|FOREST CITY REALTY TRUST, INC. filed this Form 10-Q on 10/30/2018|
In order to construct the seven buildings in Phase II, substantial additional costs for rail yard and infrastructure improvements, including a platform over the new permanent rail yard, will be required. The joint venture is accounted for on the equity method of accounting. The closing of this joint venture allows us to accelerate the delivery of needed affordable housing while significantly reducing our future equity requirements for the full build-out of this project, thereby reducing our development risk and improving our future liquidity.
The joint venture broke ground on the first affordable apartment community, 535 Carlton, in December 2014. In mid-2015, the joint venture commenced construction on two more buildings, 38 Sixth Ave, an affordable apartment building, and 550 Vanderbilt, a condominium building. From the formation of the joint venture in June 2014 through the quarter ended June 30, 2016, the Company reviewed the estimates and assumptions in the discounted cash flow model and updated them as necessary.
During the three months ended September 30, 2016, it became evident the occupancy and rental rate declines in the Brooklyn market were not temporary as a result of an increased supply of new rental product amplified by the sun-setting and the uncertainty around the 421 A real estate tax abatement program. Also, the condominium market in New York had softened, causing the projected sale schedule for 550 Vanderbilt to be adjusted accordingly. Separately, the construction costs across the New York market continued to trend upward, resulting in increases in the estimated trade costs for certain infrastructure as well as vertical construction. As a result, during the three months ended September 30, 2016, as part of our formal strategic plan update, a decision was made to revise the overall project schedule for Pacific Park Brooklyn. Accordingly, we updated the discounted cash flow model to reflect the updated timing of the project schedule as well as the revenue, expense and cost assumptions. Based on the above, the estimated fair value of the investment no longer exceeded the carrying value, requiring the recording of a $299,300,000 impairment charge to adjust the carrying value to its estimated fair value during the year ended December 31, 2016.
During June 2018, we closed on an agreement with Greenland on the restructuring of the Pacific Park Brooklyn joint venture. The transaction increases Greenland’s ownership interest in the joint venture from 70% to 95% on future construction activity, effective January 15, 2018, and significantly decreases our development risk at the project by reducing our ownership interest and future obligations to fund future construction costs, excluding the permanent rail yard, from 30% to 5%. Completed or partially completed projects of the joint venture, including 38 Sixth Ave, 550 Vanderbilt, 535 Carlton and the related parking garages, will remain owned by Greenland and us on a 70%/30% basis, respectively.
461 Dean Street
461 Dean Street is an apartment building in Brooklyn, New York adjacent to the Barclays Center at the Pacific Park Brooklyn project. This modular construction project opened during the three months ended September 30, 2016. We had a fixed price contract (the “CM Contract”) with Skanska USA to construct the apartment building. In 2014, Skanska USA ceased construction and we terminated the CM Contract for cause. As a result, significant cost overruns were incurred to complete the project. Each party has filed lawsuits relating primarily to the project’s delays and associated additional completion costs.
During the three months ended March 31, 2018, we completed the sale of 461 Dean Street. The disposition generated net cash proceeds of $147,193,000.
We intend to continue to vigorously pursue legal action against Skanska USA for damages related to its default of the CM Contract. However, there is no assurance we will be successful in recovering these damages or defending against Skanska USA’s claims.
Nonrecourse Mortgage Financings
As of September 30, 2018, we had $97,824,000 of nonrecourse mortgage financings with scheduled maturities during the year ending December 31, 2018, of which $8,760,000 represents regularly scheduled amortization payments. Subsequent to September 30, 2018, we addressed $10,022,000 of these maturities through closed transactions. We are currently in negotiations to refinance and/or extend the remaining nonrecourse debt. We cannot give assurance as to the ultimate result of these negotiations. As with all nonrecourse mortgages, if we are unable to negotiate an extension or otherwise refinance the mortgage, we could go into default and the lender could commence foreclosure proceedings on the single collateralized asset, which would likely result in a loss of the asset or an impairment which could be significant.
During the year ended December 31, 2017, the $93,096,000 nonrecourse mortgage encumbering Charleston Town Center, an unconsolidated regional mall in Charleston, West Virginia, matured and was transferred to a Special Servicer. We are in the process of working with the Special Servicer to execute a deed-in-lieu transaction. We account for our 50% ownership interest in this investment using the equity method of accounting. At September 30, 2018, we have a negative investment basis of $15,924,000.
As of September 30, 2018, our share of nonrecourse mortgage debt and notes payable, net recorded on our unconsolidated subsidiaries amounted to $1,652,159,000, of which $82,856,000 ($3,395,000 represents scheduled principal payments) is scheduled to mature during the year ending December 31, 2018. Negotiations are ongoing to address the remaining 2018 maturities, but we cannot give assurance that we will obtain these financings on favorable terms or at all.