In SEC filing, Forest City admits Greenland is already steering some Atlantic Yards decision-making; joint venture may have to use recourse financing
- Greenland is already steering some decision-making during this interim period
- Greenland and Forest City may have to buy each other out
- The joint venture may have to use recourse financing, which puts the assets of the project sponsor at risk
- B2's delays are coupled with increased costs
The document also notes:
There is also the potential for increased costs and further delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) the unavailability of additional needed financing, (iv) our or our partners’ inability or failure to meet required equity contributions, (v) increasing rates for financing, (vi) our inability to meet certain agreed upon deadlines for the development of the project, (vii) other potential litigation seeking to enjoin or prevent the project or litigation for which there may not be insurance coverage and (viii) our or our partners' inability to fulfill contractual obligations. In addition, as applicable contractual and other deadlines and decision points approach, we could have less time and flexibility to plan and implement our responses to these or other risks to the extent that any of them may actually arise.
On December 16, 2013, we entered into an agreement with Greenland Group Co. (“Greenland”), a Chinese state-owned enterprise, to create a joint venture whereby Greenland would acquire a 70% interest in the Brooklyn Atlantic Yards project (excluding the Barclays Center and B2 BKLYN, a modular apartment community currently under construction). The joint venture is subject to meeting various conditions, which include obtaining the approvals by governmental agencies in China as well as the Committee on Foreign Investment in the United States (“CFIUS”). There is no assurance that all conditions for effectuating the joint venture will be met, including obtaining such governmental approvals. We have the right to terminate the agreements by April 15, 2014 and attempt to find another partner, if certain conditions are not met, including obtaining the CFIUS approval. In addition, if all approvals are not obtained by June 16, 2014, both parties have the right to terminate. In the event the joint venture is terminated, we may be unable to find another partner for the Brooklyn Atlantic Yardsproject. Greenland also has approval rights over a certain number of decisions made during such interim period which may delay or jeopardize the development. Greenland also has the right to have up to five individuals in our offices to share in the decision making during such interim period.(Emphases added)
If and when the joint venture becomes effective, the Brooklyn Atlantic Yards project will be managed by a board composed of three representatives from Greenland and two representatives from the Company. While decisions would require a majority vote, many decisions labeled “Special Major Decisions” would require a vote by us for approval. There is the risk that many of the decisions made by the joint venture would not be in our best interests and, further, that an inability to agree on certain of the Special Major Decisions would trigger buy-sell rights and obligations between us and Greenland. The exercise of the buy-sell rights could result in our having to fund the purchase of Greenland’s interest in the entire joint venture, or in one or more individual parcels. It could also result in having our interests be purchased and the loss of ownership of the Brooklyn Atlantic Yards project or of one or more parcels thereof.In other words, if Forest City and Greenland disagree, they may have to buy each other out.
The document states:
Greenland also required that the joint venture have the ability to obtain recourse financing to the extent nonrecourse financing was not available at a commercially reasonable rate or only available at an interest rate which equals or exceeds 200 basis points more than available recourse financing. However, no more than $300 million of recourse financing could be outstanding at any time project-wide, including parcels under development. Such recourse financing would be available based on a loan guarantee provided solely by Greenland and Greenland would receive compensation from the joint venture for lending its credit for such recourse financing in the amount of the interest rate savings up to 300 basis points. However, to the extent a recourse loan becomes due and cannot be refinanced, we will be obligated to pay Greenland for our share of the loan on a capital call or, if we elect to have Greenland advance our share, within one year of such advance and out of available cash flow from the project.
The recent annual report also acknowledges delays in the B2 tower:
High rise modular construction has not previously been done at the heights of B2 BKLYN. As a result, the project has encountered, and may continue to encounter, delays and increased costs in the fabrication and assembly of the modular units. If the project continues to experience such delays, we may fail to satisfy completion deadlines set forth under the lending arrangements for the project and the lenders may not be willing to extend such deadlines. Failure to meet the completion deadlines could result in a default under such lending arrangements with a resulting acceleration of the debt and foreclosure of the project, as well as reputational damage.Last September, Forest City Ratner executive Jane Marshall acknowledged that the first modular residential tower, B2, was delayed six months until the end of 2014, as indicated in SEC filings, but suggested there were "all good reasons" for the delay, saying "we identified ways of making the modular factory work better, by purchasing different equipment."