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NEW YORK CITY-Forest City Enterprises, Inc. reached an agreement with Bruce C. Ratner to restructure their existing business relationship. The agreement covers their combined interest in a total of 30 retail, office and residential operating properties, certain service companies and seven identified development opportunities. Currently they are owned jointly by Forest City and Bruce Ratner.

The agreement calls for Bruce Ratner to contribute his ownership interests in the 30 operating assets, the service companies and participation rights in all future developments (except those named below) to a newly formed limited liability company. Forest City will pay $60.8 million in cash and issue 3.894 million units in the new limited liability company. These units will be convertible (after a one-year lock-up period) to an equal number of shares of FCEA stock or cash based on the value of FCEA stock at the time of conversion. For the first five years only, units that have not been exchanged will receive their proportionate share of an aggregate annual preferred payment of $2.5 million plus an amount equal to the dividends payable on the same number of shares of Forest City stock.

After five years, the annual preferred payment on the outstanding units will equal only the dividends payable on Forest City stock. In addition, Forest City will cover Bruce Ratner for any tax liability he may incur as a result of the sale of any of these properties during the 12-year period following the closing of the transaction. The cash and units exchanged for Bruce Ratner's interest are net of $42.5 million of preferred returns in favor of Forest City. This also takes into account $384 million of non-recourse project debt, as of Jan. 31, attributable to Bruce Ratner's ownership. All but $16.8 million of this debt is already reported on the consolidated balance sheet of Forest City's GAAP financial statements.

Forest City and Bruce Ratner have agreed to terms and conditions under which they will value the seven existing development opportunities identified below when those developments stabilize. Forest City and Bruce Ratner will agree on a market value and Bruce Ratner's interest will be exchanged for partnership units at the then current FCEA market price or cash at Forest City's option. These developments are:

Twelve MetroTech Center, 177,000-sf office building in Brooklyn
New York Times Building, 1.5-million-sf office project in Manhattan
Ridge Hill, 1.2-million-sf retail project in Yonkers
East River Plaza, 547,000-sf retail center in Harlem
Mill Basin, 125,000-sf retail center in Brooklyn
Beekman, 683-unit residential building in Lower Manhattan
80 DeKalb, 430,000-sf residential building in Brooklyn

"The transaction is expected to be accretive to Forest City's per share earnings before depreciation, amortization and deferred taxes [EBDT] in the long term but slightly dilutive [less than 2 %] to EBDT per share in the near term," explains Charles Ratner president and CEO of Forest City Enterprises. "Attributing no value to the interest in future projects and assuming the consideration exchanged for the interests contributed is based solely on stabilized net operating income from the 30 projects, the effective capitalization rate on this transaction is approximately 6.4%."

Instant Insights /

Forest City Reaches Buyout of Bruce Ratner

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