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FCE-A > SEC Filings for FCE-A > Form 10-K on 27-Mar-2013All Recent SEC Filings

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Form 10-K for FOREST CITY ENTERPRISES INC


27-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Corporate Description
We principally engage in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. We operate through three strategic business units and have six reportable operating segments. The Commercial Group, our largest strategic business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings, hotels and mixed-use projects. Additionally, it recently constructed and currently operates Barclays Center, a state-of-the-art sports and entertainment arena located in Brooklyn, New York. The Arena, which opened in September 2012, is being reported as a separate segment. The Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. Additionally, the Residential Group owns interests in entities that develop and manage military family housing. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers. It also owns and develops land into master-planned communities and mixed-use projects. On January 31, 2012, our Board of Directors approved a strategic decision by senior management to reposition or divest significant portions of our Land Development Group. During the year ended January 31, 2013, we established and executed on our land divestiture strategy. See further discussion under "Land Development Group" in this section. Corporate Activities and The Nets, a member of the National Basketball Association ("NBA") in which we account for our investment on the equity method of accounting, are the other reportable operating segments.
We have approximately $10.6 billion of consolidated assets in 26 states and the District of Columbia at January 31, 2013. Our core markets include Boston, Chicago, Dallas, Denver, Los Angeles, New York City, Philadelphia, the Greater San Francisco metropolitan area and the Greater Washington D.C. metropolitan area. We have offices in Albuquerque, Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and our corporate headquarters in Cleveland, Ohio.


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Significant milestones occurring during 2012 include:
The reduction of the authorized size of our Board of Directors from fifteen members to thirteen, effective with our Annual Meeting of Shareholders in June 2012 ("Annual Meeting"). Two non-independent directors, James A. Ratner and Joan K. Shafran, completed their terms and were not re-nominated at the Annual Meeting;

The announcement of Kenneth J. Bacon, co-founder of RailField Partners and presiding director of the board for Comcast Corporation, as a new independent Class B member of our Board of Directors. Kenneth J. Bacon spent 1998 - 2012 with Fannie Mae, rising to the position of executive vice president of the organization's multifamily division. The election of Kenneth J. Bacon, which was effective December 3, 2012, results in a majority of independent directors serving on our Board;

The announcement that we will be changing our fiscal year from January 31 to December 31, effective with the year ended December 31, 2013. In addition, we began reporting Funds From Operations with our first quarter 2012 results;

The announcement of a strategic capital partnership with the Arizona State Retirement System and creation of $400,000,000 equity fund that will invest in multifamily development projects primarily in New York City, Washington D.C., Boston, Los Angeles, and San Francisco;

The sale of a partial interest in 8 Spruce Street, an apartment community in Manhattan, New York. As a result of the transaction, we have retained an 18% ownership interest, our original partners retained a 33% ownership interest and a new partner became a 49% owner. We recognized a gain on disposition of our interest of $34,959,000 and received net cash proceeds from the transaction of approximately $129,000,000. The transaction values the building at $1,050,000,000;

Completed and opened:

? Barclays Center, a state-of-the-art sports and entertainment arena located in Brooklyn, New York and the anchor of our Brooklyn Atlantic Yards mixed-use project. This 670,000 square foot world-class arena is the home to Brooklyn Nets basketball, is future home of the New York Islanders and expects to host more than 200 cultural and sporting events annually. The site also includes a new Atlantic Avenue-Barclays Center subway entrance and the arena is designed to meet LEED guidelines;

? Our 80,000 square foot anchor tenant, Lord and Taylor, in April 2012 at Westchester's Ridge Hill, a mixed use retail project located in Yonkers, New York;

? The Aster Town Center, an 85 unit apartment community and Botanica Eastbridge, an 118 unit apartment community located at our Stapleton project in Denver, Colorado;

? The Yards - Boilermaker Shops, an adaptive reuse property in Washington D.C. that includes 39,000 square feet of ground-level retail and mezzanine office space; and

? The dedication of the newly completed Las Vegas City Hall, which we developed for the City of Las Vegas on a fee basis as part of a public-private partnership.

The privately negotiated exchanges of $209,448,000 aggregate amount of liquidation preference consisting of 4,188,952 shares of our Series A Cumulative Perpetual Convertible Preferred Stock ("Series A preferred stock") for 13,852,435 shares of our Class A common stock and cash payments of $19,069,000 for additional exchange consideration;

The issuance of $125,000,000 of additional 7.375% Senior Notes due February 1, 2034 ("2034 Senior Notes"). On August 20, 2012, proceeds from this transaction were used to redeem $125,000,000 in principal amount of our 7.625% Senior Notes due 2015 ("2015 Senior Notes");

The closing of a two-year extension, with an additional one-year option, of the previous $497,000,000 nonrecourse construction mortgage secured by Westchester's Ridge Hill. As a result of the extension, we are required to make principal paydowns aggregating $32,000,000 over the next ten months, resulting in a $465,000,000 nonrecourse construction mortgage financing on the project. This extension provides us additional time to complete lease-up, stabilize the project and position the asset for permanent financing;

Opportunistically generating net cash proceeds of $128,842,000 through the sale of non-core operating assets. The assets sold include Fairmont Plaza, an office building in San Jose, California; Emerald Palms, an apartment community in Miami, Florida; Southfield, an apartment community in Whitemarsh, Maryland; White Oak Village, a specialty retail center in Richmond, Virginia; Quebec Square, a specialty retail center in Denver, Colorado; and Village at Gulfstream Park, an unconsolidated specialty retail center in Hallandale Beach, Florida;

The completion of the divestiture activities of substantially all of our land held for divestiture;


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Commencing construction at:

? Continental Building, a 203 unit apartment community in Dallas, Texas;

? Brooklyn Atlantic Yards - B2 BKLYN, a 363 unit modular apartment community located at our Brooklyn Atlantic Yards mixed-use project in Brooklyn, New York and adjacent to Barclays Center;

? Stratford Avenue, a 128 unit apartment community in Fairfield, Connecticut;

? 120 Kingston, a 240 unit apartment community within the Chinatown district of downtown Boston, Massachusetts;

? Two projects located at The Yards, our mixed-use project in the Capital Riverfront District of Washington, D.C. The first is Twelve12, a mixed-use project with 218 apartments above street level retail, including a grocery store and fitness center. Our second new start is Lumber Shed, a 32,000 square-foot, mixed-use project with streetlevel restaurants featuring outdoor seating to take advantage of its location along the Anacostia River;

? West Village, a 381 unit apartment community in Dallas, Texas;

? Aster Northfield, a 352 unit apartment community located at our Stapleton project in Denver, Colorado; and

Closing $1,192,591,000 in nonrecourse mortgage financing transactions.

In addition, subsequent to January 31, 2013, we achieved the following significant milestones:
Completion of the conversion or redemption of all the remaining outstanding shares of our Series A preferred stock;

Announcing our intention to redeem the remaining $53,253,000 of outstanding 2015 Senior Notes on March 29, 2013;

Closing on the Fourth Amended and Restated Credit Agreement and Fourth Amended and Restated Guaranty of Payment of Debt (the "Amended Credit Facility"). The amendment extended the maturity date to February 2016, subject to a one year extension upon the satisfaction of certain conditions, reduced the interest rate spread on the London Interbank Offered Rate ("LIBOR") option by 25 basis points to 3.50% and removed the prior LIBOR floor of 100 basis points. The amendment also increased available borrowings to $465,000,000, subject to certain reserve commitments to be established, as applicable, on certain dates to be used to retire certain of our senior notes and provides an accordion provision allowing us to increase our total available borrowings to $500,000,000 upon satisfaction of certain conditions set forth in the Amended Credit Facility. Additionally, the amendment permits us to repurchase up to $100,000,000 of our Class A common stock and to declare or pay dividends in an amount not to exceed $24,000,000 in the aggregate in any four fiscal quarter period to Class A or B common shareholders, subject to certain conditions;

The sale of Millender Center, a 339 unit apartment community in Detroit, Michigan. The sale generated net cash proceeds of approximately $15,000,000. This disposition is part of our strategy to sell operating assets in non-core markets; and

Addressing $116,955,000 of nonrecourse mortgage debt financings that would have matured during the year ended January 31, 2014, through closed transactions, commitments and/or automatic extensions.

Critical Accounting Policies
Our consolidated financial statements include all majority-owned subsidiaries where we have financial or operational control and variable interest entities ("VIEs") where we are deemed to be the primary beneficiary. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, we have identified certain critical accounting policies which are subject to judgment and uncertainties. We have used our best judgment to determine estimates of certain amounts included in the financial statements as a result of these policies, giving due consideration to materiality. As a result of uncertainties surrounding these events at the time the estimates are made, actual results could differ from these estimates causing adjustments to be made in subsequent periods to reflect more current information. The accounting policies that we believe contain uncertainties that are considered critical to understanding the consolidated financial statements are discussed below. Our management reviews and discusses the policies, and these policies have been discussed with our audit committee of the Board of Directors.
Fiscal Year
The years 2012, 2011 and 2010 refer to the fiscal years ended January 31, 2013, 2012 and 2011, respectively.


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Recognition of Revenue
Real Estate Sales - The specific timing of a sale transaction and recognition of profit is measured against various criteria in the real estate sales accounting guidance covering the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the transaction by applying the deposit, finance, installment or cost recovery methods, as appropriate.
Consolidated operating properties that have been sold or determined to be held for sale are reported as discontinued operations. We consider assets held for sale when the transaction has been approved by management and there are no significant contingencies related to the sale that may prevent the transaction from closing. In many transactions, these contingencies are not satisfied until the actual closing and, accordingly, the property is not identified as held for sale until the closing actually occurs. However, each potential sale is evaluated based on its separate facts and circumstances.
Leasing Operations - We enter into leases with tenants in our rental properties. The lease terms of tenants occupying space in the retail centers and office buildings generally range from 1 to 30 years, excluding leases with certain anchor tenants, which typically are longer. Minimum rents are recognized on a straight-line basis over the non-cancelable term of the related lease, which include the effects of rent steps and rent abatements under the leases. Overage rents are recognized after the contingency has been removed (i.e., sales thresholds have been achieved). Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the applicable costs are incurred.
Construction - Revenues and profit on long-term fixed-price contracts are recorded using the percentage-of-completion method. Revenues on reimbursable cost-plus fee contracts are recorded in the amount of the accrued reimbursable costs plus proportionate fees at the time the costs are incurred. Military Housing Fee Revenues - Development fees related to military housing projects are earned based on a contractual percentage of the actual development costs incurred. Additional development incentive fees are recognized based upon successful completion of criteria, such as incentives to realize development cost savings, encourage small and local business participation, comply with specified safety standards and other project management incentives as specified in the development agreements.
Construction management fees are earned based on a contractual percentage of the actual construction costs incurred. Additional construction incentive fees are recognized based upon successful completion of certain criteria as set forth in the construction contracts.
Property management and asset management fees are earned based on a contractual percentage of the annual net rental income and annual operating income, respectively, that is generated by the military housing privatization projects as defined in the agreements. Additional property management incentive fees are recognized based upon successful completion of certain criteria as set forth in the property management agreements.
Arena Revenues - The Arena naming rights agreement with Barclays Services Corporation, which commenced with the opening of the Arena, has a 20-year term, subject to certain extension rights. Arena naming rights revenue is recognized on a straight-line basis over the contract year.
Arena founding partner and sponsor agreements entitle the parties to certain sponsorship, promotional, media, hospitality and other rights and entitlements. These agreements expire at various terms ranging from one to seven years from the opening of the Arena and is recognized on a straight-line basis. Arena suite licenses entitle the licensee the use of a luxury suite in the Arena. The terms of the suite license agreements commenced on the date the Arena opened with terms ranging from one to seven years. Revenue is recognized on a straight-line basis over each contractual year.
Ticketing fee revenue is based on the Arena's share of ticket sale fees in accordance with an agreement with Ticketmaster. Revenue from ticketing fees is deferred and recognized upon settlement of the related event. Recognition of Costs and Expenses
Operating expenses primarily represent the recognition of operating costs, which are charged to operations as incurred, administrative expenses and taxes other than income taxes. Interest expense and real estate taxes during active development and construction are capitalized as a part of the project cost.


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Depreciation and amortization is generally computed on a straight-line method over the estimated useful life of the asset. The estimated useful lives of buildings (other than the Arena) and certain first generation tenant allowances that are considered by management as a component of the building are primarily 50 years. The estimated useful life of the Arena is 34.5 years, the remaining term of the ground leases on which the Arena was built. Subsequent tenant improvements and those first generation tenant allowances that are not considered a component of the building are amortized over the life of the tenant's lease. This estimated life is based on the length of time the asset is expected to generate positive operating cash flows. Actual events and circumstances can cause the life of the building and tenant improvement to be different than the estimates made. Additionally, lease terminations can affect the economic life of the tenant improvements.
Major improvements and tenant improvements that are considered to be our assets are capitalized in real estate costs and expensed through depreciation charges. Tenant improvements that are considered lease inducements are capitalized into other assets and amortized as a reduction of rental revenues over the life of the tenant's lease. Repairs, maintenance and minor improvements are expensed as incurred.
A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves judgment. Our capitalization policy on development properties is based on accounting guidance for the capitalization of interest cost and accounting guidance for costs and the initial rental operations of real estate properties. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on any portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction. Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the respective accounts and any resulting gains or losses are reported in the Consolidated Statements of Operations. Acquisition of Rental Properties
We have not been an active acquiror of rental properties for the years presented in this Form 10-K. However, we do periodically use acquisition as a method to accelerate growth and may elect to be more active in this area in the future. Upon acquisition of a rental property, the purchase price of the property is allocated to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. Capitalized above-market lease values are amortized as a reduction of rental revenues (or rental expense for ground leases in which we are the lessee) over the remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental revenues (or rental expense for ground leases in which we are the lessee) over the remaining non-cancelable terms of the respective leases, including any fixed-rate renewal periods that are probable of being exercised. For our below market lease and in-place lease intangibles that remain at January 31, 2013 and 2012, there were no fixed rate renewal periods associated with these leases that we deemed probable of renewal and included in the calculation of the intangible asset value or related amortization period.
Intangible assets also include amounts representing the value of tenant relationships and in-place leases based on our evaluation of each tenant's lease and our overall relationship with the respective tenant. We estimate the cost to execute leases with terms similar to in-place leases, including leasing commissions, legal expenses and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective lease. Our estimates of value are made using methods similar to those used by independent appraisers or by using independent appraisals. Factors considered by us in this analysis include an estimate of the carrying costs during the expected lease-up periods, current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. We also use the information obtained as a result of our pre-acquisition due diligence as part of considering any conditional asset retirement obligations, and when necessary, will record a conditional asset retirement obligation as part of our purchase price.


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When calculating the estimated value to assign to a tenant relationship intangible asset, we estimate the likelihood that a lessee will execute a lease renewal and other factors relative to the relationship. In determining the likelihood of lease renewal, we utilize a probability weighted model based on many factors. Other qualitative factors related to the relationship that we consider include, but are not limited to, the nature and extent of the business relationship with the tenant, growth prospects for developing new business with the tenant and the tenant's credit quality. The value of tenant relationship intangibles is amortized over the remaining initial lease term and expected renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is amortized over the remaining non-cancelable term of the respective leases and any fixed-rate renewal periods that are deemed probable.
In the event that a tenant terminates its lease, the unamortized portion of each intangible asset, including market rate adjustments, in-place lease values and tenant relationship values, would be charged to expense. Allowance for Doubtful Accounts and Reserves on Notes Receivable We record allowances against our rent receivables from tenants and other receivables that we consider uncollectible. These allowances are based on management's estimate of receivables that will not be realized from cash receipts in subsequent periods. We also maintain an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. The allowance against our straight-line rent receivable is based on historical experience with early lease terminations as well as specific review of significant tenants and tenants that are having known financial difficulties. There is a risk that our estimate of the expected activity of current tenants may not accurately reflect future events. If the estimate does not accurately reflect future tenant vacancies, the reserve for straight-line rent receivable may be over or understated by the actual tenant vacancies that occur. We estimate the allowance for notes receivable based on our assessment of expected future cash flows estimated to be received with consideration given to any collateral of the respective note. If our estimate of expected future cash flows does not accurately reflect actual events, our reserve on notes receivable may be over or understated by the actual cash flows that occur. Our allowance for doubtful accounts, which includes our straight-line allowance, was $25,858,000 and $25,875,000, at January 31, 2013 and 2012, respectively. Historic and New Market Tax Credit Entities We have investments in properties that have received, or we believe are entitled to receive, Historic Preservation Tax Credits on qualifying expenditures under Internal Revenue Code ("IRC") section 47 and New Market Tax Credits on qualifying investments in designated community development entities ("CDEs") under IRC section 45D, as well as various state credit programs, including participation in the New York State Brownfield Tax Credit Program, which entitles the members to tax credits based on qualified expenditures at the time those qualified expenditures are placed in service. We typically enter into these investments with sophisticated financial investors. In exchange for the financial investors' initial contribution into the investment, the financial investor is entitled to substantially all of the benefits derived from the tax credit. Typically, these arrangements have put/call provisions (which range up to 7 years) whereby we may be obligated (or entitled) to repurchase the financial investors' interest. We have consolidated each of these entities in our consolidated financial statements and have reflected these investor contributions as accounts payable, accrued expenses and other liabilities. We guarantee to the financial investor that in the event of a subsequent recapture by a taxing authority due to our noncompliance with applicable tax credit guidelines, we will indemnify the financial investor for any recaptured tax credits. We initially record a liability for the cash received from the financial investor. We generally record income upon completion and certification of the qualifying development expenditures for Historic Preservation Tax Credits and upon certification of the qualifying investments in designated CDEs for New Market Tax Credits, resulting in an adjustment of the liability at each balance sheet date to the amount that would be paid to the financial investor based upon the tax credit compliance regulations, which range from 0 to 7 years. Income related to the sale of tax credits is recorded in interest and other income. Noncontrolling Interest
Interests held by partners in consolidated entities are reflected in noncontrolling interest, which represents the noncontrolling interests' share of . . .

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