Forest City Enterprises on stalled B2 tower: $155 million project cost could increase to $215-$265 million
"At B2 BKLYN at Pacific Park Brooklyn, our immediate goal is to restart that project quickly and in the most cost-effective manner possible, and we are exploring multiple options to do so. We also continue to pursue a variety of legal remedies to resolve ongoing disputes with the construction contractor."The company's 10-Q filing with the Securities and Exchange Commission provided far more detail, including, as noted at bottom, that a building expected to cost $155 million, including construction costs and land, could cost from $215 million or even $265 million once litigation and increased costs were calculated.
During the three months ended September 30, 2014, the Company acquired the remaining noncontrolling interest of Arizona State Retirement System in the under construction B2 BKLYN, an apartment building in Brooklyn, New York. Following the transaction, the Company determined that B2 BKLYN was no longer a VIE [variable interest entity]. The impact of the removal of the entity from VIE status to the parenthetical disclosures on the December 31, 2013 Consolidated Balance Sheet were decreases of $104,408,000 to real estate, net, $1,306,000 to cash and equivalents, $46,801,000 to restricted cash, $3,110,000 to other assets, $56,605,000 to mortgage debt and notes payable, nonrecourse and $7,656,000 to accounts payable, accrued expenses and other liabilities.The document described the detlays and the conflict:
B2 BKLYN is an apartment building under construction in Brooklyn, New York adjacent to the Brooklyn Arena at the Pacific Park Brooklyn project. In 2013, we contributed the land and development opportunity into our $400,000,000 residential development fund with Arizona State Retirement System (“ASRS”) and retained a 25% ownership. We decided to use modular construction to build this 32 story, 363 unit apartment building.It describes a mortgage in default and potential difficulties, but says, as noted in bold, that they expect to recover the costs of delay:
High rise modular construction has not previously been done at the heights of B2 BKLYN. The project has encountered, and may continue to encounter, delays and increased costs in the fabrication and assembly of the modular units. In April 2014, based on internal estimates and the pace of construction, the anticipated completion of this project was determined to be delayed until the fourth quarter of 2015. However, as a result of recent actions taken by Skanska USA (the” Construction Manager”), that date may not be achievable. We had a $117,000,000 fixed price contract with the Construction Manager to construct the apartment building. On August 27, 2014, the Construction Manager ceased construction and on September 23, 2014, terminated the contract. In response, on September 30, 2014, we issued a notice of default and intent to terminate the same contract due to the Construction Manager’s termination of the contract among other defaults, which notice expires on November 7, 2014. Additionally, lawsuits to enforce their respective rights under the governing documents have been filed by the construction manager and us.
On September 30, 2014, we bought out ASRS’s equity interest in B2 BKLYN for $40,500,000. Since this asset was a consolidated asset prior to acquisition, there was no adjustment to the historical asset basis, as the cash payment was recorded as a reduction of noncontrolling interest with the difference between the cash and the noncontrolling interest balance being recorded as a decrease to additional paid-in capital. This action allows the fund to pursue other development opportunities rather than utilizing the majority of the capital of the fund to pursue the completion of B2 BKLYN. In addition, since we now own 100%, we unilaterally make decisions regarding the asset, its construction and the litigation associated with it.
Subsequent to the construction stoppage, we received a notice of default on the nonrecourse mortgage secured by B2 BKLYN. We have since entered into a short term forbearance agreement while a longer term agreement is negotiated. The short term agreement expires by or no later than November 5, 2014 and in the event we are unable to complete the negotiation of a longer term agreement, or cure the default, we may be required to repay the current outstanding balance of $45,000,000 currently secured by, amongst other things, $37,500,000 of restricted bond proceeds included in restricted cash and an equity letter of credit of $9,300,000. In addition, we may be required to fund the apartment building until the uncertainties regarding its construction are resolved.However, the cost of construction could be much higher, and cause a loss:
Based on the recent events, including the ceasing of construction and litigation related to the construction of B2 BKLYN, we are investigating and evaluating alternatives to restart and complete the construction. We are in the very early stages of the litigation with the Construction Manager. Based on current information available, we have updated our impairment analysis using a probability weighted approach factoring in the scenarios currently being evaluated to complete B2 BKLYN. Currently, our analysis indicates the future probability weighted estimated undiscounted cash flows would be sufficient to recover the carrying value of the asset. Significant estimates were used in the determination of these estimated future undiscounted cash flows. Based on the uncertainty caused by the recent events and the significant estimates used in the calculation, we will continue to review our impairment calculations as additional information becomes available. Changes to the estimates made and future clarity to the various scenarios being evaluated are expected to cause fluctuations to our estimated probability weighted undiscounted cash flows. If we determine future estimated probability weighted undiscounted cash flows no longer exceed the carrying value of the asset, then the asset would be recorded at its estimated fair value, resulting in a future impairment, which would likely be material.
We have approximately $155,000,000 capitalized on the Consolidated Balance Sheet related to B2 BKLYN at September 30, 2014, consisting of land, building and capitalized interest. Based on the most current information available, total project costs could increase up to an amount ranging from $215,000,000 to $265,000,000. Significant estimates were used to develop the range of project costs and are expected to change as future clarity to the various construction scenarios used continue to develop. As litigation and negotiations continue, it is reasonably possible that construction costs will increase to a point where the capitalized cost is not recoverable from future undiscounted cash flows, resulting in an impairment of the asset.