progressive office space in two buildings. Both projects are located on sites within Atlantic Station in the flourishing Midtown submarket.
Hines will work with Hartshorne Plunkard Architecture (HPA) as the design architect for both T3 West Midtown and Atlantic Yards. DLR Group will be t…