Shanghai-based Greenland Holdings, struggling financially, is Guarantor for the project. Where are required annual audited financial reports to NY State?

One lesson from Atlantic Yards/Pacific Park is that complicated contracts can get ignored, whether willfully or carelessly.

We learned that during the kerfuffle over the unbuilt (and largely forgotten) Urban Room, which was supposed to be finished by May but almost certainly won't be built, given the complexity, cost, and interference (with arena activities) of building the flagship "Miss Brooklyn" tower. 

Instead, the developer wants to move most of that bulk across the Flatbush Avenue, which would require new project approvals.

Empire State Development (ESD), the state authority that oversees/shepherds the project, was distinctly uninterested in enforcing those fines, which could total $10 million by May 2023. ESD does have a "right to refrain" from enforcement, so that situation may stand.

And that posture puts in focus a more significant enforcement deadline: May 31, 2025, by which the developer is supposed to complete the project's 2,250 affordable housing units or pay $2,000/month in fines for each missing unit.

That deadline seems impossible to meet, though ESD said it has no documents regarding any request for extension or modification.

No financial statements from Guarantor?

But another obligation seems to have been ignored, one that seems even more significant in retrospect--the obligation of the project's Guarantor, if not filing financial reports as required by the U.S. Securities and Exchange Commission, to deliver annual audited financial statements to ESD, according to the project's Development Agrement (bottom).

Those statements must be "prepared in accordance with sound accounting principles by an accounting firm of national standing," and accompanied by a "certificate signed by a Qualified Certifying Party"--a top executive--"stating that such annual financial statement presents fairly the financial condition and results of operation of Guarantor."

While the original Guarantor was Cleveland-based Forest City Enterprises, parent of Forest City Ratner, since 2014, that guarantor has been--presumably--Greenland Holdings Corp., the Shanghai-based parent of Greenland USA, which bought 70% of the project going forward from Forest City, and later bought out all but 5% of Forest City's share. (Greenland since leased development sites to other developers.)

The Guaranty, according to the Development Agreement, "shall remain in full force and effect" until performance in full of the Guaranteed Obligations or payment of the Liquidated Damages, and would be binding on the original Guarantor's successors.

Given that the Guaranteed Obligations have not been performed in full, and that damages have not been paid, the Guaranty remains in effect. 

But ESD, in response to my Freedom of Information Law request, said it had no such annual audited financial statements, nor the annual accompanying required certificates signed by a Qualified Certifying Party. (I contacted the p.r. firm representing Greenland, and got no response.)

Why that's important

That's concerning. First, at least one obligation in the original Development Agreement with liquidated damages remains, notably that $10 million fine for the Urban Room. The Guarantor is supposed to have the money to pay.

The more significant obligation, the May 2025 affordable housing deadline, could total $21 million in a year if none of the remaining 876 (or 877) affordable units are completed. 

Payment of such fines, imposed as part of a 2014 settlement, could not have been guaranteed as part of the original Development Agreement. As far as I know, that obligation was not added to a revision of the document.

But the concept is clear: the parent company is supposed to guarantee project obligations, and ESD should keep track of whether that Guarantor is financially sound.

However, the financial health of Greenland has been in question since as far back as 2016, when its credit rating went from investment-grade to "junk." This year it's sunk to Selective Default, with specific notes in Default.

Meanwhile, representatives of Greenland USA have claimed there's nothing to worry about. "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," said Greenland USA executive Scott Solish in June. 

Since then, though, the promised platform, though presumably on the brink of a construction start, has not moved forward.

Barriers to compliance

Now Greenland, as a company traded on the Shanghai Stock Exchange, surely does produce quarterly and annual financial reports. 

But it's less likely that they have been translated into English. Such translations have not been circulated publicly, at least.

As to  whether an "accounting firm of national standing" has participated, well, we don't know.

There are New York-based international accounting firms, like Marcum, with offices in Shanghai. Whether Greenland's reports are prepared according to "sound accounting principles," however, is another question--at least without an audit.

 

Page 135 of Atlantic Yards Development Agreement Signed (March 4, 2010)

Contributed to DocumentCloud by Norman Oder (Atlantic Yards/Pacific Park Report) • View document or read text

Obligations and the Guarantor

In exchange to the city and state funding directed to the project, that Guarantor, at the risk of significant financial penalties, agreed to perform various obligations:

• starting and completing the arena within six years
• achieving Substantial Completion of Phase I of the project, within 12 years of the Project Effective Date (or by 5/12/22, given the 5/12/10 "Effective Date") 
• by the Outside Phase I Substantial Completion Date (12 years), completing Phase I improvements, as well as the Urban Room

Most of those obligations have been met. 

The arena opened in September 2012.

With the B4 tower (18 Sixth Ave., aka Brooklyn Crossing) beginning leasing in January, the developer had achieved Substantial Completion of Phase 1, or at least 1.5 million square feet. Even putting aside the Urban Room, the Guarantor would have had to produce annual financial statements until B4 was completed.

And nearly all the Phase I improvements have been completed, including the health care clinic, a new subway entrance, a replacement Carlton Avenue Bridge, and an upgraded railyard. But not the Urban Room.

What about the rest of the project?

As I wrote in January 2010, the developer must begin construction of the platform over the railyard no later than the 15th anniversary of the Effective Date, or May 12, 2025. That seemed like an easy hurdle, given that construction was supposed to start in 2020, and again this year. Now there some clouds over that obligation.

As to Phase II, the developer by May 12, 2035 must build at least 2,970,000 gross square feet, the school (done), an intergenerational community center with space for at least 100 children for publicly funded day care, at least 8 acres of Open Space, the platform, and the project's), the remainder of the affordable housing, and the platform.

Note that allows for a smaller project than approved--excluding the arena, about 4.5 million square feet, rather than 7.1 million square feet. But if they're obligated to build the platform and the open space, they'd have to build the three towers over the second block of the platform, and get closer to the total. 

An Event of Default, according to Section 17.1 (m), for not finishing the project by the deadline, results in the following penalty, according to Section 17.2 (a) (vi), well, the state authority can terminate any lease where construction hasn't begun. 

In other words, they get the property back. 

However, that Termination Option will be exercised in accordance with Section 17.5, which states that ESD has up to two years to deliver a Termination Option Notice, but, if not, the lease terms will be extended five years. And within a year after that, ESD can again deliver another Termination Option Notice. And that process can continue. 

So there are potential extensions.

Remember, ESD has a "right to refrain" from enforcement, as well. 

For now, it seems to have pursued a right to refrain from even monitoring obligations.