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Document reveals Greenland, Chinese investor, will control Atlantic Yards; Forest City Ratner said otherwise or left ambiguity

Despite a clear statement when the sale of the remaining Atlantic Yards project--15 towers--was proposed in August that developer Forest City Ratner would be "managing member" of a potential joint venture, newly revealed documents show that the new investor, the Chinese government-owned Greenland Group, will be in charge and may ultimately buy out Forest City's remaining 30% stake.

The internal memo by an official at Empire State Development, the state agency that oversees/shepherds Atlantic Yards was revealed in a press release yesterday by BrooklynSpeaks, headlined Greenland Holdings Group to Control Build Out of Affordable Housing at Atlantic Yards. According to the memo, Greenland’s approval would be required prior to the start of any new building at the Atlantic Yards site.

Though Forest City Ratner and parent Forest City Enterprises would have veto power since the assent of one of its appointees would be required for major decisions, that situation could change if the ownership percentages change, according to the memo.

(The memo was provided to BrooklynSpeaks, the coaltion that has pushed for changes in Atlantic Yards, by ESDC’s attorneys in response to an inquiry about the Greenland transaction.)

Speed, or uncertainty?

According to the press release:
The revelation that Greenland Holdings, a developer owned by the government of China, will control the joint venture responsible for completing Atlantic Yards contradicts previous statements made by FCRC executives. In August, FCRC CEO MaryAnne Gilmartin told the New York Times in an article announcing a prospective sale, “We’ll retain our position as the managing member."
But that's not going to happen with Greenland, the largest real estate enterprise in China, with more than $35 billion in revenues.

Expect Forest City and the state to argue, as the memo suggests, that the new investment will accelerate development of the 15 towers, which contain the bulk of the 6430 units and 2250 subsidized "affordable" apartments. (The Barclays Center and the first tower, B2, which will have 363 units--181 of them subsidized--are not part of the deal.)

But the uncertainty involved in the deal, which does not promise to change the 25-year deadline Forest City was able to renegotiate in 2009, prompted criticism from BrooklynSpeaks.

“It’s outrageous that a project receiving hundreds of millions of taxpayer dollars in exchange for badly-needed affordable housing for working people from Brooklyn could soon be controlled by a foreign government. ESDC has repeatedly abdicated its responsibility to the people of the State of New York with the Atlantic Yards project and is poised to do so again.” said Michelle de la Uz, Executive Director of The Fifth Avenue Committee.

This is more fodder for BrooklynSpeaks's ongoing call for a revision of the project deadline and new oversight. “It’s clear we can’t rely on more promises. The ESDC has an obligation to get ironclad guarantees that Atlantic Yards provides the affordable housing and other public benefits that FCRC promised and originally committed to before the ESDC and MTA approve this deal,” said Jo Anne Simon, Democratic District Leader for Brooklyn’s 52nd A.D. “And the people of New York State need real oversight to hold this project accountable until those benefits are delivered.”

Note that some project neighbors stress that the oversight must focus well beyond the delivery of benefits to offer more scrutiny of project impacts.

Strategic ambiguity

Despite Gilmartin's statement in August, Forest City was subsequently more ambiguous about who would control the project going forward.

When the potential deal involving Greenland was announced in October, the Wall Street Journal reported that Forest City would "continue to manage the development." But the word "manage" is ambiguous--it could mean manage operations or manage decision making.

Forest City's press release at the time suggested "manage" meant operations, while leaving management of the joint venture unclear: "Under the proposed joint venture, Greenland Group would acquire 70 percent of the project, co-develop the project with FCRC, and share in the entire project costs going forward at the same percentage interest. FCRC would manage the day-to-day activities on behalf of the joint venture, which would develop the project consistent with the approved master plan."

The potential for change became clear, as I wrote 11/3/13, when Crain's New York Business quoted Kit Kwok, an attorney for Greenland, who said, "Atlantic Yards is going to be a joint effort; Greenland is not going to be a purely financial partner of Forest City."

According to a December 2013 Forest City Enterprises Investor Presentation, Forest City would manage the day-to-day activities on behalf of the joint venture, but there was no clarity about who would steer the joint venture.

However, the 12/9/13 Form 10-Q filed with the Securities and Exchange Commission allowed for the possibility that Forest City would either share control or lose control.

Either of those cases, Forest City said, would require deconsolidation of and allocation of site acquisition costs--which has since meant an "impairment" of some $250 million. Forest City, which has invested more than $500 million, is expecting to get a $200 million payment from Greenland, which seemingly got a bargain for its pro rata share. Greenland will then control 70% of the project going forward and will invest at that percentage.

The ESDC memo: how joint venture will work

According to the 12/13/13 memo to the "Atlantic Yards file" by ESDC VP of Planning and Environmental Review Rachel Shatz, the Development Agreement signed in 2009 allows FCR to transfer its interest to another party. That sale would also transfer obligations in the Memorandum of Environmental Commitments.

A five-person board of directors would be established, with Greenland appointing the Chairman, CEO, and CFO, and Forest City Enterprises appointing Vice Chairman and President. Decisions of particular importance, including starting a new building, require a majority vote, including a vote from one appointee from both, which "in effect requires that both Greenland and FCRC agree to such decisions," according to Shatz.

Day to day operations would be the responsibility of a Management Team and a Development Team. The Management Team would consist of seven FCR executives, plus up to five additional people appointed by Greenland. The Development Team would consist of at least 14 current FCR executives, plus other members that may be appointed by Greenland. There may be overlap among the two teams.

The agreement does provide for a possible buy-out in the event of a deadlock among the members of the Board of Managers and it also provides for a dilution of a member's interest if it fails to meet certain obligations. "Accordingly, it cannot be assumed that the 30%-70% divisions of interests described above is a permanent arrangement," Shatz wrote.

The ESDC memo: MTA issues

Given pending work on the Vanderbilt Yard, where Long Island Rail Road trains are stored and services, Forest City Ratner has also asked the MTA to consent to joint venture, according to the memo.

FCR, which has built a temporary railyard after moving the railyard functions east from the site--in part--of the Barclays Center, has until 90 days past 9/1/16 to finish the permanent railyard. The original completion guarantee was to be posted by 6/30/12, but, after two extensions, is now 6/30/14.

The MTA requires a completion guarantee from Greenland, as well, and should Greenland buy out FCR, they must retain FCR as manager or another real estate company with at least 10 years of experience.

The ESDC memo: state approvals and SEIS?

FCR has told ESD it believes it can do the transfer without the agency's consent, but ESD is reviewing that, according to Shatz's memo.

That said, the rhetorical support offered by ESD suggests that there would be no opposition even if approval were required.

ESD has determined that a Supplementary Environmental Impact Statement (SEIS) in response to the Greenland deal, is neither required nor warranted in this case, since this will bring an infusion of capital and therefore facilitate construction according to the agreements already in place, according to Shatz.

The proposed sale, according to Shatz, "will do nothing to hamstring ESD's ongoing environmental review," which was ordered by a state judge to study the potential impacts of a 25-year buildout.

Then again, it could be argued, that the sale has already delayed that review, which has already taken about as much time as did the original 2006 environmental review--a far more extensive effort, though in that case with pressure to move quickly, while now there's reason to believe ESD has delayed or slowed the review so Forest City could market the project.

The issue of foreign control

As I wrote 10/11/13, as with the sale of the Brooklyn Nets to Russian oligarch Mikhail Prokhorov, the bottom line is: after Forest City did the heavy lifting to get subsidies, tax breaks, and regulatory approval, gaining what they call in the real estate development business "entitlement," Atlantic Yards became a pure investment opportunity, and global capital knows no boundaries, neither ethical nor geographic.

And that means public assistance from New Yorkers will help the Chinese government earn profits.