If Greenland USA's parent defaults, Development Agreement (as Veconi notes) suggests project stall. Company/ESD say: no worries.

This is the third of ten articles on the 6/7/22 meeting of the Atlantic Yards Community Development Corporation. The first concerned the affordable housing timetable. The second assessed an estimated 2031 completion date. The fourth concerned expectations of 421-a benefits. The fifth concerned the deadline for the Urban Room. The sixth addressed timing for the school. The seventh concerned plans for the platform. The eighth discussed community impacts of construction. The ninth concerned plans for B12/B12 affordable housing. The tenth concerned the Open Meetings Law.

While the Shanghai-based parent company of Greenland USA--which owns nearly all of master developer Greenland Forest City Partners (GFCP)--is struggling financially and seen its credit rating plummet, representatives of both the U.S. subsidiary and of Empire State Development (ESD), the state authority that oversees/shepherds Atlantic Yards/Pacific Park, played down the implications of potential default.

Still, a potential reading of governing Master Development Agreement (MDA), as AY CDC Director Gib Veconi pointed out, indicates that such a default could stall the project. 

As I describe below, it's possible that Greenland USA, as long as it avoids default, would be shielded from the troubles of parent Greenland Holdings Corp. though that may depend on a document that has not been made public.

(Updated 6/16/22) While I initially wrote that Greenland USA could be shielded from the troubles of its parent, Greenland Holdings Corp., that seems unlikely; the two entities would seem to have a similar structural relationship as did initial Guarantor Forest City Enterprises and its New York subsidiary, Forest City Ratner, and its related entities.

Crucially, however, it's unclear whether ESD would even enforce the agreement. As I wrote regarding the affordable housing obligation, the Development Agreement offers a huge loophole, a "Right To Refrain":

ESDC shall have the right, in its sole discretion, to refrain from exercising any of its rights under this Agreement at any time or from time to time.

But those rights are not merely the rights of the state authority (formerly known as ESDC), but represent obligations to the public.

Framing the question

"OK, next I'd like to ask," said Veconi in the video excerpt below, "about a report that was out last week about [ratings agencies] S&P and Moody's downgrading the debt of Greenland Holdings and S&P stating that they felt Greenland Holdings, which is the parent of Greenland USA, was at risk of default." (Here's my coverage.)

"Can you comment," he continued, "on the effect of default of your parent company on your company, Greenland USA, and what impact that would have on Greenland Forest City Partners as developer of this project?" (Veconi is the best-informed--and perhaps the only informed--member of the AY CDC board, which is supposed to advise ESD.)

"It's not going to change anything," responded Greenland USA Executive VP Scott Solish, who did not appear on camera. "So we're continuing to do exactly what we've done, which is continue to invest substantial amounts in the project and continue to execute as we've had since we came into the project in 2014."

That ignores how GFCP has raised funds for investment by selling off pieces of the project. It raised $199 million in 2019 by selling development leases for three parcels, to The Brodsky Organization and TF Cornerstone.

And it just sold two completed buildings, 535 Carlton and 38 Sixth, to Avanath Capital, at a $315 million price that seemed a bargain for the buyer. That sale, by the way, went unmentioned at the AY CDC meeting.

 

Bankruptcy impact?

"That's good to hear," Veconi responded. "The possibility is though, if there's a bankruptcy, you could have creditors coming after any assets that Greenland has. Are the assets in the United States, protected from creditors, or the bondholders in China coming after you guys?"

AY CDC Director Daniel Kummer, an attorney who was serving as Acting Chair for the meeting, noted to Solish that "it sounds like something that may be beyond your purview, but go ahead."

"So, all I can say is that we have done nothing but invest substantial amounts of company equity, as well as significant loans, to get this project built, throughout this, whatever the conditions may be: old 421-a [tax break], new 421-a, COVID, post COVID," Solish said, not offering a direct answer. "And we're gonna continue to do it. It's our commitment. We've shared that commitment with everyone we're sharing with you as the directors today."

Of course, he did not share any commitment to delivering the required affordable housing by May 2025.

"And we're eager, as I just said, to move forward with the next significant phase of this project, which is not building housing, it's building the capacity to put the housing there in the form of a platform, as well as the [ongoing] purchase of the air rights from the Long Island Rail Road," Solish said. "So we're just continuing with our commitments and our obligations. And that’s—I'm here representing that to you as directors."

Getting contentious

"I appreciate that," Veconi said. "And I--"

"I get it," Solish interrupted. "I think I've tried to answer as directly as I can."

"Okay, I appreciate that," Veconi continued. "I just want to make it clear: the reason I'm asking is because my read of the MDA is that if you—if there was a bankruptcy and if there was a proceeding, anything entered against Greenland, against Greenland Forest City Partners, all development--that would be a default under the agreement and basically all new development would stop. That is--"

"There's no one—" Solish said.

Tobi Jaiyesimi, who serves both as AY CDC Executive Director and ESD's Atlantic Yards Project Director, intervened to deflect the issue and support the developer

"I think, Gib, in the situation when we find ourselves needing to address that worst-case scenario, we'll cross that bridge when we get there," she said. "I think we've gotten the assurance from Scott that his team has continued their commitment to the development of the project, and are excited to start work on the platform, which would lead to the future development of the towers over the platform."

Omitted: that commitment could involve, as I wrote, an effort to evade the $2,000/month fines for each unit of affordable housing missing as of the May 2025 deadline.

"I'm excited about that, too," Veconi said. "I just wanted the other directors to understand the same thing I understand about the development agreements."

Looking at the document

The Development Agreement states--in my attempt to distill some very complicated legalese--that an Event of Default occurs if the developer or Guarantor seeks relief as debtor or is adjudicated as bankrupt--and that proceeding is not vacated, discharged, or stayed within 90 days.

The Guarantor refers to a document originally signed by Forest City Enterprises, parent of original developer Forest City Ratner, said to be attached as Exhibit W but not included in the document I have posted.

(Updated: 6/16/22, since the document was indeed included; I had missed it.)

So, it's unclear to me, without seeing Exhibit W, whether the provisions 

Would the provisions apply to Greenland USA in the event of default by Greenland Holdings Corp., or would it shielded from its parent company's troubles?

The document suggests it would. The Guaranty was signed by Forest City Enterprises, the Cleveland-based parent company of original developer Forest City Ratner and its affiliate Atlantic Yards Development Company (AYDC).

Presumably the parent of the majority developer--in this case Greenland Holdings--would succeed Forest City Enterprises (which became Forest City Realty Trust) as Guarantor.

The document notes $100 million in direct state subsidies and $131 million in direct city subsidies. In connection with the execution of those funding agreements, the Guarantor delivered to the city and state separate guarantees, each dated 9/12/07, regarding performance of certain obligations. 

This Guaranty succeeds those previous obligations. The Guaranteed Obligations include the start and completion of the arena within specified time periods, as well a completion of Phase 1 (as defined in the City Funding Agreement) within 12 years of the Effective Date, which was 5/12/22. The Urban Room also was required, but was not completed by that date last month.

Phase 1, the first of two phases contemplated, includes the arena and no less than 1,500,400 gross square feet of new construction on the Phase 1 Site west of Sixth Avenue, including Affordable Housing comprising no less than 30% of the residential units. 

(Well, B4 is 30% affordable, B3 is 100%, and B2 is 50%. They were approved at a cumulative 1,548,948 gross square feet.)

A "Foreclosure Event" is any transfer of title through a judicial or non-judicial foreclosure, or a transfer in lieu of foreclosure. The Guaranteed Obligations include promises that the work will remain free and clear of liens and encumbrances.

The Guarantor, as of the 2010 signing of the Development Agreement, owned 100% of the arena company and 58% of the AYDC.

The document notes that Mikhail Prokhorov's Onexim was in line to control the arena lease, thus diluting the Guarantor's control of those operations. But the Guarantor had to warrant that its obligations would not be affected by a loss of that control, and that was "a material inducement" to ESD's (then ESDC) pre-approval of Prokhorov's entry.

What about the successor?

The Guaranty shall remain until the Guaranteed Obligations are performed or Liquidated Damages delivered. "This Guaranty shall be binding upon Guarantor, its successors and permitted assigns, and shall inure to the benefit of and be enforceable by ESDC and its successors, transferees and assigns," the document states.

And the Guarantor cannot (and could not) assign the Guaranty or delegate its obligations without ESDC's consent. So it's hard to imagine that Greenland Holdings--the parent--is not the Guarantor, in the same way Forest City's parent served as Guarantor. But that hasn't been confirmed.

Transparency issues

The document states:

From and after the date Guarantor no longer is filing annual and quarterly financial and other required reports and notices pursuant to the Securities Exchange Act of 1934, as amended, Guarantor agrees to furnish ESDC (i) annually, within one hundred twenty (120) days following the end of each fiscal year for the Guarantor, a complete copy of Guarantor's annual audited financial statements prepared in accordance with sound accounting principals by an accounting firm of national standing, and (ii) a certificate signed by a Qualified Certifying Party stating that such annual financial statement presents fairly the financial condition and results of operation of Guarantor.

Greenland USA and its parent, of course, do not file with the SEC, so it should have been providing annual audited financial statements, with a certificate from a Qualified Certifying Party--in English, presumably.

Default, or refrain?

Upon an Event of Default described, according to the document, the developer cannot:

"request the creation or severance of any Development Parcels under this Agreement or any Interim Lease, request the execution and delivery by ESDC of any Development Lease or commence the performance of any Development Work under the applicable Development Lease."

That would preclude any new development (though maybe not infrastructure work). Then again, there's always that Right To Refrain.