Why did the Greenland-Forest City deal take a year? "Complicated" likely relates to 421-a revision, at least

Some questions linger regarding the recently announced restructuring of Greenland Forest City Partners, in which Forest City Realty Trust will sell all but 5% of its 30% stake in the joint venture to Greenland USA.

First, why did the deal, if was decided on in late 2016, take a year or so? I posed that question to Greenland USA's Scott Solish, who, unsurprisingly, was vague.

"Things are complicated," he said at the 1/23/18 Atlantic Yards/Pacific Park Quality of Life meeting. "Things take time."

Forest City's former veto

Sure, but let's recap. Forest City Realty Trust, in an 11/3/16 bombshell announcement, said it would delay future development on the site, with no timetable stated. At that point, though Forest City owned a minority stake in the project, it had effective veto power over new building starts.

That veto power related to the board structure of Greenland Forest City Partners. In March 2014, Forest City told the SEC:

... 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.

That suggests that, if Greenland disagreed with Forest City's stall, then it could have bought out Forest City's share of a specific building site or a larger share. The latter seems to have happened.

The three factors for delay

So why did it take so long? At the time, Forest City blamed losses (and the stall) an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs. That surely made Forest City reluctant to invest.

The supply issue takes time to shake out, but it's certainly possible that the glut will have diminished in a few years. Construction costs often go up but, again, the growth rate would presumably recede once the glut diminishes.

The uncertain fate of 421-a

What about 421-a? That brings us to a January 2017 interview the Real Deal conducted with MaryAnne Gilmartin, then CEO of Forest City New York, regarding the return of 421-a

"Well, instantly it's going to allow Pacific Park Brooklyn to continue and for us to build it as quickly as possible," she told the Real Deal's Hiten Samtani. "Because without it, it would not be possible to meet the timeline, so that's critical."

That did not happen. While a version of 421-a was renewed, known as Affordable New York, the tax break no longer included condos, which were planned for two more buildings (plus a portion of a third, at least) on the site, or 100% market-rate rental buildings, of which three were planned. Note the buildings below that have no green.

That's because the Atlantic Yards "carve-out," a 2007 provision that allowed the tax break for the market-rate buildings as long as the overall project met an affordability threshold, was not renewed.

Changing assumptions, lowered revenue/profit

So, by April 2017, the financial assumptions behind the project had to have changed. The buildings would have to be reconfigured to all include a minimum percentage--25% or 30%--of affordable housing to qualify for 421-a.

(Given that the upper limit is 130% of Area Median Income, or AMI, and a significant chunk of Atlantic Yards/Pacific Park units are above that, it's certainly possible the new AY/PP buildings will have more "affordable housing" than the minimum. That's because the developers face a 2025 deadline for 2,250 units of affordable housing--defined as participating in government subsidy programs--and have built only about 782.)

No longer would condos--which cost more to construct and which reap higher revenues--be built. No longer would there be ownership opportunities for, say, customers from China familiar with Greenland.

That had to factor, I suspect, into the further negotiations between Forest City and Greenland. That also affects the amount of money Greenland is paying for Forest City's share. My guess is that it's not a lot--could it be paid off as a loan?--and Forest City Realty Trust will register another impairment.

There's a wild card here, of course. It's possible that lobbyists for the project will get the 421-a provision revised, perhaps to encompass rentals if not condos. That would improve the project's financials. 

That said, though Gilmartin's new firm L&L MAG is now Forest City's public face on the project, Pacific Park is owned predominantly by Greenland USA, an arm of Greenland Holding Co., which is essentially controlled by the government of Shanghai. They might have a tougher time lobbying for a tax break.

Update and correction

By the way, I was wrong, it turns out, in suggesting in January 2017 that Greenland Forest City could have started building on sites grandfathered in for 421-a. Yes, those sites were grandfathered in, but until 421-a was renewed it would've been unclear whether the Atlantic Yards "carve-out" continued. So it was prudent to wait.