Friday, September 12, 2014

Urban American Roosevelt Landings Lease Assignment To Brookfield Joint Venture Approved By Roosevelt Island Operating Corp Yesterday - RIOC To Receive Payment Of $2.7 Million

Reported August 15:

A change in ownership is coming to Roosevelt Island's 1003 unit Roosevelt Landings building complex currently owned by Urban American.

Brookfield Property Partners has acquired an interest in Urban American's Putnam Apartment Portfolio (approximately 4,000 units) which includes Roosevelt Landings on Roosevelt Island in a transaction valued in excess of 1 Billion Dollars.
The change in the ownership structure of Roosevelt Landings was the subject of September 11 meeting of the Roosevelt Island Operating Corp (RIOC) Real Estate Advisory Committee meeting  (audio web cast of meeting here) yesterday followed by the full RIOC Board Of Directors (video web cast here) voting on the lease assignment later that afternoon.

The consent of the RIOC Board Of Directors was required to change the ownership structure of Roosevelt Landings allowing Urban American to assign the Roosevelt Landings lease to a new joint venture partnership with various Brookfield entities. According to the September RIOC Board Agenda:
... 6. Authorization of Consent to Assignment of Lease by North Town Roosevelt, LLC (the Eastwood Tenant) to BSREP UA Roosevelt Landings LLC (Board Action Required)...
RIOC President Charlene Indelicato and General Counsel Don Lewis explained to the Real Estate Advisory committee the terms of the assignment including:
  • payment of approximately $2.7 million fee to RIOC,
  • the assignment will maintain the status quo as far as the tenants of Roosevelt Landings are concerned and
  • the $2.7 million will be spent on Roosevelt Island capital projects.
RIOC Director Fay Christian expressed concern that the RIOC Directors were not informed about the transaction earlier. The Roosevelt Landings lease assignment item was placed on the RIOC Board agenda the morning of the meeting.

Several other RIOC Board Directors expressed concern over various Roosevelt Landings issues including the possible financial overleveraging of debt placed on the building due to the transaction, affordability, displacement of seniors and electricity submetering.

Urban American's Josh Eisenberg replied that Roosevelt Landings has never been overleveraged, that all of its debt service has been paid out of cash flow and that there will be even less debt on Roosevelt Landings with this transaction. Mr. Eisenberg also described the energy efficiency program being undertaken at Roosevelt Landings and noted future additional capital improvements and affordability efforts. Here's what Mr. Eisenberg had to say.

The RIOC Board of Directors consented to the assignment of Roosevelt Landings/Eastwood ground lease from Urban American to the new joint venture between Urban American and Brookfield Property. Based upon a previously agreed formula in the ground lease, RIOC will receive payment of approximately $2.7 million for its consent.

The vote to approve the assignment was 6 in favor 1 against and 1 recusal. Director Michael Shinozaki was the single no vote. Director David Kraut, who lives in Roosevelt Landings, recused himself from participating in the RIOC Board meeting discussion and vote.

During the RIOC Real Estate Advisory Committee meeting prior to the full RIOC Board vote, Mr. Kraut indicated he would seek to table (postpone) the Urban American lease assignment at the full RIOC Board meeting later in the day in order to obtain additional information about the transaction. Immediately after Mr. Kraut indicated his intent to seek to postpone the vote, RIOC President Indelicato and General Counsel Lewis asked him to step outside the conference room where the public committee meeting was taking place and they had a private conversation with him.

Upon the start of the Roosevelt Landings lease assignment agenda item at the full RIOC Board meeting, Mr. Kraut announced his recusal from participating in the discussion and vote.

Here's the discussion and vote at the full RIOC Board meeting yesterday

and memorandum from RIOC President Indelicato to the RIOC Board describing the transaction in detail (full Board Material Package here)
To: Board of Directors
From: Charlene M. Indelicato
Re: Eastwood Lease Assignment
Date: September 10, 2014

Background – Proposed Transaction

The property located at 510-580 Main Street, Roosevelt Island (commonly known as “Eastwood”) is leased to North Town Roosevelt, LLC (“North Town”) pursuant to an Amended and Restated Lease dated as of September 21, 2006 (the “Eastwood Lease”) between Roosevelt Island Operating Corporation (“RIOC”) as landlord, and North Town Roosevelt, LLC, as tenant. North Town entered into a Purchase and Sale Agreement dated as of July 18, 2014 (the “PSA”) by and among North Town, as one of the sellers, and BSREP US Operating LLC, as purchaser, pursuant to which Tenant’s interest as tenant in the Lease is to be assigned to the purchaser, or its designee.(The PSA covers multiple properties owned by multiple sellers.) The aggregate sales price set forth in the PSA for all of the various properties is $1,041,800,000, of which $272,000,000 has been allocated to the assignment of the Eastwood Lease. Pursuant to Article 10 of the Eastwood Lease, North Town has requested RIOC’s consent to the assignment of North Town’s right, title and interest in the Eastwood Lease to BSREP UA Roosevelt Landings LLC (“Assignee”), a designee of BSREP US Operating LLC. The Eastwood Lease provides that Landlord’s consent may not be unreasonably withheld, conditioned or delayed.

In addition to the assignment of North Town’s interest in and to the Eastwood Lease, North Town will assign to Assignee, and Assignee will assume, all of North Town’s right, title and interest in and to the Sublease dated as of September 21, 2006 by and between North Town Roosevelt, LLC, as Sublandlord, and Roosevelt Island Operating Corporation, as Subtenant for the ground floor commercial space in Eastwood. North Town has provided RIOC with a proposed Assignment and Assumption Agreement to be delivered at closing, which references this sublease.

RIOC is currently holding a letter of credit in the amount of $750,000 pursuant to the provisions of Article 5 of the Eastwood Lease. Under the Eastwood Lease, North Town was entitled to reduce the face amount of the Letter of Credit to $500,000, but had not yet done so. At closing, Assignee will deliver a replacement Letter of Credit in the sum of $500,000, with RIOC as the beneficiary. The Eastwood Lease obligates the tenant to maintain the Letter of Credit in effect until November 21, 2016.

Under the PSA, Assignee is bound to comply with the HAP (Housing Assistance Payment) Contracts in effect with respect to tenants receiving Section 8 benefits. In addition, pursuant to The North Town Tenant Settlement Agreement, a “Landlord Assistance Program” is being provided to various tenants. North Town’s obligations under this Settlement Agreement and Landlord Assistance Program will be among the obligations assumed by Assignee at closing.

Eastwood Lease Provisions Regarding Assignments

Together with its request for consent to a lease assignment, Tenant is obligated to notify RIOC of names and addresses of all managers and managing members and all other members of the assignee having, directly or indirectly, a five percent (5%) or greater ownership interest in the Assignee. The Assignee delivered to RIOC an affidavit which provided the names and addresses of all managers and managing members of the Assignee, and all other members of the Assignee having, directly or indirectly, a twelve percent (12%) or greater ownership interest in the Assignee, together with an organizational chart showing the direct and indirect ownership of Assignee and a list of all newly formed entities which were formed for the purpose of investing, directly or indirectly, in the Assignee. Assignee is wholly owned by BSREP UA Holdings LLC, which, in turn, is owned 7% by Urban American Holdings II, LLC and 93% by BSREP Putnam Portfolio LLC. (All of these entities were formed for the purpose of this transaction.)As shown on the organizational chart provided by Assignee, BSREP Putman Portfolio LLC is owned indirectly by various Brookfield affiliated entities. Due to certain confidentiality agreements, Assignee is unable to disclose the identity of passive investors owning, directly or indirectly, less than a twelve percent (12%) ownership interests in Assignee. As set forth in Assignee’s affidavit, investors owning less than a twelve percent (12%) interest in the funds directly or indirectly owning Assignee are passive investors, and do not control or otherwise manage Assignee.

Calculation of Transaction Payment

RIOC is entitled to receive a Transaction Payment in connection with an assignment of the Eastwood Lease. The Transaction Payment is the total of (a) three percent (3%) of the initial $8,200,000 of Net Proceeds from the assignment, and (b) ten percent (10%) of the Net Proceeds in excess of $8,200,000. As noted above, the portion of the purchase price allocated in the PSA to the assignment of the Eastwood Lease is $272,000,000. North Town is permitted to deduct certain expenses from the sales price to determine the Net Proceeds of sale. These expenses are (i) actual out-of-pocket standard closing costs paid by Tenant to unaffiliated third parties, (ii) repayment of mortgages, if any, (iii) return of all equity contributed to Tenant as reasonably evidenced by Landlord, with a 6% return on such equity from the time contributed, to the extent not deducted from the calculation of Net Proceeds in a prior transaction, (iv) the unamortized cost of all capital improvements, to the extent not deducted from the calculation of Net Proceeds in a prior transaction, and (v) capital gains tax liability of Tenant. The total deductions set forth in North Town’s calculation are $238,883,425, which includes repayment of the outstanding $199,000,000 mortgage. Based on these numbers, the Transaction Payment payable to RIOC is $2,737,658. RIOC has asked for evidence of the amount of the mortgage being repaid, and clarification of certain of the numbers set forth in this schedule, and the Transaction Payment may be adjusted as necessary if the amount of the Net Proceeds changes.

Letter Agreement Regarding Affordability Agreements

Following the closing of the assignment, Assignee may enter into discussions with the City of New York with respect to any tax abatement and/or rent stabilization programs which would affect the premises during the term of the Eastwood Lease. At the closing, Assignee will deliver a letter to RIOC confirming that any final agreement entered into with the City of New York with respect to such matters will not amend, modify or otherwise alter the terms and conditions of the Eastwood Lease or any other written agreements to which RIOC is a signatory.


I hereby recommend that the RIOC Board of Directors consent to the Assignment of the Eastwood Lease and to North Town’s calculation of the Transaction Payment in connection therewith (subject to possible adjustment as indicated above), in compliance with the Eastwood Lease.
Here's the full video of RIOC Real Estate Advisory Committee discussion of Roosevelt Landings lease assignment. It was a very interesting discussion of many issues facing the building and Roosevelt Island.