Forest City Ratner Cos. is selling a 70 percent stake in Atlantic Yards, its 22-acre development in Brooklyn, New York, to a Chinese company to speed up construction as real estate demand in the borough surges.
Greenland Holding Group Co., a developer building one of China’s tallest towers, signed a memorandum of understanding with New York-based Forest City to co-develop the $5 billion project, including infrastructure and 14 apartment buildings, the companies said in a joint statement today. The deal excludes the Barclays Center, the year-old arena that anchors the site, and one residential tower already under construction.
Forest City Ratner Executive Chairman Bruce Ratner is turning over control of the project he has been trying to develop for almost a decade after being plagued by years of delays. The company sought a partner to share the costs while the Brooklyn market benefits from surging housing demand and investor interest in New York real estate is high, said Jeff Linton, a spokesman for Forest City Enterprises Inc. (A:US), the developer’s Cleveland-based parent.
“If we’re able to consummate this with Greenland we would be able to deliver the housing and the balance of the project more quickly,” Linton said in an interview. Greenland’s interest in the deal suggests “worldwide recognition of how strong the Brooklyn market is.”
The investment is the largest of its kind by a Chinese developer in the U.S., Greenland said in an e-mailed statement. Financial terms of the transaction weren’t disclosed.
Brooklyn apartment rents are soaring and investors are racing to partake in that income by acquiring multifamily buildings. In September, rents in the borough climbed 10 percent from a year earlier to a median of $2,800, the second-highest in five years of record-keeping, according to New York appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.
Purchases of multifamily properties in Brooklyn totaled $1.17 billion in 2012, up 23 percent from the previous year and the most since 2006, according to research firm Real Capital Analytics Inc. Sales this year are on pace to match that, with about $897 million of buildings changing hands through September.
“They want to build as quickly as possible to capitalize on how strong the market is,” said Samit Parikh, an analyst with ISI Group in New York, who rates Forest City a strong buy. “Brooklyn rents are rising quickly. There’s a huge gentrification happening. They understand this is a great opportunity to get this going right now.”
Shares of Forest City Enterprises rose (2FA:US) 5.5 percent to $19.55 today. It was the biggest gain since February 2012.
Greenland and Forest City will enter a period of exclusive negotiations that will last through about December, with the option to extend talks until financial terms are reached, Linton said. With the additional equity investment, the companies may be able to start multiple buildings at the same time, he said.
The Atlantic Yards project, approved in 2006 with a 10-year timeline, has been delayed in part by the recession that froze credit markets, and lawsuits filed by opponents objecting to the seizure of private land for the project. In 2009, the Empire State Development Corp. extended the timeframe for construction by 15 years.
Atlantic Yards was planned in conjunction with Ratner’s 2004 purchase of the National Basketball Association’s New Jersey Nets with the intention to move them to a new home in Brooklyn. In 2009, Ratner sold an 80 percent stake in the Nets and a 45 percent share of the Barclays Center to Russian billionaire Mikhail Prokhorov, just three months ahead of a deadline to break ground on the arena or lose financing through tax-exempt New York State bonds. Barclays Plc (BARC) also had the right to pull out of its 20-year, $400 million naming-rights deal for the arena if construction hadn’t started by that date.
The overall delays have increased the company’s cost per square foot for the project, Forest City Enterprises Chief Executive Officer David J. LaRue said in a conference call last month. He said at the time that the company was seeking a partner in the development.
Forest City has about $500 million invested in the Atlantic Yards project, LaRue said in a July conference call.
“The best way to monetize that is to start building all the residential that’s in demand out there,” ISI’s Parikh said.
Greenland’s investment in the project involves 14 apartment buildings and one office property, Linton said. The complete development, including the apartment tower now under construction, will produce about 6,400 residential rental units, of which 2,250 will be considered affordable housing, Linton said.
With a capital partner, it’s reasonable to assume that Forest City could complete two buildings per year at the site, Parikh said. Doing so with a partner is also part of the company’s strategy to reduce leverage.
“As a company on their own, basically taking on this entire project and putting up $2 billion up front is probably not the best way of de-risking the company,” Parikh said.
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