| FOREST CITY ENTERPRISES INC Item 1A Risk Factors We are Subject to Risks Associated with Investments in Real Estate The value of, and our income from, our properties may decline due to developments that adversely affect real estate generally and those that are specific to our properties |
| General factors that may adversely affect our real estate portfolios include: • Increases in interest rates; • A general tightening of the availability of credit; • A decline in the economic conditions in one or more of our primary markets; • An increase in competition for tenants and customers or a decrease in demand by tenants and customers; • An increase in supply of our property types in our primary markets; • A continuation of terrorist activities or other acts of violence or war in the United States of America or abroad or the occurrence of such activities or acts that impact properties in our real estate portfolios or that may impact the general economy; • Continuation or escalation of tensions in the Middle East; • Declines in consumer spending during an economic recession that adversely affect our revenue from our retail centers; and • The adoption on the national, state or local level of more restrictive laws and governmental regulations, including more restrictive zoning, land use or environmental regulations and increased real estate taxes |
| In addition, there are factors that may adversely affect the value of, and our income from, specific properties, including: • Adverse changes in the perceptions of prospective tenants or purchasers of the attractiveness of the property; • Opposition from local community or political groups with respect to development or construction at a particular site; • Our inability to provide adequate management and maintenance or to obtain adequate insurance; • Our inability to collect rent or other receivables; • An increase in operating costs; • Introduction of a competitor’s property in or in close proximity to one of our current markets; and • Earthquakes, floods, hurricanes or underinsured or uninsured natural disasters |
| The occurrence of one or more of the above risks could result in significant delays or unexpected expenses |
| If any of these occur, we may not achieve our projected returns on properties under development and we could lose some or all of our investments in those properties |
| We are Subject to Real Estate Development Risks Our development projects are subject to significant risks relating to our ability to complete our projects on time and on budget |
| Factors that may result in a development project exceeding budget or being prevented from completion include: • An inability to secure sufficient financing on favorable terms, including an inability to refinance construction loans; • Construction delays or cost overruns, either of which may increase project development costs; • An increase in commodity costs; 5 _________________________________________________________________ [60]Table of Contents • An inability to obtain zoning, occupancy and other required governmental permits and authorizations; • An inability to secure tenants or anchors necessary to support the project; and • Failure to achieve or sustain anticipated occupancy or sales levels |
| If any of these occur, we may not achieve our projected returns on properties under development and we could lose some or all of our investments in those properties |
| In the past, we have elected not to proceed, or have been prevented from proceeding, with specific development projects, and we anticipate that this may occur again from time to time in the future |
| A development project may be delayed or terminated because a project partner or prospective anchor tenant withdraws or a third party challenges our entitlements or public financings |
| We periodically serve as either the construction manager or the general contractor for our development projects |
| The construction of real estate projects entails unique risks, including risks that the project will fail to conform to building plans, specifications and timetables |
| These failures could be caused by strikes, weather, government regulations and other conditions beyond our control |
| In addition, we may become liable for injuries and accidents occurring during the construction process that are not insured |
| In the construction of new projects, we generally guarantee the lender of the construction loan the lien-free completion of the project |
| This guaranty is recourse to us and places the risk of construction delays and cost overruns on us |
| In addition, from time to time we guarantee the construction obligations of a major tenant |
| This type of guaranty is released upon completion of the project |
| Furthermore, as the general partner of certain limited partnerships, we guarantee the funding of operating deficits of newly-opened apartment projects for an average of five years |
| We may have to make significant expenditures in the future in order to comply with our lien-free completion obligations and funding of operating deficits |
| Examples of projects that face these and other development risks include the following: • New York Times Building |
| Our New York Times building in Manhattan is expected to open in the second quarter of fiscal 2007 with 734cmam000 square feet of office space |
| To date, we have not been able to secure any tenants to lease space in this property |
| If we are not able to lease space in this building or if we lease space at rates below expected levels, the profitability of this property will be adversely affected |
| • Brooklyn Atlantic Yards |
| We are in the process of developing Brooklyn Atlantic Yards, a dlra3dtta5 billion mixed-use project in downtown Brooklyn expected to feature an 800cmam000 square foot sports and entertainment arena for the Nets |
| The acquisition and development of Brooklyn Atlantic Yards is subject to the completion of negotiations with local and state governmental authorities, including negotiation of the applicable development rights, the satisfactory completion of due diligence, the receipt of governmental and non-governmental approvals and the possible condemnation of the land needed for the development |
| The negotiations relating to the acquisition and development rights for Brooklyn Atlantic Yards may not be successfully completed, the acquisition and development rights may not be obtained or completed on the terms described above and the Brooklyn Atlantic Yards may not be developed with the features we anticipate |
| The development of Brooklyn Atlantic Yards is being done in connection with the proposed move of the Nets to the planned arena |
| While we are part of an ownership group that acquired the Nets on August 16, 2004, any movement of the team is subject to approval by the NBA commissioner and the owners of the other NBA franchises |
| If we do not receive this approval, we may not be able to develop Brooklyn Atlantic Yards to the same extent or at all |
| Even if we are able to continue with the development, we would likely not be able to do so as quickly as originally planned |
| • Military Family Housing |
| Hawaii Military Communities, LLC, a wholly owned subsidiary of the Company, has been selected to form a partnership to be known as Ohana Military Communities, LLC with the United States Department of the Navy |
| Ohana Military Communities, LLC will own, redevelop and operate military family housing at five United States Navy housing communities on the island of Oahu, Hawaii |
| Midwest Military Communities, LLC, a wholly owned subsidiary of the Company, has been selected to form a partnership to be known as Midwest Family Housing, LLC with the United States Department of the Navy |
| Midwest Family Housing, LLC will own, redevelop, and operate military family housing at eight United States Navy housing communities located primarily in the Chicago, Illinois area |
| We have not engaged in projects of this type before, and we cannot assure you we will be able to complete them successfully |
| We are pursuing the development of condominiums in selected markets |
| Current condominium projects under construction include 1100 Wilshire Building and 3800 Wilshire Building, both previously unfinished office buildings in Los Angeles, and Cutters Ridge at Tobacco Row, located in Richmond, Virginia |
| Beekman, a site adjacent to a hospital in downtown Manhattan is currently under development |
| While we have previously developed for-sale condominium projects with partners, we are developing some of these projects without the development assistance of one or more partners |
| We may not be able to sell the units at the projected sales prices for a number of reasons, including, without limitation, a rise in interest rates |
| • Illinois Science and Technology |
| Our life science campus in Skokie, Illinois is expected to open in phases beginning in the third quarter of fiscal 2006 |
| This campus currently has over 600cmam000 square feet of space and, to date, we have not been able to secure tenants to lease the existing space in this property |
| If we are not able to lease space in these buildings or if we lease space at rates below expected levels, the profitability of this project will be adversely affected |
| The final completion of the campus includes a redevelopment of an additional 1cmam100cmam000 square feet for a total of over 1cmam700cmam000 square feet, of office space |
| This final redevelopment is contingent upon obtaining the necessary permits and government approval |
| If we are not successful in obtaining the necessary approvals, we may not be able to develop the additional 1cmam100cmam000 square feet, or we may not be able to develop the additional square feet with the features we anticipate |
| To help finance this redevelopment we expect to receive a portion of the redevelopment costs from government financing |
| If we do not receive these funds, or we receive amounts less than anticipated, we may be required to fund these amounts or seek additional financing sources that may not be available at the time of the planned redevelopment |
| An Economic Decline in One or More of Our Primary Markets May Adversely Affect Our Operating Results and Financial Condition Our core markets include New York City/ Philadelphia metropolitan area, Denver, Boston, Greater Washington DC/ Baltimore metropolitan area, Chicago and the state of California |
| We also have a concentration of real estate assets in Cleveland, Ohio |
| A downturn in any of these markets may impair or continue to impair: • The ability of our tenants to make lease payments; • Our ability to market new developments to prospective purchasers and tenants; • Our rental and lease rates; • Hotel occupancy and room rates; • Land sales; and • Occupancy rates for commercial and residential properties |
| Adverse economic conditions may negatively impact our results of operations and cash flows |
| In addition, local real estate market conditions have been, and may continue to be, significantly impacted by one or more of the following events: • Business layoffs and downsizing; • Industry slowdowns; • Relocations or closings of businesses; • Changing demographics; and • Any oversupply of or reduced demand for real estate |
| Relative to historical results from operations, we have experienced weakness across almost all of the markets in which we hold investments in our Residential Group |
| For example, our Residential Group has been experiencing weakness in rental rates and occupancy rates in its portfolio in almost all of its markets |
| We do not expect these situations to change in the near to medium-term |
| With respect to particular markets, the Denver and Cleveland real estate markets have been significantly impacted by a continuing local economic downturn, which has made it more difficult to maintain occupancy levels at certain of our properties |
| In the Cleveland market, we have a concentration of significant office space with significant office 7 _________________________________________________________________ [62]Table of Contents vacancies due to weak market conditions |
| This situation has directly impacted us since we had a relatively low number of long-term office space leases in place and have had to significantly lower rental rates to attract and retain tenants |
| Unless this situation improves, our rate of return may be lower than expected |
| We may also have trouble refinancing our Cleveland office space or our lenders may require significant principal reductions |
| Vacancies in Our Properties May Adversely Affect Our Results of Operations and Cash Flows Our results of operations and cash flows may be adversely affected if we are unable to continue leasing a significant portion of our commercial and residential real estate portfolio |
| We depend on commercial and residential tenants in order to collect rents and other charges |
| Our ability to sustain our current and historical occupancy levels depends on many factors that are discussed elsewhere in this section |
| For example, as discussed above, we have experienced decreased occupancy levels in our residential properties in all of our markets and in our commercial office properties in our Cleveland market |
| Our failure to successfully lease our property on favorable terms would adversely affect our results of operations and cash flows |
| Our Properties and Businesses Face Significant Competition The real estate industry is highly competitive in many of the markets in which we operate |
| Competition could over-saturate any market, as a result of which we may not have sufficient cash to meet the debt service requirements on certain of our properties |
| Although we may attempt to renegotiate a restructuring with the mortgagee, we may not be successful, which could cause a property to be transferred to the mortgagee |
| There are numerous other developers, managers and owners of commercial and residential real estate and undeveloped land that compete with us nationally, regionally and/or locally, some of whom have greater financial resources than us |
| They compete with us for management and leasing revenues, land for development, properties for acquisition and disposition and for anchor department stores and tenants for properties |
| We may not be able to successfully compete in these areas |
| Tenants at our retail properties face continual competition in attracting customers from retailers at other shopping centers, catalogue companies, online merchants, warehouse stores, large discounters, outlet malls, wholesale clubs, direct mail and telemarketers |
| Our competitors and those of our tenants could have a material adverse effect on our ability to lease space in our properties and on the rents we can charge or the concessions we can grant |
| This in turn could materially and adversely affect our results of operations and cash flows, and could affect the realizable value of our assets upon sale |
| We May Be Unable to Sell Properties to Avoid Losses or to Reposition Our Portfolio Because real estate investments are relatively illiquid, we may be unable to dispose of underperforming properties and may be unable to reposition our portfolio in response to changes in regional or local real estate markets |
| As a result, we may incur operating losses from some of our properties and may have to write down the value of some properties due to impairment |
| Our Results of Operations and Cash Flows May Be Adversely Affected by Tenant Defaults or the Closing or Bankruptcy of Non-Tenant Anchors Our results of operations and cash flows may be adversely affected if a significant number of our tenants are unable to meet their obligations or do not renew their leases, or if we are unable to lease a significant amount of space on economically favorable terms |
| In the event of a default by a tenant, we may experience delays in payments and incur substantial costs in recovering our losses |
| Our ability to collect rents and other charges will be even more difficult if the tenant is bankrupt or insolvent |
| Our tenants have from time to time filed for bankruptcy or been involved in insolvency proceedings and others may in the future, which could make it more difficult to enforce our rights as lessor and protect our investment |
| Based on tenants with net base rent of greater than 2prca as of January 31, 2006, our five largest office tenants by leased square feet were the City of New York, Millennium Pharmaceuticals Inc, US Government, Morgan Stanley & Co |
| and Securities Industry Automation Corp |
| Based on tenants with net base rent of greater than 1prca as of January 31, 2006, our five largest retail tenants by leased square feet were Regal Entertainment Group, AMC Entertainment Inc, The Gap, The Home Depot and TJX Companies |
| We believe that net base rent is an operating statistic and is not comparable to rental revenue, a GAAP financial measure |
| Net base rent is determined using the tenant’s contractual rental agreements at the Company’s ownership share of the base rental income from expiring leases as determined within the rent agreement and it does not include adjustments such as the impact of straight-line rent and contingent rental payments, which are not reasonably estimatable |
| 8 _________________________________________________________________ [63]Table of Contents Current bankruptcies of some of our tenants and the potential bankruptcies of other tenants in the future could make it difficult for us to enforce our rights as lessor and protect our investment |
| With respect to our retail centers, we also could be adversely affected if one or more non-tenant anchors were to close or enter into bankruptcy |
| Although non-tenant anchors generally do not pay us rent, they typically contribute towards common area maintenance and other expenses |
| The loss of these revenues could adversely affect our results of operations and cash flows |
| Further, the temporary or permanent loss of an anchor likely would reduce customer traffic in the retail center, which could reduce the percentage of rent paid by retail center tenants or cause retail center tenants to close or to enter into bankruptcy |
| Rents obtained from other tenants may be adversely impacted |
| One or more of these factors could cause the retail center to fail to meet its debt service requirements |
| We May Be Negatively Impacted by Department Store Consolidations Department store consolidations may result in the closure of existing department stores |
| With respect to existing department stores, we may be unable to re-lease this area or to re-lease it on comparable terms |
| Additionally, department store closures could result in decreased customer traffic, which could lead to decreased sales at other stores |
| Rents obtained from other tenants may also be adversely impacted |
| Consolidations may also negatively affect current and future development and redevelopment projects |
| Terrorist Attacks and Other Armed Conflicts May Adversely Affect Our Business We have significant investments in large metropolitan areas, including New York City/ Philadelphia, Boston, Washington DC/ Baltimore, Denver, Chicago, Los Angeles, and San Francisco, which face a heightened risk related to terrorism |
| Some tenants in these areas may choose to relocate their business to less populated, lower-profile areas of the United States of America that are not as likely to be targets of terrorist activity |
| This could result in a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease our properties on less favorable terms |
| In addition, properties in our real estate portfolio could be directly impacted by future terrorist attacks which could cause the value of our property and the level of our revenues to significantly decline |
| Future terrorist activity, related armed conflicts or prolonged or increased tensions in the Middle East could cause consumer confidence and spending to decrease and adversely affect mall traffic |
| Additionally, future terrorist attacks could increase volatility in the US and worldwide financial markets |
| Any of these occurrences could have a significant impact on our revenues, costs and operating results |
| We Have Limited Experience Participating in the Operation and Management of a Professional Basketball Team, and Future Losses Are Expected for the Nets On August 16, 2004, we purchased a legal ownership interest in the Nets |
| This interest is reported on the equity method of accounting as a separate segment |
| The purchase of the interest in the Nets is the first step in our efforts to pursue development projects at Brooklyn Atlantic Yards, which include a new entertainment arena complex and adjacent developments combining housing, offices, shops and public open space |
| The relocation of the Nets is, among other items, subject to approval by the NBA commissioner and the owners of the other franchises, and we cannot assure you we will receive these approvals on a timely basis or at all |
| If we are unable to relocate the Nets to Brooklyn, we may be unable to achieve our projected returns on the related development projects, which could result in a delay, termination or losses on our investment |
| The Nets are currently operating at a loss and are projected to continue to operate at a loss as long as they remain in New Jersey |
| Even if we are able to relocate the Nets to Brooklyn, there can be no assurance that the Nets will be profitable in the future |
| Losses are allocated to each member based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of each accounting period without regard to unrealized appreciation (if any) in the fair value of the Nets |
| Therefore, losses allocated to us may exceed our legal ownership interest |
| The Operation of a Professional Sports Franchise Involves Certain Risks Our investment in the Nets is subject to a number of operational risks, including risks associated with operating conditions, competitive factors, economic conditions and industry conditions |
| If we are not able to successfully manage the following operational risks, we may incur additional operating losses, which are allocated to each member based on an analysis of the respective members’ claim on net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of the Nets: • Competition with other major league sports, college athletics and other sports-related entertainment; • Dependence on competitive success of the Nets; 9 _________________________________________________________________ [64]Table of Contents • Fluctuations in the amount of revenues from advertising, sponsorships, concessions, merchandise and parking, which are tied to the popularity and success of the Nets; • Uncertainties of increases in players’ salaries; • Dependence on talented players; • Risk of injuries to key players; and • Dependence on television and cable network, radio and other media contracts |
| We Are Controlled by the Ratner, Miller and Shafran Families, Whose Interests May Differ from Those of Other Shareholders Our authorized common stock consists of Class A common stock and Class B common stock |
| The economic rights of each class of common stock are identical, but the voting rights differ |
| The Class A common stock, voting as a separate class, is entitled to elect 25prca of the members of our board of directors, while the Class B common stock, voting as a separate class, is entitled to elect the remaining 75prca of our board of directors |
| On all other matters, the Class A common stock and Class B common stock vote together as a single class, with each share of Class A common stock entitled to one vote per share and each share of Class B common stock entitled to ten votes per share |
| At March 1, 2006, members of the Ratner, Miller and Shafran families, which include members of our current board of directors and executive officers, owned 74dtta8prca of the Class B common stock |
| RMS, Limited Partnership (“RMS LP”), which owned 74dtta5prca of the Class B common stock, is a limited partnership, comprised of interests of these families, with eight individual general partners, currently consisting of: • Samuel H Miller, Treasurer of Forest City and Co-Chairman of our Board of Directors; • Charles A Ratner, President, Chief Executive Officer of Forest City and a Director; • Ronald A Ratner, Executive Vice President of Forest City and a Director; • Brian J Ratner, Executive Vice President of Forest City and a Director; • Deborah Ratner Salzberg, President of Forest City Washington, Inc, a subsidiary of Forest City, and a Director; • Joan K Shafran, a Director; • Joseph Shafran; and • Abraham Miller |
| Joan K Shafran is the sister of Joseph Shafran |
| Albert B Ratner, Co-Chairman of our Board of Directors, is the father of Brian J Ratner and Deborah Ratner Salzberg and is first cousin to Charles A Ratner, James A Ratner, Ronald A Ratner, Joan K Shafran and Joseph Shafran |
| Samuel H Miller was married to Ruth Ratner Miller (now deceased), a sister of Albert B Ratner, and is the father of Abraham Miller |
| General partners holding 60prca of the total voting power of RMS LP determine how to vote the Class B common stock held by RMS LP No person may transfer his or her interest in the Class B common stock held by RMS LP without complying with various rights of first refusal |
| In addition, at March 1, 2006, members of these families collectively owned 18dtta1prca of the Class A common stock |
| As a result of their ownership in Forest City, these family members and RMS LP have the ability to elect a majority of our board of directors and to control the management and policies of Forest City |
| Generally, they may also determine, without the consent of our other shareholders, the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and prevent or cause a change in control of Forest City |
| Even if these families or RMS LP reduce their level of ownership of Class B common stock below the level necessary to maintain a majority of voting power, specific provisions of Ohio law and our Amended Articles of Incorporation may have the effect of discouraging a third party from making a proposal to acquire us or delaying or preventing a change in control or management of Forest City without the approval of these families or RMS LP 10 _________________________________________________________________ [65]Table of Contents RMS Investment Corp |
| Provides Property Management and Leasing Services to Us and is Controlled By Some of Our Affiliates We paid approximately dlra343cmam000 and dlra323cmam000 as total compensation during the year ended January 31, 2006 and 2005, respectively, to RMS Investment Corp |
| for property management and leasing services |
| RMS Investment Corp |
| is controlled by members of the Ratner, Miller and Shafran families, some of whom are our directors and executive officers |
| RMS Investment Corp |
| manages and provides leasing services to two of our Cleveland-area specialty retail centers, Golden Gate, which has 362cmam000 square feet, and Midtown Plaza, which has 240cmam000 square feet |
| The current rate of compensation for these management services is 4prca of all rental income, plus a leasing fee of generally 3prca to 4prca of rental income |
| Management believes these fees are comparable to those other management companies would charge to non-affiliated third parties |
| Our Directors and Executive Officers May Have Interests in Competing Properties, and We Do Not Have Non-Compete Agreements with Our Directors and Executive Officers Under our current policy, no director, officer or employee, including any member of the Ratner, Miller and Shafran families, is allowed to invest in a competing real estate opportunity without first obtaining the approval of the audit committee of our board of directors |
| We do not have non-compete agreements with any director, officer or employee, however, and upon leaving Forest City any director, officer or employee could compete with us |
| Notwithstanding our policy, we permit our principal shareholders who are officers and employees to own, alone or in conjunction with others, certain commercial, industrial and residential properties that may be developed, expanded, operated and sold independently of our business |
| As a result of their ownership of these properties, a conflict of interest may arise between them and Forest City |
| The conflict may involve the development or expansion of properties that may compete with our properties and the solicitation of tenants to lease these properties |
| Our High Debt Leverage May Prevent Us from Responding to Changing Business and Economic Conditions Our high degree of debt leverage could limit our ability to obtain additional financing or adversely affect our liquidity and financial condition |
| We have a relatively high ratio of debt, which consists of nonrecourse mortgage debt, the bank revolving credit facility and senior and subordinated debt, to total market capitalization, which was approximately 60dtta3prca and 64dtta8prca at January 31, 2006 and 2005, respectively, based on our long-term debt outstanding at that date and the market value of our outstanding Class A common stock and Class B common stock |
| Our high leverage may adversely affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes and may make us more vulnerable to a downturn in the economy |
| Nonrecourse mortgage debt is collateralized by completed rental properties, projects under development and undeveloped land |
| We do not expect to repay a substantial amount of the principal of our outstanding debt prior to maturity or to have available funds from operations sufficient to repay this debt at maturity |
| As a result, it will be necessary for us to refinance our debt through new debt financings or through equity offerings |
| If interest rates are higher at the time of refinancing, our interest expense would increase, which would adversely affect our results of operations and cash flows |
| In addition, in the event we were unable to secure refinancing on acceptable terms, we might be forced to sell properties on unfavorable terms, which could result in the recognition of losses and could adversely affect our financial position, results of operations and cash flows |
| If we were unable to make the required payments on any debt collateralized by a mortgage on one of our properties or to refinance that debt when it comes due, the mortgage lender could take that property through foreclosure and, as a result, we could lose income and asset value |
| Of our outstanding debt of approximately dlra5dtta8 billion at January 31, 2006, approximately dlra686 million becomes due in fiscal 2006 and approximately dlra557 million becomes due in fiscal 2007 |
| This is inclusive of credit enhanced mortgage debt we have obtained for a number of our properties |
| Generally, the credit enhancement, such as a letter of credit, expires prior to the term of the underlying mortgage debt and must be renewed or replaced to prevent acceleration of the underlying mortgage debt |
| We treat credit enhanced debt as maturing in the year the credit enhancement expires |
| We cannot assure you that we will be able to refinance our debt, obtain renewals or replacement of credit enhancement devices, such as a letter of credit, or otherwise obtain funds by selling assets or by raising equity |
| Our inability to repay or refinance our debt when it becomes due could result in foreclosure on the properties pledged as collateral thereof |
| From time to time, a nonrecourse mortgage may become past due and if we are unsuccessful in negotiating an extension or refinancing, the lender could commence foreclosure proceedings |
| 11 _________________________________________________________________ [66]Table of Contents Our Credit Facility Covenants Could Adversely Affect Our Financial Condition We have guaranteed the obligations of Forest City Rental Properties Corporation, or FCRPC, under the FCRPC credit agreement, dated as of March 22, 2004, as amended, among FCRPC, the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent |
| This guaranty imposes a number of restrictive covenants on Forest City, including a prohibition on certain consolidations and mergers and limitations on the amount of debt, guarantees and property liens that Forest City may incur |
| The guaranty also requires Forest City to maintain a specified minimum cash flow coverage ratio, consolidated shareholders’ equity and Earnings Before Depreciation and Taxes, or EBDT While we are in compliance at January 31, 2006, failure to comply with any of the covenants under the guaranty or failure by FCRPC to comply with any of the covenants under the FCRPC credit agreement could result in an event of default, which would trigger Forest City’s obligation to repay all amounts outstanding under the FCRPC credit agreement |
| Forest City’s ability and FCRPC’s ability to comply with these covenants will depend upon the future economic performance of Forest City and FCRPC These covenants may adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that may be desirable or advantageous to us |
| Any Rise in Interest Rates Will Increase Our Interest Costs Due to the protection provided by the interest rate swaps, caps and long-term contracts in place as of January 31, 2006, a 100 basis point increase in taxable interest rates (including properties accounted for under the equity method) would not materially increase the annual pre-tax interest cost for the next 12 months of our taxable variable-rate debt at January 31, 2006 |
| A portion of our taxable variable-rate debt is related to construction loans for which the interest expense is capitalized |
| Although tax-exempt rates generally move in an amount that is smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt, which includes subordinated debt, by approximately dlra9dtta3 million at January 31, 2006 |
| If We Are Unable to Obtain Tax-Exempt Financings, Our Interest Costs Would Rise We regularly utilize tax-exempt financings and tax increment financings, which generally bear interest at rates below prevailing rates available through conventional taxable financing |
| We cannot assure you that tax-exempt bonds or similar government subsidized financing will continue to be available to us in the future, either for new development or acquisitions, or for the refinancing of outstanding debt |
| Our ability to obtain these financings or to refinance outstanding debt on favorable terms could significantly affect our ability to develop or acquire properties and could have a material adverse effect on our financial position, results of operations and cash flows |
| Our Business Will Be Adversely Impacted Should an Uninsured Loss or a Loss in Excess of Insurance Limits Occur We carry comprehensive general liability, special property, flood, earthquake and rental loss (and environmental insurance on certain locations) with respect to our properties within insured limits and policy specifications that we believe are customary for similar properties |
| There are, however, specific types of losses, generally of a catastrophic nature, such as losses from wars, terrorism, hurricanes or earthquakes, for which we may not have adequate insurance coverage or, in our judgment, for which we cannot obtain insurance at a reasonable cost |
| In the event of an uninsured loss or a loss in excess of our insurance limits, we could lose both our invested capital in, and anticipated profits from, the affected property |
| Any such loss could materially and adversely affect our results of operations, cash flows and financial position |
| Under our current policies, which expire October 31, 2006, our properties are insured against acts of terrorism, subject to various limits, deductibles and exclusions for acts of war and terrorist acts involving biological, chemical and nuclear damage |
| Once this policy expires, we may not be able to obtain adequate terrorism coverage at a reasonable cost |
| In addition, our insurers may not be able to maintain reinsurance sufficient to cover any losses we may incur as a result of terrorist acts |
| As a result, our insurers’ ability to provide future insurance for any damages that we sustain as a result of a terrorist attack may be reduced |
| Additionally, most of our current project mortgages require special all-risk property insurance, and we cannot assure you that we will be able to obtain policies that will satisfy lender requirements |
| 12 _________________________________________________________________ [67]Table of Contents We are self-insured as to the first dlra500cmam000 of liability coverage and self-insured on the first dlra250cmam000 of property damage per occurrence |
| We believe our wholly-owned captive insurance company, licensed and regulated by the state of Vermont, is adequately funded to cover the per occurrence limits for liability coverage and property damage subject to certain aggregate limits as defined in the respective policies |
| While we believe that our self-insurance reserves are adequate, we cannot assure you that we will not incur losses that exceed these self-insurance reserves |
| We May Incur Unanticipated Costs and Liabilities Due to Environmental Problems Under various federal, state and local environmental laws, an owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances at that property |
| These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances |
| The presence of hazardous or toxic substances, or the failure to remediate these substances when present, may adversely affect the owner’s ability to sell or rent that real property or to borrow funds using that real property as collateral, and it also may impose unanticipated costs and delays on projects |
| Persons who arrange for the disposal or treatment of hazardous or toxic wastes may also be liable for the costs of the investigation, removal and remediations of those wastes at the disposal or treatment facility, regardless of whether that facility is owned or operated by that person |
| In some instances, federal, state and local laws require abatement or removal of specific asbestos-containing materials in the event of demolition, renovations, remodeling, damage or decay |
| These laws also impose specific worker protection and notification requirements and govern emissions of and exposure to asbestos fibers in the air |
| We could be held liable for the environmental response costs associated with the release of some regulated substances or related claims, whether by us, our tenants, former owners or tenants of the affected property or others |
| In addition to remediation actions brought by federal, state and local agencies, the presence of hazardous substances on a property could result in personal injury, contribution or other claims by private parties |
| These claims could result in costs or liabilities that could exceed the value of the affected property |
| We are not aware of any notification by any private party or governmental authority of any claim in connection with environmental conditions at any of our properties that we believe will involve any material expenditure |
| Nor are we aware of any environmental condition on any of our properties that we believe will involve any material unrecorded expenditures |
| However, we cannot assure you that any non-compliance, liability, claim or expenditure will not arise in the future |
| To the extent that we are held liable for the release of regulated substances by tenants or others, we cannot assure you we would be able to recover our costs from those persons |
| We Face Potential Liability from Residential Properties Accounted For on the Equity Method and Other Partnership Risks As part of our financing strategy, we have financed several real estate projects through limited partnerships with investment partners |
| The investment partner, typically a large, sophisticated institution or corporate investor, invests cash in exchange for a limited partnership interest and special allocations of expenses and the majority of tax losses and credits associated with the project |
| These partnerships typically require us to indemnify, on an after-tax or “grossed up” basis, the investment partner against the failure to receive or the loss of allocated tax credits and tax losses |
| Due to the economic structure and relating economic substance, we have consolidated each of these properties in our consolidated financial statements |
| We believe that all the necessary requirements for qualification for such tax credits have been and will be met and that our investment partners will be able to receive expense allocations associated with these properties |
| However, we cannot assure you that this will, in fact, be the case or that we will not be required to indemnify our investment partners on an after-tax basis for these amounts |
| Any indemnification payment could have a material adverse effect on our results of operations and cash flows |
| In addition to partnerships, we also use limited liability companies, or LLCs, to finance some of our projects with third party lenders |
| Acting through our wholly-owned subsidiaries, we typically are a general partner or managing member in these partnerships or LLCs |
| There are, however, instances in which we do not control or even participate in management or day-to-day operations |
| The use of a structure where we do not control the management of the entity involves special risks associated with the possibility that: • Another partner or member may have interests or goals that are inconsistent with ours; • A general partner or managing member may take actions contrary to our instructions, requests, policies or objectives with respect to our real estate investments; or • A partner or a member could experience financial difficulties that prevent it from fulfilling its financial or other responsibilities to the project or its lender or the other partners or members |
| 13 _________________________________________________________________ [68]Table of Contents To the extent we are a general partner, we may be exposed to unlimited liability, which may exceed our investment or equity in the partnership |
| If one of our subsidiaries is a general partner of a particular partnership it may be exposed to the same kind of unlimited liability |
| Failure to Continue to Maintain Effective Internal Controls in Accordance with Section 404 of the Sarbanes-Oxley Act of 2002 Could Have a Material Adverse Effect on Our Ability to Ensure Timely and Reliable Financial Reporting Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires our management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting |
| We will continue our ongoing process of testing and evaluating the effectiveness of, and remediating any issues identified related to, our internal control over financial reporting |
| We also will strive to continue to improve our processes to improve efficiency of our financial reporting process |
| The process of documenting, testing and evaluating our internal control over financial reporting is complex and time consuming |
| Due to this complexity and the time-consuming nature of the process and because currently unforeseen events or circumstances beyond our control could arise, we cannot assure you that we ultimately will be able to continue to comply fully in subsequent fiscal periods with Section 404 in our Annual Report on Form 10-K or Quarterly Report on Form 10-Q We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404, which could adversely affect public confidence in our ability to record, process, summarize and report financial data to ensure timely and reliable external financial reporting |
| Compliance or Failure to Comply with the Americans with Disabilities Act and Other Similar Laws Could Result in Substantial Costs The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons |
| In the event that we are not in compliance with the Americans with Disabilities Act, the federal government could fine us or private parties could be awarded damages against us |
| If we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our results of operations and cash flows |
| We may also incur significant costs complying with other regulations |
| Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and safety requirements |
| If we fail to comply with these requirements, we could incur fines or private damage awards |
| We believe that our properties are currently in material compliance with all of these regulatory requirements |
| However, existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that could adversely affect our cash flows and results of operations |