S-4 1 d82808ds4.htm S-4 S-4
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As filed with the Securities and Exchange Commission on July 10, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Forest City Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland 6798 47-4113168

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code)

(I.R.S. Employer

Identification No.)

Terminal Tower, 50 Public Square, Suite 1100

Cleveland, Ohio 44113

(216) 621-6060

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

FCE Statutory Agent, Inc.

Terminal Tower, 50 Public Square, Suite 1360

Cleveland, Ohio 44113

(216) 621-6060

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

Copies to:

Benjamin R. Weber, Esq.

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004-2498

(212) 558-4000

Geralyn M. Presti, Esq.

Executive Vice President, General Counsel

and Corporate Secretary

Forest City Enterprises, Inc.

Terminal Tower

50 Public Square, Suite 1360

Cleveland, Ohio 44113-2267

(216) 621-6060

Thomas A. Aldrich, Esq.

Thompson Hine LLP

3900 Key Center

127 Public Square

Cleveland, Ohio 44114-1291

(216) 566-5500

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement is declared effective.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer

¨  (Do not check if a smaller reporting company) Smaller reporting company ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross Border Third-Party Tender Offer)  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

Amount

to be

registered

Proposed

maximum

offering price

per unit

Proposed

maximum

aggregate

offering price(3)

Amount of

registration fee

Class A common stock, par value $0.01 per share

277,073,192(1) N/A $6,181,502,914(4) $718,291(3)

Class B common stock, par value $0.01 per share

19,159,576(2) N/A $427,450,141(5) $49,670(3)

Class A common stock, par value $0.01 per share, issuable upon conversion of the Class B common stock

19,159,576(6) N/A N/A N/A(7)

 

 

(1) Represents the estimated maximum number of shares of Class A common stock, par value $0.01 per share, of Forest City Realty Trust, Inc. (the “REIT”) that may be issuable pursuant to the merger (the “Merger”) of FCE Merger Sub, Inc. (“Merger Sub”), a subsidiary of the REIT, with and into Forest City Enterprises, Inc. (“Forest City”), pursuant to the agreement and plan of merger between Forest City, the REIT, FCILP, LLC and Merger Sub as described in the proxy statement/prospectus that forms a part of this registration statement, which is the sum of the number of shares of Class A Common Stock, par value $.33 13 per share, of Forest City outstanding at the close of business on June 30, 2015 (including shares of restricted stock) plus shares that may be issued by Forest City prior to the date the Merger is expected to be completed. Pursuant to the Merger, each outstanding share of Forest City Class A Common Stock will be converted into one share of REIT Class A common stock.
(2) Represents the estimated maximum number of shares of Class B common stock, par value $0.01 per share, of the REIT that may be issuable pursuant to the Merger, based on the number of shares of Class B Common Stock, par value $.33 13 per share, of Forest City outstanding at the close of business on June 30, 2015 plus shares that may be issued by Forest City prior to the date the Merger is expected to be completed. Pursuant to the Merger, each outstanding share of Forest City Class B Common Stock will be converted into one share of REIT Class B common stock.
(3) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The proposed maximum aggregate offering price of REIT common stock was calculated in accordance with Rule 457(c).
(4) Reflects $22.31, the average of the high and low prices per share of Forest City Class A Common Stock on the New York Stock Exchange on July 6, 2015, multiplied by 277,073,192, the estimated maximum number of shares of REIT Class A common stock that may be issued upon the completion of the merger of Merger Sub with and into Forest City.
(5) Reflects $22.31, the average of the high and low prices per share of Forest City Class B Common Stock on the New York Stock Exchange on July 6, 2015, multiplied by 19,159,576, the estimated maximum number of shares of REIT Class B common stock that may be issued upon the completion of the merger of Merger Sub with and into Forest City.
(6) Represents the maximum number of shares of REIT Class A common stock issuable upon conversion of REIT Class B common stock, which are convertible at the option of the holder on a one-for-one basis at any time.
(7) Pursuant to Rule 457(i) under the Securities Act, there is no additional filing fee with respect to the shares of REIT Class A common stock issuable upon conversion of the REIT Class B common stock because no additional consideration will be received by the REIT in connection with the conversion.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.

 

 

 


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The information in this proxy statement/prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. Forest City Realty Trust, Inc. may not sell or exchange these securities until the registration statement is effective. This proxy statement/prospectus is not an offer to sell or exchange these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY—SUBJECT TO COMPLETION, DATED JULY 10, 2015

A HOLDING COMPANY MERGER IS PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Forest City Shareholder:

I am pleased to invite you to attend a special meeting (the “Special Meeting”) of shareholders of Forest City Enterprises, Inc., an Ohio corporation (“Forest City”), which will be held in the 6th floor Riverview Room of the Ritz-Carlton Hotel, Tower City Center, 1515 West Third Street, Cleveland, Ohio 44113, on [●], 2015 at [●], Eastern Time. We have called this meeting to present two proposals to Forest City shareholders that, if approved, will facilitate our previously announced decision to reorganize as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”).

After careful consideration, on June 26, 2015, Forest City’s board of directors unanimously approved and declared to be advisable an agreement and plan of merger (the “Merger Agreement”) by and among Forest City, Forest City Realty Trust, Inc. (the “REIT”), FCILP, LLC (“FCILP”) and FCE Merger Sub, Inc. (“Merger Sub”), which was signed on [●]. As of the date of this letter, (i) the REIT is a wholly-owned direct subsidiary of Forest City incorporated under the laws of the state of Maryland, (ii) FCILP is a wholly-owned direct subsidiary of the REIT organized under the laws of the state of Delaware and (iii) Merger Sub is an Ohio corporation and is a wholly-owned subsidiary of the REIT owned in part directly and in part through the REIT’s interest in FCILP.

At the Special Meeting, you will be asked to consider and vote on a proposal to approve the Merger Agreement, which we refer to as the holding company merger proposal. Pursuant to this proposal, Merger Sub will merge with and into Forest City, with Forest City surviving as a subsidiary of the REIT owned by the REIT directly and through the REIT’s interest in FCILP. As a result of the merger, Forest City shareholders will receive shares of stock of the REIT as described in more detail below. Following the merger, Forest City will be converted to a limited partnership and thereafter will serve as the REIT’s operating partnership. We intend for the merger and the subsequent steps taken to convert Forest City to a limited partnership to qualify as a tax-free reorganization for Forest City’s U.S. shareholders under the Code.

At the effective time of the merger, each outstanding share of Forest City Class A Common Stock will be converted into one share of Class A common stock of the REIT and each outstanding share of Forest City Class B Common Stock will be converted into one share of Class B common stock of the REIT. As a result, immediately following the merger you will own shares of stock of the REIT in the same amount and percentage as your holdings in Forest City immediately prior to the merger.

The total number of shares of REIT common stock to be issued in the merger will not be known until immediately prior to completing the merger, but may be up to approximately [●] million shares of REIT Class A common stock and [●] million shares of REIT Class B common stock. We expect the shares of REIT Class A common stock and REIT Class B common stock to trade on the New York Stock Exchange under Forest City’s current trading symbols, “FCE.A” and “FCE.B”, respectively. On July 9, 2015, the last trading day before the announcement of the holding company merger proposal, the closing price per share of Forest City Class A Common Stock was $22.35 and the closing price per share of Forest City Class B Common Stock was $22.45.

As described in this proxy statement/prospectus, shares of REIT common stock to be issued as a result of the merger will be subject to certain transfer and ownership restrictions, which we refer to as the REIT Restrictions. The primary consequence of the REIT Restrictions is that following the merger no shareholder or group of shareholders of the REIT acting together will be permitted to own actually or constructively, under applicable


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U.S. federal income tax rules, in the aggregate, more than 9.8% in value of the outstanding shares of stock of the REIT (i.e., common and preferred stock that may be issued by the REIT) or more than 9.8% in value or number (whichever is more restrictive) of the outstanding shares of REIT common stock. The REIT Restrictions are designed, among other purposes, to facilitate the REIT’s planned compliance with certain of the U.S. federal income tax rules that the REIT must satisfy in order to qualify as a real estate investment trust under the Code.

As noted above, the REIT is a Maryland corporation and, following the merger, will be organized in a manner designed to enable it to qualify as a real estate investment trust for U.S. federal income tax purposes. Approximately 80% of the public companies that qualify as real estate investment trusts under the Code are currently formed under Maryland law. Our board of directors has concluded that, when compared with Ohio, Maryland has more comprehensive and flexible laws governing entities that qualify as real estate investment trusts under the Code and courts with greater expertise in addressing issues pertinent to entities that so qualify. As a result, among other reasons described in this proxy statement/prospectus, our board of directors has concluded that the holding company merger proposal, which is to be made to enable us to carry out our previously announced intention to convert to a structure that will allow the parent company of the Forest City business to qualify as a real estate investment trust under the Code, is advisable and in the best interests of Forest City and our shareholders.

Approval of the holding company merger proposal requires the affirmative vote of holders of at least two-thirds of the outstanding shares of Forest City Class A Common Stock and at least two-thirds of the outstanding shares of Forest City Class B Common Stock, each voting as a separate class.

The merger is just one step in a series of transactions that will result in the REIT and Forest City being organized as an umbrella partnership real estate investment trust, also commonly known as an UPREIT, which is a structure commonly used by other publicly held companies that qualify as real estate investment trusts under the Code. Following these transactions, the REIT will be the sole general partner and a limited partner of an operating partnership and FCILP will be the other limited partner of the operating partnership. Following the merger and the other related transactions, the REIT will hold substantially all of its assets, and will conduct substantially all of its business, through the operating partnership.

The UPREIT structure will enable the REIT to acquire and hold its properties through an entity that is not treated as a corporation for U.S. federal income tax purposes, which, we believe, will provide the REIT with greater flexibility in negotiating future acquisitions by enabling the REIT to offer certain tax advantages to sellers of assets and to investors who prefer to receive partnership units as consideration rather than cash or publicly-traded shares. The implementation of an UPREIT structure will be an important milestone in our previously announced overall business strategy.

At the Special Meeting, you will also be asked to adopt an amendment to the Forest City articles of incorporation that will facilitate our payment of a special dividend prior to the REIT conversion. As one of the steps necessary to enable the REIT to qualify as a real estate investment trust under the Code, Forest City intends to make a special dividend of all accumulated earnings and profits, as measured for U.S. federal income tax purposes, for the period ending at the time of the merger. To preserve working capital, Forest City intends to pay a significant portion (i.e., 80%) of this special dividend in shares of Forest City Common Stock, with the balance to be paid in cash, and to do so in a manner that provides each shareholder an opportunity to elect whether that shareholder prefers to receive the dividend in all stock or all cash, subject to the overriding limitation, however, that if shareholders who elect cash account for more than 20% of the total dividend, the cash portion of their dividend will be pro-rated so that the aggregate cash payment by Forest City does not exceed 20% of the total amount of the dividend being paid to all shareholders. Forest City’s articles of incorporation currently do not contemplate the payment of a dividend in which shareholders may receive payment in different forms based on their respective elections. The proposed amendment is necessary to authorize the dividend in the proposed form and to enable Forest City to make the dividend prior to the proposed merger. If the proposed amendment does not receive the requisite approvals, Forest City will not be able to pay the dividend prior to the proposed merger, and, in that case, the REIT will have to pay the special dividend at some time during its first year of operation as a real estate investment trust under the Code.


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Finally, you will be asked to vote on a proposal to adjourn the Special Meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the Special Meeting to approve either the holding company merger proposal or the proposed amendment of our articles of incorporation.

Our board of directors has carefully considered each of these proposals, believes that each is advisable and in the best interests of Forest City and our shareholders and unanimously recommends that you vote “FOR” the holding company merger proposal, “FOR” the proposed amendment to the Forest City articles of incorporation and “FOR” the adjournment proposal.

Your vote is very important. Whether or not you plan to attend the Special Meeting, please vote as soon as possible. You may authorize a proxy to vote your shares via the Internet, by telephone, or by completing, signing, dating and mailing the enclosed proxy card in the enclosed postage pre-paid envelope. Specific instructions for shareholders of record who wish to use Internet or telephone voting procedures are included in the enclosed proxy statement/prospectus. You may revoke your proxy in the manner discussed in the accompanying proxy statement/prospectus at any time before it has been exercised at the Special Meeting.

This proxy statement/prospectus provides detailed information about the foregoing proposals and the Special Meeting. The proxy statement/prospectus also is a prospectus of the REIT with respect to its offering of shares of REIT common stock to Forest City shareholders in the proposed merger. We encourage you to read carefully this entire proxy statement/prospectus, including all its annexes, and we especially encourage you to read the section entitled “Risk Factors” beginning on page 29.

 

Sincerely,

Charles A. Ratner

Chairman of the Board

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities to be issued by the REIT under this proxy statement/prospectus or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated [], 2015 and is being first mailed to shareholders on or about [], 2015.


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FOREST CITY ENTERPRISES, INC.

Notice of Special Meeting of Shareholders

To Be Held [], 2015

NOTICE IS HEREBY GIVEN that the special meeting (the “Special Meeting”) of the shareholders of Forest City Enterprises, Inc., an Ohio corporation (“Forest City”), will be held in the 6th floor Riverview Room of the Ritz-Carlton Hotel, Tower City Center, 1515 West Third Street, Cleveland, Ohio 44113, on [●], 2015 at [●], Eastern Time, for the purpose of considering and acting upon:

 

  (1) A proposal, which we refer to as the holding company merger proposal, to approve and adopt the Agreement and Plan of Merger (the “Merger Agreement”), dated as of [●], 2015, by and among Forest City, Forest City Realty Trust, Inc. (the “REIT”), a wholly-owned direct subsidiary of Forest City incorporated under the laws of the state of Maryland, FCILP, LLC (“FCILP”), a wholly-owned direct subsidiary of the REIT organized under the laws of the state of Delaware and FCE Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of the REIT incorporated under the laws of the state of Ohio and owned directly and through the REIT’s interest in FCILP; the Merger Agreement provides for the merger of Merger Sub with and into Forest City (the “Merger”) in a manner in which Forest City will survive as a subsidiary of the REIT and holders of shares of Common Stock of Forest City will receive corresponding shares of common stock of the REIT. The Merger Agreement is included in the accompanying proxy statement/prospectus as Annex A;

 

  (2) A proposal to adopt an amendment to the Forest City articles of incorporation to add provisions necessary to authorize Forest City to declare and pay a special dividend part in stock and part in cash in a manner in which different shareholders may receive the dividend in different forms (i.e., cash vs. stock) based on their individual elections; and

 

  (3) A proposal, which we refer to as the adjournment proposal, to adjourn the Special Meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the time of the Special Meeting to approve either or both of the foregoing proposals.

On June 26, 2015, our board of directors unanimously approved the Merger Agreement, which was signed on [] and the proposed amendment to the Forest City articles of incorporation and declared each to be advisable and in the best interests of Forest City and its shareholders. Accordingly, our board of directors unanimously recommends that shareholders vote “FOR” the holding company merger proposal and “FOR” the proposed amendment to the Forest City articles of incorporation. In addition, our board of directors unanimously recommends that shareholders vote “FOR” the adjournment proposal. Your vote “FOR” the holding company merger proposal will also constitute a vote “FOR” the assumption by the REIT of the various Forest City equity incentive compensation plans (including the existing share reserves under such plans) and all the outstanding equity awards under those plans.

We expressly reserve the right to cancel or defer the timing of the Merger, even if our shareholders vote to approve and adopt the Merger Agreement, if our board of directors determines that one or more of the conditions precedent has not been met and should not be waived or that the Merger is no longer advisable and in the best interests of Forest City and its shareholders. Similarly, we expressly reserve the right to not proceed with the proposed amendment to the Forest City articles of incorporation, even if our shareholders vote to adopt the amendment, if our board of directors determines that the amendment is no longer advisable and in the best interests of Forest City and its shareholders.

Shareholders of record at the close of business on [●], 2015 will be entitled to notice of and to vote by proxy or in person at the Special Meeting or any adjournment or postponement thereof.

BY THE ORDER OF THE BOARD OF DIRECTORS

Geralyn M. Presti

Corporate Secretary

Cleveland, Ohio

[●], 2015

 

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IMPORTANT: It is important that your shares be represented at the meeting. Whether or not you intend to be present, please mark, date and sign the appropriate enclosed proxy or proxies and send them by return mail in the enclosed envelope, which does not require postage if mailed in the U.S.

Important Notice Regarding the Availability of Proxy Materials for

the Special Meeting to Be Held on [], 2015

This proxy statement/prospectus and the proxy card are available on the Investor Relations page of our Internet site at www.forestcity.net.

 

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ADDITIONAL INFORMATION

Forest City files annual, quarterly, current and special reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we (or the REIT) file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our filings are also available to the public without charge from the SEC’s Internet site at http://www.sec.gov or from our Internet site at http://www.forestcity.net. Our Corporate Governance Guidelines, our Code of Legal and Ethical Conduct and our board committee charters are also available on our Internet site at http://www.forestcity.net or in print upon written request addressed to Corporate Secretary, Forest City Enterprises, Inc., Terminal Tower, 50 Public Square, Suite 1360, Cleveland, Ohio 44113. The information in, or that can be accessed through, our Internet site is not a part of this proxy statement/prospectus, and all references herein to Internet sites are inactive textual references only.

This proxy statement/prospectus constitutes a proxy statement of Forest City with respect to the solicitation of proxies by Forest City for the Special Meeting described within. This proxy statement/prospectus also constitutes a prospectus of the REIT, which is part of the registration statement on Form S-4 filed by the REIT to register the shares of REIT Class A common stock and REIT Class B common stock that holders of Forest City Class A Common Stock and Forest City Class B Common Stock, respectively, will receive in connection with the Merger if the Merger Agreement is adopted and the Merger is completed.

As permitted under SEC rules, in this proxy statement/prospectus we incorporate by reference important business and financial information about us that is contained in documents filed with the SEC that are not included in or delivered with this proxy statement/prospectus. This allows us to disclose important information to you by referring you to those documents rather than repeating them in full in this proxy statement/prospectus. The information incorporated by reference is considered to be part of this proxy statement/prospectus and later information filed with the SEC will update or supersede this information. This proxy statement/prospectus incorporates by reference the documents listed below:

 

    Forest City’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on February 24, 2015, as amended;

 

    the information specifically incorporated by reference into Forest City’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 from Forest City’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 9, 2015;

 

    Forest City’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 filed with the SEC on May 4, 2015;

 

    Forest City’s Current Reports on Form 8-K filed with the SEC on January 13, 2015 (other than the portions of such document not deemed to be filed), February 19, 2015, February 27, 2015 (other than the portions of such document not deemed to be filed), March 6, 2015 (other than the portions of such document not deemed to be filed), May 4, 2015 (which was accepted by the SEC for filing at 4:12 Eastern Time on May 4, 2015), May 4, 2015 (which was accepted by the SEC for filing at 4:13 Eastern Time on May 4, 2015, other than the portions of such document not deemed to be filed), May 12, 2015 (other than the portions of such document not deemed to be filed), May 29, 2015, and June 29, 2015; and

 

    all reports and definitive proxy or information statements filed by Forest City or the REIT under Section 13(a), Section 13(c), Section 14 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), between the date of this proxy statement/prospectus and the date of the Special Meeting.

Nothing in this proxy statement/prospectus shall be deemed to incorporate information furnished but not filed with the SEC pursuant to Item 2.02 or 7.01 of Form 8-K, including the related exhibits, or any information deemed to have been “furnished” and not “filed” with the SEC.

 

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Following the Merger described in this proxy statement/prospectus, the REIT will become subject to the same informational requirements as Forest City is prior to the Merger, and will file annual, quarterly and current reports, proxy statements and other information with the SEC in accordance with the Exchange Act and with the New York Stock Exchange (“NYSE”) pursuant to the Exchange Act and NYSE Listing Rules. Forest City does not expect to be subject to such requirements following the Merger.

You may request a copy of any of the above-referenced filings, at no cost, by telephoning or writing to us at the following phone number, postal address or e-mail address:

Jeffrey B. Linton

Forest City Enterprises, Inc.

Terminal Tower, 50 Public Square, Suite 1100

Cleveland, Ohio 44113-2203

Telephone Number: (216) 621-6060

jefflinton@forestcity.net

You also may obtain documents incorporated by reference into this proxy statement/prospectus by requesting them in writing or by telephone from our proxy solicitor at the following address and telephone number:

D.F. King & Co., Inc.

48 Wall Street

New York, New York 10005

Holders Call Toll Free: (866) 796-7179

To receive timely delivery of requested documents in advance of the Special Meeting, please make your request no later than [], 2015 (five business days before the date of the Special Meeting).

You should only rely on the information contained in, or incorporated by reference in, this proxy statement/prospectus to vote on the proposals being presented at the Special Meeting. No one has been authorized to provide you with different or additional information. We are not making an offer to exchange or sell (or soliciting any offer to buy) any securities, or soliciting any proxy, in any state or other jurisdiction where it is unlawful to do so.

This proxy statement/prospectus is dated [●], 2015. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any other date, and you should not consider any information in this proxy statement/prospectus or in the documents incorporated by reference herein to be investment, legal or tax advice. Neither the mailing of this proxy statement/prospectus to shareholders nor the issuance of shares of REIT Class A common stock and shares of REIT Class B common stock pursuant to the proposed Merger implies that information is accurate as of any other date.

 

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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THIS PROXY STATEMENT/PROSPECTUS AND THE SPECIAL MEETING

  1   

QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION

  5   

SUMMARY

  15   

SELECTED FINANCIAL DATA

  24   

SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA

  26   

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

  28   

RISK FACTORS

  29   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  42   

SIMPLIFIED STRUCTURE OF THE TRANSACTION

  44   

VOTING AND PROXIES

  52   

BACKGROUND OF THE REIT CONVERSION

  55   

REASONS FOR THE MERGER AND THE REIT CONVERSION

  57   

TERMS OF THE MERGER

  59   

CONVERSION OF FOREST CITY TO A LIMITED PARTNERSHIP

  63   

DIVIDEND AND DISTRIBUTION POLICY

  64   

DISTRIBUTION OF PRE-REIT ACCUMULATED E&P

  65   

OUR BUSINESS

  67   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

  74   

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

  78   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  84   

DESCRIPTION OF REIT STOCK

  86   

CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE REIT CHARTER AND REIT BYLAWS

  92   

COMPARISON OF RIGHTS OF SHAREHOLDERS OF FOREST CITY AND THE REIT

  99   

LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

  115   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

  117   

PROPOSAL TO AMEND THE FOREST CITY ARTICLES OF INCORPORATION

  134   

ADJOURNMENT PROPOSAL

  136   

LEGAL MATTERS

  137   

EXPERTS

  138   

SHAREHOLDER PROPOSALS

  139   

 

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QUESTIONS AND ANSWERS ABOUT THIS PROXY STATEMENT/PROSPECTUS AND THE SPECIAL MEETING

Unless otherwise specifically stated or the context otherwise requires, all references in this proxy statement/prospectus to the “Company”, “we”, “our” and “us” refer to Forest City Enterprises, Inc. (“Forest City”) and its subsidiaries, with respect to the period before the Merger (as defined below), and Forest City Realty Trust, Inc. (the “REIT”) and its subsidiaries, with respect to the period after the Merger.

 

Q. Why am I receiving this proxy statement/prospectus?

 

A. This proxy statement/prospectus is provided in connection with the solicitation of proxies by our board of directors for use at the Special Meeting (as defined below) and any adjournment or postponement thereof, as well as in connection with the registration of the Class A common stock and Class B common stock of the REIT, which we refer to collectively as REIT common stock. You are receiving this proxy statement/prospectus because you owned shares of Class A Common Stock or Class B Common Stock of Forest City, which we refer to collectively as the Forest City Common Stock, at the close of business on [●], 2015 (the “Record Date”).

 

Q. Where and when is the Special Meeting?

 

A. The special meeting (the “Special Meeting”) of the shareholders of Forest City will be held in the 6th floor Riverview Room of the Ritz-Carlton Hotel, Tower City Center, 1515 West Third Street, Cleveland, Ohio 44113, on [●], 2015 at [●], Eastern Time.

 

Q. Who can attend the Special Meeting?

 

A. All owners of Forest City Common Stock at the close of business on the Record Date are invited to attend the Special Meeting. Persons who are not owners of Forest City Common Stock may attend only if invited by our board of directors. If you are the beneficial owner of shares of Forest City Common Stock held in the name of your broker, bank, trust or other nominee, you must bring proof of ownership (e.g., a current brokerage statement) in order to be admitted to the Special Meeting.

 

Q. Who can vote at the Special Meeting?

 

A. Only shareholders of record at the close of business on the Record Date or their duly authorized proxies will be entitled to vote at the Special Meeting. If you are not a shareholder of record but hold shares of Forest City Common Stock through your broker, bank, trust or other nominee, you may vote your shares in person only if you obtain a legal proxy from the broker, bank, trust or other nominee that holds your shares authorizing you to vote the shares. We will begin mailing this proxy statement/prospectus on or about [●], 2015 to shareholders of record at the close of business on the Record Date.

 

Q. What will I be voting on at the Special Meeting?

 

A. At the Special Meeting, Forest City shareholders will consider and vote upon the following proposals:

 

    Proposal 1: A proposal, which we refer to as the holding company merger proposal, to approve and adopt the Agreement and Plan of Merger (the “Merger Agreement”), dated as of [●], 2015, by and among Forest City, the REIT, a wholly-owned direct subsidiary of Forest City incorporated under the laws of the state of Maryland, FCILP, LLC (“FCILP”), a wholly-owned direct subsidiary of the REIT organized under the laws of the state of Delaware and FCE Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of the REIT incorporated under the laws of the state of Ohio and owned directly and through the REIT’s interest in FCILP; the Merger Agreement provides for the merger of Merger Sub with and into Forest City (the “Merger”) in a manner in which Forest City will survive as a subsidiary of the REIT and holders of shares of Forest City Common Stock will receive corresponding shares of REIT common stock;

 

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    Proposal 2: A proposal to adopt an amendment to the Forest City articles of incorporation, which we refer to as the Forest City articles, to add provisions necessary to authorize Forest City to declare and pay a special dividend part in shares of Forest City Common Stock and part in cash in a manner in which different shareholders may receive the dividend in different forms (i.e., cash vs. stock) based on their individual elections; and

 

    Proposal 3: A proposal, which we refer to as the adjournment proposal, to adjourn the Special Meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the Special Meeting to approve either or both of the foregoing proposals.

 

Q. What are the board of directors’ voting recommendations?

 

A. Our board of directors recommends that you vote:

 

    “FOR” the holding company merger proposal;

 

    “FOR” the proposed amendment to the Forest City articles; and

 

    “FOR” the adjournment proposal.

 

Q. How do I vote?

 

A. If you are a shareholder of record at the close of business on the Record Date, you may vote in person at the Special Meeting or authorize a proxy to vote your shares, in which case you may:

 

    Submit a proxy by Mail: sign, date and mail in your proxy card using the accompanying envelope;

 

    Submit a proxy by Telephone: submit a proxy by calling 1-800-690-6903; or

 

    Submit a proxy via the Internet: connect to the Internet site www.proxyvote.com and follow the directions provided.

Detailed instructions for using the telephone and Internet options for voting by proxy are set forth on the proxy card accompanying this proxy statement/prospectus. Because the Internet and telephone services authenticate shareholders by use of a control number, you must have the Notice of Special Meeting or proxy card available in order to use these services to vote. Proxies submitted by telephone or Internet must be received by 11:59 p.m. Eastern Time on [●], 2015. If you choose to vote by telephone or Internet, you do not need to return the proxy card.

If you elect to vote by proxy, the proxy holders will vote your shares based on your directions. If you submit your proxy card but do not properly direct how your shares of Forest City Common Stock should be voted, the proxy holders will vote “FOR” the holding company merger proposal, “FOR” the approval of the proposed amendment to the Forest City articles and “FOR” the approval of the adjournment proposal. The proxy holders will use their discretion on any other proposals and matters that may be brought before the Special Meeting.

If your shares of Forest City Common Stock are held by a broker, bank, trust or other nominee, then you are not the shareholder of record. In that case, to vote in person at the Special Meeting, you must obtain a legal proxy from your broker, bank, trust or other nominee and present it at the Special Meeting.

 

Q. Why is my vote important?

 

A. If you do not submit a proxy or vote in person at the Special Meeting, it will be more difficult for us to obtain the necessary quorum to hold the Special Meeting. In addition, your failure to submit a proxy or to vote in person will have the same effect as a vote “AGAINST” the holding company merger and “AGAINST” the proposed amendment to the Forest City articles.

 

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Q. What constitutes a quorum for the Special Meeting?

 

A. In order to carry out the business of the Special Meeting, shareholders constituting a quorum must be present. For this purpose, a quorum is the presence, either in person or by proxy, of holders of a majority of the issued and outstanding shares of Forest City Common Stock eligible to vote as of the Record Date. Broker non-votes and abstentions will be counted for purposes of determining whether a quorum is present. Failure of a quorum to be present at the Special Meeting will necessitate an adjournment or postponement of the Special Meeting and will subject us to additional expense.

 

Q. What votes are required to adopt the proposals?

 

A. The votes required to approve each proposal submitted for consideration at the Special Meeting are as follows:

 

  (1) the adoption of the holding company merger proposal requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Forest City Class A Common Stock and at least two-thirds of the outstanding shares of Forest City Class B Common Stock, each voting as a separate class;

 

  (2) the adoption of the proposed amendment to the Forest City articles requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Forest City Class A Common Stock and at least two-thirds of the outstanding shares of Forest City Class B Common Stock, each voting as a separate class; and

 

  (3) the adoption of the adjournment proposal, if one becomes necessary, will require the affirmative vote from holders of a majority of the voting power of holders of outstanding shares of Forest City Common Stock entitled to vote and present or represented by proxy at the Special Meeting, whether or not a quorum is present.

For this purpose, holders will be entitled to one vote per share of Forest City Class A Common Stock and ten votes per share of Forest City Class B Common Stock held as of the Record Date, on each proposal.

As of the close of business on the Record Date there were [●] shares of Forest City Class A Common Stock and [●] shares of Forest City Class B Common Stock outstanding and entitled to vote at the Special Meeting.

 

Q. How are broker non-votes and abstentions treated?

 

A. Broker non-votes and abstentions will be counted for purposes of determining whether a quorum is present. Abstentions and broker non-votes, if any, will have the effect of votes “AGAINST” the holding company merger proposal and the proposed amendment to the Forest City articles. An abstention will have the effect of a vote “AGAINST” the adjournment proposal and broker non-votes will have no effect on such proposal. See “Voting and Proxies—Proxies” beginning on page [●].

 

Q. If my shares are held in “street name” by my broker, bank, trust or other nominee, will my broker, bank, trust or other nominee vote my shares for me?

 

A. No. If your shares of Forest City Common Stock are held in “street name” by your broker, bank, trust or other nominee, you should follow the directions provided by your broker, bank, trust or other nominee. Your broker, bank, trust or other nominee will vote your shares only if you provide instructions on how you would like your shares to be voted.

 

Q. What do I need to do now?

 

A. You should carefully read and consider this proxy statement/prospectus including its annexes. It includes important information about what our board of directors considered in approving and declaring advisable the Merger Agreement and the proposed amendment to the Forest City articles, as well as the risks associated with each proposal.

 

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You should then authorize a proxy to vote your shares by one of the three methods described as soon as possible so that your shares will be represented at the Special Meeting. If your shares of Forest City Common Stock are known to us to be held by you through a broker, bank, trust or other nominee, you should receive a separate voting instruction form with this proxy statement/prospectus.

 

Q. Can I change my vote after I have mailed my signed proxy card or otherwise granted my proxy (i.e., by telephone or by Internet)?

 

A. Yes. If you deliver a duly executed proxy, you may revoke your proxy prior to the close of voting at the Special Meeting in any of the following five ways:

 

    Revoking your proxy at the Internet site www.proxyvote.com by 11:59 p.m. on [], 2015;

 

    Call 1-800-690-6903 by 11:59 p.m. on [●], 2015;

 

    Deliver a duly executed proxy bearing a later date;

 

    Deliver a written notice of revocation to our Corporate Secretary; or

 

    Vote in person at the Special Meeting (but your attendance at the Special Meeting, in and of itself, will not revoke the proxy).

If your shares of Forest City Common Stock are held through a broker, bank, trust or other nominee, you should contact your broker, bank, trust or other nominee to change your vote.

 

Q. Who will conduct the proxy solicitation and how much will it cost?

 

A. We have engaged D.F. King & Co. (“D.F. King”) to assist in the solicitation of proxies from brokers, nominees, institutions and individuals. We will pay D.F. King a fee of $20,000, plus reasonable expenses, for these services. We have also agreed to indemnify D.F. King against certain losses, costs and expenses. In addition, our directors, officers and employees may request the return of proxies by telephone or in person, but no additional compensation will be paid to them.

D.F. King & Co., Inc.

48 Wall Street

New York, New York 10005

Holders Call Toll Free: (866) 796-7179

 

Q. Where can I find the voting results of the Special Meeting?

 

A. We plan to announce preliminary voting results at the Special Meeting and publish final results on a Form 8-K filed with the Securities and Exchange Commission (the “SEC”) promptly after the Special Meeting.

 

Q. Whom should I call with questions?

 

A. You should call D.F. King, our proxy solicitor, toll-free at (866) 796-7179 with any questions about the holding company merger proposal or our proposal to amend the Forest City articles or to obtain additional copies of this proxy statement/prospectus or additional proxy cards. You may also call Jeffrey B. Linton, Senior Vice President, Corporate Communications, at (216) 621-6060.

 

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QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION

What follows are questions that you, as a shareholder of Forest City, may have regarding the Merger and our intention to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year ending December 31, 2016, and answers to those questions. Additional important information is contained in the annexes to, and the documents incorporated by reference into, this proxy statement/prospectus.

 

Q. What is the holding company merger proposal?

 

A. We are asking you to approve the merger of Merger Sub with and into Forest City, which we refer to as the Merger. Following the Merger, you will receive shares of REIT common stock in exchange for your shares of Forest City Common Stock and Forest City will become a subsidiary of the REIT owned by the REIT directly and through the REIT’s interest in FCILP. The Merger is the means by which we intend to create a holding company structure that will facilitate our conversion to a real estate investment trust for U.S. federal income tax purposes. The Merger will ensure, among other things, the effective adoption and implementation of an amended and restated charter of the REIT, attached as Annex B-1 to this proxy statement/prospectus, that will enable us to, among other things, implement share ownership and transfer restrictions that are necessary to ensure the REIT’s compliance with certain of the U.S. federal income tax rules applicable to companies that qualify as real estate investment trusts under the Code related to share ownership.

Immediately following the Merger and the transactions relating thereto:

 

    each outstanding share of Forest City Class A Common Stock will have been converted into one share of REIT Class A common stock, and each outstanding share of Forest City Class B Common Stock will have been converted into one share of REIT Class B common stock;

 

    the shares of Merger Sub held by the REIT and FCILP will be converted into, and immediately thereafter will represent, 100% of the issued and outstanding shares of common stock of Forest City (as the surviving company of the Merger) and, as a result, Forest City will become a subsidiary of the REIT;

 

    Forest City will be reorganized as a limited partnership and thereafter will serve as the REIT’s operating partnership, which we refer to as the Operating Partnership;

 

    the REIT will be the sole general partner and a limited partner of the Operating Partnership and FCILP will be the other limited partner of the Operating Partnership;

 

    REIT Class A common stock and REIT Class B common stock will have been approved for listing on the New York Stock Exchange (“NYSE”) under the symbols “FCE.A” and “FCE.B”, respectively;

 

    the board of directors of the REIT will be comprised of the same individuals who comprise the Forest City board of directors immediately prior to the Merger;

 

    the individuals serving as principal executive officer, principal financial officer and principal accounting officer of Forest City immediately prior to the Merger will hold the same positions at the REIT;

 

    the REIT will have assumed all of Forest City’s equity incentive compensation plans, and all rights to acquire shares of Forest City Class A Common Stock under any Forest City equity incentive compensation plan will have been converted into rights to acquire shares of REIT Class A common stock pursuant to the terms of the equity incentive compensation plans and other related documents, if any;

 

    you will own shares of REIT common stock in the same class, amount and percentage as your holdings in Forest City immediately prior to the Merger; and

 

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    your rights as a shareholder of the REIT will be governed by Maryland law, the amended and restated REIT charter, which we refer to as the REIT Charter, and the amended and restated bylaws of the REIT, which we refer to as the REIT Bylaws.

A vote to approve the holding company merger proposal will also be a vote to approve, among other things, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of the REIT common stock that will be received by Forest City shareholders in the Merger, as set forth in the Maryland General Corporation Law (“MGCL”) and as contained in the REIT Charter and REIT Bylaws.

A copy of the Merger Agreement is attached as Annex A to, and is incorporated by reference in, this proxy statement/prospectus. Copies of the forms of the REIT Charter and REIT Bylaws are attached as Annex B-1 and Annex B-2, respectively. You are encouraged to read each of these documents carefully.

 

Q. What will holders of shares of Forest City Common Stock receive in connection with the Merger, and when will they receive it?

 

A. We have two classes of Common Stock: Class A Common Stock, $.33 13 par value per share, and Class B Common Stock, $.33 13 par value per share. At the effective time of the Merger:

 

    each outstanding share of Forest City Class A Common Stock will be converted into a share of REIT Class A common stock, par value $0.01 per share; and

 

    each outstanding share of Forest City Class B Common Stock will be converted into a share of REIT Class B common stock, par value $0.01 per share.

For reference, as of [●], 2015, Forest City had [●] shares of Class A Common Stock outstanding and [●] shares of Class B Common Stock outstanding. At the time of completion of the Merger, each holder of Forest City Class A Common Stock and each holder of Forest City Class B Common Stock will hold the same percentage ownership in the REIT as each such holder previously held in Forest City.

The respective powers, privileges, preferences, rights, qualifications, limitations and restrictions, including voting rights, of the REIT common stock received in the Merger will be equivalent in most major respects to the respective powers, privileges, preferences, rights, qualifications, limitations and restrictions relating to Forest City Common Stock, except that such shares will be subject to certain transfer and ownership restrictions, which we refer to as the REIT Restrictions, and the rights of shareholders will be governed by Maryland law and the REIT Charter and REIT Bylaws. See “Description of REIT Stock” beginning on page [●] and “Comparison of Rights of Shareholders of Forest City and the REIT” beginning on page [●].

 

Q. What key steps are expected to be involved in implementing the REIT Conversion?

 

A. Our board of directors has unanimously approved a plan to reorganize our business operations so that, following the Merger, we anticipate qualifying as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. We refer to this plan, including the transactions immediately preceding and immediately following the Merger, as the REIT Conversion. Our board of directors has determined that the REIT Conversion is advisable and in the best interests of Forest City and its shareholders. The REIT Conversion will include the following key components:

 

    an internal restructuring of our business operations to facilitate the REIT Conversion;

 

    the distribution of our accumulated earnings and profits for the period preceding commencement of the first calendar year in which we intend to elect to be taxed as a real estate investment trust for U.S. federal income tax purposes, currently anticipated to be the taxable year ending December 31, 2016; we currently anticipate paying this dividend, which we refer to as the 2015 Special Dividend, prior to the commencement of 2016, although we may pay this dividend in one or more increments at any time prior to the end of the first calendar year in which we elect to be taxed as a REIT;

 

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    the adoption of a holding company structure as a result of the Merger;

 

    following the Merger, the reorganization of Forest City as a limited partnership so that it can serve as the REIT’s operating partnership;

 

    the payment of regular quarterly dividends to shareholders, the amount of which will be determined, and subject to adjustment from time to time, by our board of directors and the declaration of which is expected to commence in the first quarter of 2016; and

 

    the management and operation of the REIT in a manner designed to enable it to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016.

We expect that prior to the effective date of this proxy statement/prospectus our counsel, Sullivan & Cromwell LLP, will render an opinion to the REIT to the effect that our proposed organization, ownership and method of operation, as represented by management, will enable the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016.

 

Q. What is a real estate investment trust?

 

A. After the Merger, the REIT intends to qualify and elect to be taxed as a real estate investment trust under Sections 856 through 860 of the Code commencing with the taxable year ending December 31, 2016. A company that qualifies and elects to be taxed as a real estate investment trust under the Code generally will not be subject to U.S. federal income tax on its real estate investment trust taxable income that it pays to its shareholders in the form of a dividend. A company’s qualification as a real estate investment trust under the Code depends on its ability to meet, on a continuing basis, through actual investment and operating results, various highly technical and complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares. The REIT believes that it will be organized in conformity with the requirements for qualification and taxation as a real estate investment trust under the Code, and that its intended manner of operation will enable it to meet the requirements for qualification and taxation as a real estate investment trust. The REIT anticipates that dividends it pays to its shareholders generally will be taxable to its shareholders as ordinary income, although a portion of the dividends may be designated by the REIT as qualified dividend income or capital gain or may constitute a return of capital. For a more complete discussion of the U.S. federal income taxation of real estate investment trusts and the tax treatment of distributions to shareholders of the REIT, please refer to “Material U.S. Federal Income Tax Considerations”.

 

Q. What is an UPREIT?

 

A. “UPREIT” stands for umbrella partnership real estate investment trust. In an UPREIT structure, shareholders own equity interests in a holding company that qualifies as a real estate investment trust under the Code. The holding company generally does not own any properties itself, but instead owns the controlling interest in an operating partnership subsidiary which, in turn, owns all or substantially all of the properties and other assets of the enterprise directly or through one or more subsidiaries.

 

Q. How will being a shareholder of the REIT differ from being a shareholder of Forest City?

 

A.

Following the Merger, your rights, and the limitations thereon, as a shareholder of REIT common stock will be governed by the REIT Charter and REIT Bylaws and Maryland law, which we believe are similar, but not identical, to the rights and limitations thereon of shares of Forest City under the Forest City articles, the Forest City Code of Regulations and Ohio law. We refer to the Forest City Code of Regulations as the Forest City regulations, and we refer to the Forest City articles and regulations collectively as the Forest City organizational documents. The primary difference is that following the Merger, your shares of REIT common stock will be subject to the REIT Restrictions, which are designed to facilitate the REIT’s

 

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  compliance with certain of the U.S. federal income tax rules that the REIT must satisfy in order to qualify as a real estate investment trust under the Code. The REIT Restrictions are designed, primarily, to ensure that no person or group of persons acting together will own, actually or constructively, as determined under the Code, more than 9.8% in value of the outstanding shares of REIT stock or more than 9.8% determined by value or number, whichever is more restrictive, of the outstanding shares of REIT common stock unless they have obtained a written waiver from the REIT and have provided such representations and undertakings acceptable to the REIT in connection therewith, in each case as determined by the REIT board of directors in its sole discretion. Once the REIT Restrictions are in effect, any violation thereof will result in the violating shareholder’s shares of stock being automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected by the REIT, and the intended transferee or other prohibited owner will acquire no rights in the shares. The REIT Restrictions are comparable to the restrictions in the governing documents of many other public companies that qualify as real estate investment trusts under the Code. See “Comparison of Rights of Shareholders of Forest City and the REIT” beginning on page [●].

 

Q. What will it mean that the REIT is an UPREIT?

 

A. An UPREIT is a real estate investment trust that conducts its business through an operating partnership. After the REIT Conversion, the REIT will be the sole general partner of the Operating Partnership, and, as such, the REIT will control the day to day operations of the Operating Partnership. The REIT will conduct substantially all of our business through the Operating Partnership and will own substantially all of our assets through the Operating Partnership, either directly or through direct and/or indirect subsidiaries of the Operating Partnership. Accordingly, the REIT’s cash flow and ability to pay dividends to shareholders will be dependent upon the cash flow of the Operating Partnership and the ability of the Operating Partnership and its direct and indirect subsidiaries to first satisfy their obligations to creditors.

Immediately following the REIT Conversion, the REIT will own 100% of the Operating Partnership, directly and through its ownership of FCILP. Following the REIT Conversion, the REIT may identify one or more persons or entities who agree to purchase and hold limited partnership interests in the Operating Partnership. Nevertheless, the REIT will be the sole general partner of the Operating Partnership.

Factors outside of our control could result in the timing of our adoption of the UPREIT structure being delayed, or not being completed at all, and our board of directors may, without notice to you, cancel, delay or modify the nature or timing of our adoption of the UPREIT structure at any time for any reason.

 

Q. Why are we adopting the UPREIT structure following the Merger?

 

A. The UPREIT structure will enable the REIT to acquire and hold its properties through an entity that is not treated as a corporation for U.S. federal income tax purposes, which, we believe, will provide the REIT with greater flexibility in negotiating future acquisitions because it will enable the REIT to offer certain tax advantages to sellers of assets and to investors who prefer to receive partnership units as consideration rather than cash or publicly-traded shares. The UPREIT structure is commonly used by public companies that qualify as real estate investment trusts under the Code. The REIT Conversion and the implementation of an UPREIT structure are important milestones in our previously announced overall strategic plan.

If additional limited partners are admitted to the Operating Partnership, in exchange for properties, cash or other consideration, we expect that the REIT’s ownership of the Operating Partnership, as a percentage of the total, will decline. Over time, we may acquire limited partners’ interests in the Operating Partnership for cash or stock and we may acquire newly issued limited partnership interests in the Operating Partnership for cash, each of which would have the effect of increasing the REIT’s ownership of the Operating Partnership. As a result of these various occurrences, our ownership percentage of the Operating Partnership can be expected to vary over time. Nonetheless, in each case we expect that the REIT will retain control of the Operating Partnership as its sole general partner.

 

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Q. What other restructuring transactions are we pursuing in connection with the REIT Conversion?

 

A. Forest City has been developing, and preparing to implement, an internal reorganization of its personnel and business units that we believe will enable us to operate more efficiently, better support our business strategies and improve our operating margins. We anticipate finalizing our new organization structure during 2015 with the substantial portion of the implementation occurring after the expected effective REIT conversion date of January 1, 2016.

 

Q. Why is Forest City proposing the REIT Conversion?

 

A. Our board of directors, with the assistance of investment banking, legal, tax and other financial advisors, completed a comprehensive evaluation of long-term growth and capital allocation strategies, including assessing the potential of a variety of corporate and tax structures to enhance shareholder value. We believe qualifying as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016 will benefit our shareholders because, among other things, it will provide an increased dividend yield, could expand our shareholder base to include real estate investment trust dedicated investors or those investors attracted by yield which may increase the demand for and improve the liquidity of our common stock and should be a more tax efficient investment. The REIT Conversion also will support our core strategic drivers of creating a strong and sustainable capital structure, striving for operational excellence and focusing on core products in our core markets to help create additional shareholder value.

To review the background of, and the reasons for, the REIT Conversion in greater detail, and the related risks associated therewith, see “Background of the REIT Conversion” beginning on page [], “Reasons for the Merger and the REIT Conversion” beginning on page [], “Conversion of Forest City to a Limited Partnership” beginning on page [] and “Risk Factors” beginning on page [].

 

Q. Will my voting rights remain the same following the Merger?

 

A. As a general matter, yes, except that you will hold shares of REIT common stock (rather than Forest City Common Stock). Like Forest City, the REIT will have two classes of common stock and the relative voting rights of the two classes generally will match those of the Class A and Class B Common Stock of Forest City. That being said, there are some important differences between your rights as a holder of shares of Forest City Common Stock and your rights as a holder of shares of REIT common stock, specifically including, among other things, the REIT Restrictions described in this proxy statement/prospectus. For a detailed discussion of these differences, see “Comparison of Rights of Shareholders of Forest City and the REIT” beginning on page [].

 

Q. What distributions will shareholders receive in connection with, and following the completion of, our plan for the REIT to qualify as a real estate investment trust?

 

A.

Prior to the Merger, our board of directors expects to declare and pay the 2015 Special Dividend; we currently estimate the total amount of the 2015 Special Dividend will range from $75,000,000 to $125,000,000. The 2015 Special Dividend will be a special distribution of Forest City’s pre-real estate investment trust accumulated earnings and profits, as measured for U.S. federal income tax purposes, which distribution will be made to satisfy certain tax rules in connection with the REIT’s plan to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. To preserve working capital, Forest City intends to pay a significant portion (expected to be 80%) of this special dividend in shares of Forest City Common Stock, with the balance (i.e., 20%) to be paid in cash, and to do so in a manner that provides each shareholder an opportunity to designate whether that shareholder prefers to receive the dividend in all stock or all cash, subject to the overriding limitation, however, that if shareholders who elect cash account for more than the total amount of the dividend that will be paid in cash (currently expected to be 20%), then the cash portion of the dividend will be pro-rated so that the aggregate

 

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  cash payment by Forest City does not exceed the amount of the total dividend that is being paid in cash, and the remainder of the dividend payable to each such shareholder will be paid in shares of Common Stock of the same class as the shares in respect of which the dividend is being paid – specifically, holders of Class A Common Stock will receive additional shares of Class A Common Stock and holders of Class B Common Stock will receive additional shares of Class B Common Stock in respect of the non-cash portion of the special dividend.

Following the Merger, in order for us to qualify as a real estate investment trust under the Code, we will be required to distribute annually at least 90% of our real estate investment trust taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain). Our real estate investment trust taxable income generally will not include income earned by any of our subsidiaries that elect to be treated, for federal income tax purposes, as a taxable real estate investment trust subsidiary (each, a “TRS”), except to the extent that a TRS pays dividends to the REIT. We estimate that we had approximately $[●] in federal net operating loss carryforwards (“NOLs”) as of January 1, 2015. To the extent we use these NOLs to offset our real estate investment trust taxable income, the amount of our required distributions to shareholders will be reduced. However, in such a case, we may be subject to the alternative minimum tax.

Beginning with the first quarter of 2016, the REIT intends to declare and pay regular quarterly dividends to the REIT’s shareholders, the amount of which will be determined, and will be subject to adjustment from time to time, by the REIT’s board of directors. Any such dividends will be paid on all shares of REIT common stock outstanding as of the close of business on the record date set for the payment of such dividend. The actual timing and amount of the dividends will be as determined and authorized by the REIT’s board of directors and will depend on, among other factors, our financial condition, earnings, debt covenants, other possible uses of such funds and applicable law. See “Dividend and Distribution Policy” beginning on page [●].

 

Q. Will our operating strategy change as a result of the Merger or the REIT Conversion?

 

A. While our organizational structure will change, we do not anticipate that our current operating strategy will change in any material respect as a result of the Merger and the REIT Conversion. As mentioned above, we expect the Merger and the REIT Conversion will support our core strategic drivers of:

 

    Creating a strong and sustainable capital structure by continuing to deleverage our balance sheet;

 

    Striving for operational excellence by reorganizing our operations to increase efficiency, reduce costs and improve our operating margins; and

 

    Focusing on our core markets and products by executing on selective disposition of our non-core assets and concentrating our development and acquisition activities on core retail, office and apartment products in our core markets, which we believe have strong demographics and long-term growth prospects.

 

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Q. Will the requirements to qualify as a real estate investment trust under the Code restrict any of the REIT’s business activities or limit the REIT’s financial flexibility?

 

A. We do not anticipate that our decision to operate as a real estate investment trust for U.S. federal income tax purposes will have any material impact on our ability to continue pursuing our present business operations and strategies. As summarized in the section entitled “Material U.S. Federal Income Tax Considerations” beginning on page [●], however, to qualify as a real estate investment trust under the Code following the Merger (commencing with the taxable year ending December 31, 2016), we must satisfy various Code requirements concerning, among other things, the sources of our income, the nature and diversification of our assets, the diversity of our share ownership and the amounts we distribute to our shareholders. These requirements could restrict our business activities, including our ability to invest in new development projects, and our financial flexibility because:

 

    we may be required to liquidate or otherwise forego attractive investments, including new development opportunities, to satisfy the asset and income tests or to qualify under certain statutory relief provisions; and

 

    to meet annual distribution requirements, we may be required to distribute amounts that could otherwise be used for our operations, including amounts that might otherwise have been invested in future acquisitions, development opportunities, capital expenditures or repayment of debt. Because of this dividend requirement, it is possible that we might be required to borrow funds, sell assets or raise equity to fund these distributions or our operating costs, even if the then-prevailing market conditions are not favorable for such borrowings, sales or offerings.

To review in greater detail the risks associated with the REIT’s anticipated qualification as a real estate investment trust under the Code, see “Risk Factors—Risks Related to the REIT Conversion” beginning on page [].

In reaching its determination to unanimously approve the plan to reorganize our business operations so that, following the Merger, we will qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, Forest City’s board of directors considered the Code qualification requirements and other potential disadvantages arising from the REIT Conversion, which are more fully described in the sections entitled “Background of the REIT Conversion” beginning on page [●] and “Reasons for the Merger and the REIT Conversion” beginning on page [●].

 

Q. What are the material U.S. federal income tax consequences of the Merger?

 

A. The Merger, and the related transactions by which we will reorganize as an UPREIT, are intended to qualify as a tax-free reorganization under U.S. federal income tax laws. We expect that U.S. shareholders will not recognize any gain or loss for U.S. federal income tax purposes as a result of their receipt of shares of REIT common stock for their shares of Forest City Common Stock. If you are a non-U.S. person who beneficially owns or has owned more than 5% of the outstanding shares of Forest City Common Stock, the tax consequences to you may be different and we urge you to consult with your own tax advisor to determine the tax consequences to you resulting from your receipt of shares of REIT common stock for your shares of Forest City Common Stock in connection with the Merger.

Our payment of the 2015 Special Dividend will result in the recognition of ordinary dividend income by you, which, depending on your circumstances, may qualify as qualified dividend income that is potentially eligible for preferential rates of taxation. Other ordinary dividends, however, paid by the REIT following its anticipated qualification as a real estate investment trust under the Code generally will not be treated as qualified dividend income.

The U.S. federal income tax treatment of holders of shares of Forest City Common Stock and shares of REIT common stock depends in some instances on determinations of fact and interpretations of highly technical and complex provisions of U.S. federal income tax laws for which no clear precedent or authority

 

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may be available. In addition, the tax consequences to any particular shareholder of holding shares of Forest City Common Stock or shares of REIT common stock will depend on that shareholder’s particular tax circumstances. We urge you to consult with your tax advisor, particularly if you are a non-U.S. person, regarding the specific tax consequences, including the federal, state and local tax consequences and foreign tax consequences, to you in light of your particular investment in, or the tax circumstances of acquiring, holding, exchanging, selling or otherwise disposing of, shares of Forest City Common Stock or shares of REIT common stock.

For more information, see “Material U.S. Federal Income Tax Considerations” beginning on page [].

 

Q. How will the Merger be treated for accounting purposes?

 

A. For accounting purposes, the Merger will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities by the REIT will be the carryover basis of Forest City. Similarly, shareholders’ equity of the REIT will be that carried over from Forest City, after giving effect to the planned 2015 Special Dividend.

 

Q. Who will be the board of directors and management of the REIT?

 

A. Each director of Forest City immediately prior to the Merger will be a director of the REIT immediately after the Merger and will serve for an identical term or until his or her successor is qualified and elected. Similarly, the principal executive officer, principal financial officer and principal accounting officer of Forest City immediately prior to the Merger will have identical positions with the REIT immediately following the Merger.

 

Q. Do any of Forest City’s directors or executive officers have any interests in the Merger different from, or in addition to, mine?

 

A. No. Our directors and executive officers and their affiliates have equity interests in Forest City through the ownership of shares of Forest City Common Stock and/or options to purchase shares of Forest City Class A Common Stock and, to that extent, their interest in the Merger is the same as that of the other holders of shares of Forest City Common Stock and options to purchase shares of Forest City Class A Common Stock. Our non-employee directors also hold shares of Forest City Class A Common Stock subject to restrictions and certain members of the Ratner, Miller and Shafran families who serve as directors and executive officers of Forest City hold shares of Forest City Common Stock both through and outside of RMS Limited Partnership (“RMSLP”). The Merger will not cause any vesting or acceleration of benefits.

 

Q. When is the Merger expected to occur?

 

A. If the Forest City shareholders approve the holding company merger proposal at the Special Meeting and all other conditions precedent, as set forth in the Merger Agreement, have been satisfied or waived on or prior to such date, we expect to complete the Merger on or about December 31, 2015.

Please note, however, that if our board of directors determines that one or more of the conditions precedent specified in the Merger Agreement has not been met and should not be waived, or that the Merger and/or any of the other related transactions is no longer advisable and in the best interest of Forest City and our shareholders, we reserve the right to cancel or defer the timing of the Merger even if Forest City shareholders vote to approve the holding company merger proposal.

Additionally, even if the Merger is effected, we may abandon or delay one or more of the other transactions contemplated as part of the REIT Conversion if the board of directors of the REIT determines that such transaction, or the REIT’s qualification as a real estate investment trust under the Code, is not in the best interests of the REIT. See “Terms of the Merger” beginning on page [●] for a more detailed description of the Merger.

 

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Q. Will the REIT common stock have a different CUSIP number than Forest City Common Stock following the proposed Merger?

 

A. Yes. Following the proposed Merger, the REIT’s CUSIP numbers will be [●] and [●] for the REIT Class A common stock and REIT Class B common stock, respectively.

 

Q. Why is the board proposing to amend the Forest City articles of incorporation?

 

A. Under the Forest City articles, holders of shares of Forest City Common Stock are entitled to participate share-for-share in any dividend, without priority or distinction between classes. No cash dividend can be paid on a class of shares of Forest City Common Stock until provision is made for payment of a dividend of at least an equal amount on a share-for-share basis to holders of shares of the other class of Forest City Common Stock. In addition, if our board of directors declares any stock dividend with respect to either class of shares of Forest City Common Stock, it must at the same time declare a proportionate stock dividend with respect to the other class.

As part of the REIT Conversion, Forest City (or the REIT) must distribute all of the accumulated earnings and profits of Forest City for the period prior to the first year in which the REIT elects to qualify as a real estate investment trust under the Code. In order to preserve working capital, we intend to pay a substantial portion of that dividend (i.e, 80%) in Forest City Common Stock rather than cash, on a shareholder elective basis. Currently, Forest City’s articles would not permit us to pay a dividend in one form to one holder of Forest City Common Stock and in a different form to another such holder. Under the proposed election arrangement, however, a holder of Forest City Class A Common Stock could elect to receive his or her entire dividend in Forest City Class A Common Stock. In such a case, if another shareholder elected to receive all cash, the result would be that one holder of Forest City Class A Common Stock would receive the dividend 100% in additional shares of Forest City Class A Common Stock and the other shareholder would receive all cash (or a combination of cash and stock, if the aggregate cash elections of all shareholders would exceed the amount of cash available for the dividend). The proposed amendment adds provisions to the Forest City articles that will permit the payment of the dividend on this basis. Both the text of the proposed amendment and a more complete description of the proposed amendment are provided in the section of this proxy statement/prospectus entitled “Proposal to Amend the Forest City Articles of Incorporation” beginning on page [●]. Also see “Distribution of Pre-REIT Accumulated E&P” beginning on page [●].

 

Q. Have any shareholders already agreed to approve the Merger?

 

A. No. There are no agreements between us and any of our shareholders in which a shareholder has agreed to vote in favor of the holding company merger proposal. We expect, however, that RMSLP, which is a limited partnership comprised of members of the Ratner, Miller and Shafran families, will vote the shares of Forest City Common Stock it beneficially owns in favor of the holding company merger proposal, the proposed amendment to the Forest City articles and the adjournment proposal. As of the date hereof, RMSLP owned [●]% of the issued and outstanding shares of Forest City Class B Common Stock.

 

Q. Am I entitled to dissenters’ (or appraisal) rights as a holder of Forest City Common Stock?

 

A. No. Under Ohio law, you are not entitled to any dissenters’ rights of appraisal in connection with the Merger or the adoption of the proposed amendment to the Forest City articles.

 

Q. Should I send in my stock certificates now?

 

A. No. After the Merger is completed, [●], the exchange agent for the Merger, will send you a letter of transmittal explaining how to exchange your certificates, which represented shares of Forest City Common Stock, for confirmation that you have received uncertificated shares in book-entry form of REIT Class A common stock or REIT Class B common stock, as applicable. The REIT does not expect to issue its common stock in certificated form.

 

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Q. Will REIT common stock be publicly traded?

 

A. Yes. We plan to undertake the necessary applications such that shares of REIT Class A common stock and REIT Class B common stock will both trade on the NYSE under our current symbols “FCE.A” and “FCE.B”, respectively, following the Merger. We will not complete the Merger unless and until the shares of REIT common stock have been approved for NYSE listing.

 

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SUMMARY

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. This summary is qualified in its entirety by, and should be read together with, the other parts of this proxy statement/prospectus and the other documents to which this proxy statement/prospectus refers to fully understand the holding company merger proposal and the proposed amendment to the Forest City articles. In particular, you should read the annexes attached to this proxy statement/prospectus, including the Merger Agreement, which is attached as Annex A. You should also read the form of charter of the REIT, attached as Annex B-1, and the form of amended and restated bylaws of the REIT, attached as Annex B-2, because these documents, together with Maryland law, will govern your rights as a REIT shareholder following the Merger. For a discussion of the risk factors that you should carefully consider, see the section entitled “Risk Factors” beginning on page []. Most items in this summary include a page reference directing you to a more complete description of that item. The information contained in this proxy statement/prospectus, unless otherwise indicated, assumes the REIT Conversion and all the transactions related to the REIT Conversion, including the Merger, will occur.

The Principal Parties

Forest City Enterprises, Inc.

Terminal Tower, 50 Public Square

Suite 1100

Cleveland, Ohio 44113

(216) 621-6060

Forest City’s predecessor was founded in 1920. Forest City was incorporated under the laws of the state of Ohio in 1960, made its initial public offering in that same year, and is currently publicly traded on the NYSE under the symbols “FCE.A” and “FCE.B”.

Forest City principally engages in the ownership, development, management and acquisition of commercial and residential real estate and land in 24 states and the District of Columbia. Our core markets include Boston, Chicago, Dallas, Denver, Los Angeles, the Greater New York City metropolitan area, Philadelphia, the Greater San Francisco metropolitan area, and the Greater Washington, D.C. metropolitan area. We have offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C. and our corporate headquarters are located in Cleveland, Ohio.

Our headquarters are located at Terminal Tower, 50 Public Square, Suite 1100, Cleveland, Ohio 44113 and the telephone number at this location is (216) 621-6060. Information about us is available on our Internet site at www.forestcity.net. The contents of our Internet site are not incorporated by reference herein and are not deemed to be part of this proxy statement/prospectus.

Forest City Realty Trust, Inc.

Terminal Tower, 50 Public Square

Suite 1100

Cleveland, Ohio 44113

(216) 621-6060

The REIT, a Maryland corporation, is a newly formed, direct, wholly-owned subsidiary of Forest City. Forest City formed the REIT for the purpose of participating in the transactions contemplated by the Merger Agreement. Prior to the Merger, the REIT will have no assets or operations other than those incident to its formation and its participation in the transactions contemplated by the Merger Agreement. After the Merger, the REIT intends to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016.

 

 

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FCILP, LLC

Terminal Tower, 50 Public Square

Suite 1100

Cleveland, Ohio 44113

(216) 621-6060

FCILP, a Delaware limited liability company, is a newly formed, direct, wholly-owned subsidiary of the REIT. Prior to the Merger, FCILP will have no assets or operations other than those incident to its formation and its participation in the transactions contemplated by the Merger Agreement.

FCE Merger Sub, Inc.

Terminal Tower, 50 Public Square

Suite 1100

Cleveland, Ohio 44113

(216) 621-6060

Merger Sub, an Ohio corporation, is a newly formed, wholly-owned subsidiary of the REIT owned directly and through the REIT’s interest in FCILP. Prior to the Merger, Merger Sub will have no assets or operations other than those incident to its formation and its participation in the transactions contemplated by the Merger Agreement. After the Merger, Merger Sub will cease to exist.

Risk Factors (See page [])

Before voting on any of the proposals described in the Notice of Special Meeting, you should carefully consider all of the information contained in or incorporated by reference into this proxy statement/prospectus, as well as the specific factors under the heading “Risk Factors”.

The REIT Conversion (See page [])

Our board of directors has unanimously approved a plan to reorganize our business operations so that, following the Merger, we will qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. We refer to this plan, including the transactions immediately preceding and immediately following the Merger, as the REIT Conversion.

If, following the Merger, we qualify as a real estate investment trust under the Code, we generally will not be subject to U.S. federal corporate income taxes on that portion of our capital gain or ordinary income from our real estate investment trust operations that we distribute to our shareholders. This treatment would substantially eliminate the federal “double taxation” on our earnings from our real estate investment trust operations, or taxation once at the corporate level and again at the shareholder level, that generally results from investment in a regular C corporation. As explained more fully below, however, our non-real estate investment trust assets and operations, which we expect will consist primarily of our (i) military housing business, (ii) land development projects at Stapleton in Denver, Colorado, and Mesa del Sol in Albuquerque, New Mexico, (iii) condominium development projects at Pacific Park Brooklyn, a mixed-use project in Brooklyn, New York, and (iv) ownership interests in Barclays Center, the arena in Brooklyn, New York, and The Brooklyn Nets, a National Basketball Association member, and which we refer to as our non-qualifying operations, would continue to be subject, as applicable, to U.S. federal and state corporate income taxes and to foreign taxes in the jurisdictions in which those operations are located.

We are distributing this proxy statement/prospectus to you as a holder of shares of Forest City Common Stock, in connection with the solicitation of proxies by our board of directors for your approval of the holding company merger proposal, as well as for your approval of the proposed amendment to the Forest City articles, which

 

 

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amendment is necessary to authorize us to declare and pay the planned 2015 Special Dividend. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A and the text of the proposed amendment to the Forest City articles is provided in the section of this proxy statement/prospectus entitled “Proposal to Amend the Forest City Articles of Incorporation” beginning on page [●].

We estimate that one-time transaction costs incurred and to be incurred in connection with the REIT Conversion will be approximately $[●] in the aggregate.

Forest City’s board of directors may decide to delay or cancel the Merger and/or other components of the transactions involved in the REIT Conversion if it determines that any of the foregoing is not advisable and in the best interests of Forest City and its shareholders. Similarly, Forest City may not proceed with the proposed amendment to the Forest City articles, even if our shareholders vote to adopt the amendment, if our board of directors determines that the amendment is no longer advisable and in the best interest of Forest City and its shareholders.

The Merger (See page [])

Subject to the receipt of necessary shareholder approval, Forest City, the REIT, FCILP and Merger Sub have agreed to consummate the Merger under the terms and subject to the conditions of the Merger Agreement.

The Merger Agreement provides that Merger Sub will merge with and into Forest City, at which time the separate corporate existence of Merger Sub will cease, Forest City will be the surviving company and the REIT will become the parent company of Forest City. Upon the effectiveness of the Merger, each outstanding share of Forest City Class A Common Stock will be converted into one share of REIT Class A common stock, and each outstanding share of Forest City Class B Common Stock will be converted into one share of REIT Class B common stock.

A vote to approve the holding company merger proposal will also be a vote to approve, among other things, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of the shares of REIT common stock that will be received by our shareholders in the Merger, as set forth in the MGCL and as contained in the REIT Charter and REIT Bylaws.

Reasons for the Merger (See page [])

The Merger is being proposed to enable us to carry out our previously announced intention to convert to a structure that will allow the parent company of the Forest City business to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. Forest City is an Ohio corporation. Following the Merger, you will hold shares of common stock of a Maryland corporation. Approximately 80% of the public companies that qualify as real estate investment trusts under the Code are currently formed under Maryland law. Forest City’s board of directors has concluded that, when compared with Ohio, Maryland has more comprehensive and flexible laws governing entities that qualify as real estate investment trusts under the Code and has courts with greater experience in addressing issues pertinent to entities that so qualify. In addition, the Merger will allow for the effective adoption and implementation of certain transfer and ownership restrictions that are designed to facilitate the REIT’s compliance with certain of the U.S. federal income tax law rules that the REIT must satisfy in order to qualify as a real estate investment trust under the Code, which provisions have been specifically validated under Maryland law. As a result, among other reasons described in this proxy statement/prospectus, Forest City’s board of directors believes that the holding company merger proposal is advisable and in the best interest of Forest City and its shareholders.

 

 

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Conditions to Completion of the Merger (See page [])

The completion of the proposed Merger depends on the satisfaction or waiver by Forest City of the following conditions:

 

    the Merger Agreement shall have been duly adopted by the requisite vote of Forest City shareholders at the Special Meeting;

 

    Forest City’s board of directors shall have determined that no legislation or proposed legislation with a reasonable possibility of being enacted will have the effect of (a) impairing in any material respect the ability of the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, (b) increasing in any material respect the federal tax liabilities of the REIT resulting from so qualifying or (c) amending Sections 856 through 860 of the Code in a manner that reduces in any material respect the expected benefits to the REIT of so qualifying;

 

    Forest City’s board of directors shall not have determined that the Merger or the REIT’s anticipated qualification as a real estate investment trust under the Code is no longer advisable and in the best interests of Forest City and its shareholders;

 

    the REIT shall have amended and restated its charter and bylaws to read in substantially the form attached hereto as Annex B-1 and Annex B-2, respectively;

 

    Forest City shall have received an opinion from Sullivan & Cromwell LLP to the effect that (i) the Merger and the subsequent steps taken to convert Forest City to a limited partnership will qualify as a reorganization within the meaning of Section 368 of the Code and (ii) commencing with the REIT’s taxable year ending December 31, 2016, the REIT’s organization and proposed method of operations will enable it to meet the requirements for qualification and taxation as a real estate investment trust under the Code;

 

    the NYSE shall have approved the listing of the shares of both classes of REIT common stock to be issued in connection with the Merger, subject to official notice of issuance;

 

    Forest City shall have received all required governmental approvals to the transactions contemplated prior to and in connection with the REIT Conversion, except for such approvals that, if not obtained, would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of the REIT and its subsidiaries taken as a whole following the REIT Conversion;

 

    Forest City shall have received all required third party consents and approvals in respect of the transactions contemplated prior to and in connection with the REIT Conversion, except for such consents and/or approvals that, if not obtained, would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of the REIT and its subsidiaries taken as a whole following the REIT Conversion; and

 

    the registration statement of which this proxy statement/prospectus is a part shall have been declared effective by the SEC and shall not be the subject of any stop order or proceeding initiated by the SEC seeking a stop order.

Termination of Merger Agreement (See page [])

Forest City’s board of directors has the right to terminate the Merger Agreement prior to the completion of the Merger even after our shareholders approve the holding company merger proposal.

 

 

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Effective Time of the Merger

The Merger will take effect upon the filing of the certificate of merger with the Secretary of State of the state of Ohio, assuming that the holding company merger proposal and the proposed amendment to the Forest City articles are both approved by Forest City shareholders at the Special Meeting. We refer to this as the “Effective Time”.

If the holding company merger proposal and the proposed amendment to the Forest City articles are approved at the Special Meeting, we expect the Merger will take place on or about December 31, 2015. Forest City’s board of directors may, however, cancel or defer the timing of the Merger or even terminate the Merger Agreement and abandon the Merger should it determine that one or more of the conditions precedent specified in the Merger Agreement has not been met and should not be waived, or that the Merger would not be advisable and in the best interests of Forest City or its shareholders. In the event of such termination and abandonment, the Merger Agreement will become void and none of Forest City, the REIT, FCILP or Merger Sub will have any liability with respect to such termination and abandonment.

Regulatory Approvals and Third Party Consents (See page [])

We are not aware of any regulatory requirements that must be complied with or regulatory approvals that must be obtained prior to completion of the Merger, other than compliance with applicable federal and state securities laws and the filing and acceptance of a certificate of merger as required under the Ohio Revised Code (the “ORC”).

Under the Merger Agreement, our obligation to complete the Merger is conditioned on the satisfaction or waiver of the closing condition that we shall have received all required third party consents to the Merger, except for such consents that, if not obtained, would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of the REIT and its subsidiaries taken as a whole. In order to satisfy this closing condition, we must obtain consents to the Merger from certain of our outside partners, members of our joint ventures, certain lenders and other parties prior to completion of the Merger. These consents are required due to contractual restrictions in our agreements with such parties.

Treatment of Forest City Common Stock in the Merger (See page [])

As a result of the Merger, each share of Forest City Class A Common Stock will be converted into one share of REIT Class A common stock, and each share of Forest City Class B Common Stock will be converted into one share of REIT Class B common stock.

Treatment of Forest City Incentive Compensation Plans and Outstanding Equity Awards in the Merger (See page [])

At the effective time of the Merger, the REIT will assume Forest City’s equity incentive related plans and applicable award agreements, which includes the Forest City 1994 Stock Plan (as amended and restated as of March 17, 2013 and further amended on December 17, 2013), which we refer to as the Plan. The REIT will also assume Forest City’s 2005 Deferred Compensation Plan for Nonemployee Directors (as amended and restated effective January 1, 2008) and Forest City’s Deferred Compensation Plan for Nonemployee Directors. As of the effective time of the Merger, all rights of participants to acquire shares of Forest City Class A Common Stock under the Plan will automatically convert into rights to acquire an equal number of shares of REIT Class A common stock in accordance with the terms of the Plan and the applicable award agreements. The REIT will also assume Forest City’s cash-based incentive plans, which include the Forest City Executive Short-Term Incentive Plan (as amended and restated as of March 14, 2013), the Forest City Executive Long-Term Incentive Plan (as amended and restated as of March 14, 2013), the Forest City Senior Management Short-Term Incentive Plan and the Forest City Senior Management Long-Term Incentive Plan.

 

 

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Comparative Rights of Shareholders of Forest City and the REIT (See page [])

Your rights as a holder of shares of Forest City Common Stock are governed by Ohio law and Forest City’s organizational documents. If the Merger is completed, you will become a holder of shares of REIT common stock and your rights as a shareholder will be governed by Maryland law and the REIT’s organizational documents. Some important differences exist between your rights as a holder of shares of Forest City Common Stock and your rights as a holder of shares of REIT common stock.

One difference is that, in order to facilitate the REIT’s compliance with certain of the U.S. federal income tax rules that must be satisfied in order for the REIT to qualify as a real estate investment trust under the Code, the REIT Charter will generally prohibit any person or group of persons, acting together, from owning, actually or constructively under applicable income tax rules, more than 9.8% in value of the outstanding shares of REIT stock or more than 9.8% in value or number (whichever is more restrictive) of the outstanding shares of REIT common stock. The REIT Restrictions are set out in Article VII of the REIT Charter.

Material U.S. Federal Income Tax Considerations (See page [])

The Merger and the subsequent steps taken to convert Forest City to a limited partnership are intended to qualify as a tax-free reorganization under U.S. federal income tax laws. We expect that U.S. shareholders of Forest City will not recognize any gain or loss for U.S. federal income tax purposes upon the conversion of their shares of Forest City Common Stock for shares of REIT common stock. However, the tax consequences to you will depend on your own situation. You are urged to consult your own tax advisors concerning the specific tax consequences of the Merger to you, including any state, local or foreign tax consequences of the Merger.

Accounting Treatment

For accounting purposes, the Merger will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities by the REIT will be the carryover basis of Forest City. Shareholders’ equity of the REIT will be that carried over from Forest City, after giving effect to the planned 2015 Special Dividend.

The Qualification of the REIT as a Real Estate Investment Trust under the Code Following the Merger (See page [])

Following the Merger, the REIT intends to qualify and elect to be taxed as a real estate investment trust under Sections 856 through 860 of the Code, commencing with the taxable year ending December 31, 2016. A company that qualifies and elects to be taxed as a real estate investment trust under the Code generally will not be subject to U.S. federal income tax on its real estate investment trust taxable income that it distributes to its shareholders. A company’s qualification as a real estate investment trust under the Code depends on its ability to meet, on a continuing basis, through actual investment and operating results, various highly technical and complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares. The REIT believes that it will be organized in conformity with the requirements for qualification and taxation as a real estate investment trust under the Code, and that its intended manner of operation will enable it to meet the requirements for qualification and taxation as a real estate investment trust. The REIT anticipates that distributions it makes to its shareholders generally will be taxable to its shareholders as ordinary income, although a portion of the distributions may be designated by the REIT as qualified dividend income or capital gain or may constitute a return of capital. Even if the REIT qualifies as a real estate investment trust under the Code, the REIT may be subject to some U.S. federal, state and local and foreign taxes on the REIT’s income and property. Given the complex and highly technical nature of the Code requirements that the REIT must satisfy in order to qualify as a real estate investment trust, the ongoing importance of factual determinations and the

 

 

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possibility of future changes in the REIT’s circumstances and the laws and regulations applicable to an entity that seeks to qualify as real estate investment trust under the Code, there is no assurance that the REIT will qualify as a real estate investment trust under the Code for any particular taxable year.

We expect that prior to the effective date of this proxy statement/prospectus our counsel, Sullivan & Cromwell LLP, will render an opinion to the REIT to the effect that our proposed organization, ownership and method of operation, as represented by management, will enable the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. Sullivan & Cromwell LLP will not verify those representations and their opinion will assume that such representations are true, accurate and complete, that Forest City and the REIT have operated and will operate in accordance with such representations and that they will take no action inconsistent with such representations. The Sullivan & Cromwell LLP tax opinion will represent counsel’s legal judgment based on the law existing and in effect on the effective date of this proxy statement/prospectus, is not binding on the IRS or any court, and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to U.S. federal income tax laws or regulations, any of which could be applied retroactively. Sullivan & Cromwell LLP will not review the REIT’s eligibility to qualify as a real estate investment trust under the Code on a continuing basis. Accordingly, the opinion of Sullivan & Cromwell LLP will not cover subsequent periods and does not guarantee the REIT’s ability to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. There is no assurance that the REIT will so qualify. Sullivan & Cromwell LLP will have no obligation to advise the REIT or the holders of shares of REIT common stock of any subsequent change in the matters stated, represented or assumed in its opinion or of any subsequent change in applicable law.

Recommendation of the Board of Directors (See page [])

Our board of directors believes that each proposal is advisable and in the best interests of Forest City and its shareholders and unanimously recommends that you vote “FOR” the holding company merger proposal, “FOR” the proposed amendment to the Forest City articles and “FOR” the adjournment proposal.

Date, Time, Place and Purpose of Special Meeting (See page [])

The Special Meeting will be held on [], 2015 at [], Eastern Time, in the 6th floor Riverview Room of the Ritz-Carlton Hotel, Tower City Center, 1515 West Third Street, Cleveland, Ohio 44113 to consider and vote upon the proposals described in the Notice of Special Meeting.

Shareholders Entitled to Vote (See page [])

Our board of directors has fixed the close of business on [], 2015 as the record date for the determination of shareholders entitled to receive notice of, and to vote at, the Special Meeting. As of [], 2015, there were [] million shares of Forest City Class A Common Stock outstanding and entitled to vote and [] holders of record and [] shares of Forest City Class B Common Stock outstanding and entitled to vote and [] holders of record.

Vote Required (See page [])

Both the adoption of the holding company merger proposal and the adoption of the proposed amendment to the Forest City articles require the affirmative vote of the holders of at least two-thirds of the outstanding shares of Forest City Class A Common Stock and at least two-thirds of the outstanding shares of Forest City Class B Common Stock, each voting as a separate class.

The adoption of the adjournment proposal requires the affirmative vote from the holders of a majority of the voting power of the holders of outstanding shares of Forest City Common Stock entitled to vote and present or

 

 

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represented by proxy at the Special Meeting, whether or not a quorum is present. For this purpose, each outstanding share of Forest City Class A Common Stock is entitled to one vote and each outstanding share of Forest City Class B Common Stock is entitled to ten votes.

Abstentions and broker non-votes, if any, will have the effect of a vote “AGAINST” the holding company merger proposal and the proposed amendment to the Forest City articles. An abstention will have the effect of a vote “AGAINST” the adjournment proposal and broker non-votes will have no effect on such proposal.

Our board of directors reserves the right to cancel or defer the timing of the Merger, even if Forest City shareholders vote to approve and adopt the Merger Agreement, if our board of directors determines that one or more of the conditions precedent has not been met and should not be waived, or that the Merger is no longer advisable and in the best interests of Forest City and its shareholders. Similarly, we expressly reserve the right to not proceed with the proposed amendment to the Forest City articles, even if our shareholders vote to adopt the amendment, if our board of directors determines that the amendment is no longer advisable and in the best interest of Forest City and its shareholders.

No Dissenters’ (or Appraisal) Rights (See page [])

Under the ORC, you will not be entitled to dissenters’ rights of appraisal as a result of the Merger or the adoption of the proposed amendment to the Forest City articles.

Shares Owned by Forest City’s Directors and Executive Officers (See page [ ])

At the close of business on the Record Date, our directors and executive officers and their affiliates were entitled to vote [] shares of Forest City Class A Common Stock and [●] shares of Forest City Class B Common Stock. This represents approximately [●]% of the issued and outstanding shares of Forest City Class A Common Stock as of the Record Date and [●]% of the issued and outstanding shares of Forest City Class B Common Stock as of such date.

Board of Directors and Executive Officers of the REIT Following the Merger (See page [])

Immediately following the Merger, the REIT board of directors will consist of the same individuals who comprise the Forest City board of directors immediately prior to the Merger. The individuals serving as principal executive officer, principal financial officer and principal accounting officer of Forest City immediately prior to the Merger will hold the same positions at the REIT immediately following the Merger. Other executive officers of Forest City may have different responsibilities as executive officers of the REIT as a result of certain organizational changes and several officers of Forest City who are not principal officers or “named executive officers” have indicated that they may retire following the Merger. Forest City does not anticipate any material impact from these changes and expects that any resulting vacant positions will be filled internally in the ordinary course of business.

Historical Market Price of Forest City Common Stock

Forest City Class A Common Stock and Forest City Class B Common Stock are listed on the NYSE under the symbols “FCE.A” and “FCE.B”, respectively.

 

 

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The following table presents the reported high and low sale prices of Forest City Common Stock on the NYSE for the periods presented and as reported by the NYSE, as well as the dividends declared per share of Forest City Common Stock. On July 9, 2015, the most recent trading day before the announcement of the holding company merger proposal, the closing price per share of Forest City Class A Common Stock was $[●] and the closing price per share of Forest City Class B Common Stock was $[●]. You should obtain a current stock price quotation for both classes of Forest City Common Stock.

 

Quarter Ended  
     March 31,
2015
     December 31,
2014
     September 30,
2014
     June 30,
2014
     March 31,
2014
 

Market price range of Forest City Common Stock

        

Class A

              

High

   $ 25.90       $ 21.67       $ 21.30       $ 20.09       $ 19.58   

Low

   $ 20.68       $ 19.20       $ 19.17       $ 18.46       $ 17.71   

Class B

              

High

   $ 25.81       $ 21.70       $ 21.30       $ 20.05       $ 19.64   

Low

   $ 20.74       $ 19.24       $ 19.13       $ 18.48       $ 17.69   

Quarterly dividends declared per share of Forest City Common Stock

   $ —         $ —         $ —         $ —         $ —     

 

Quarter Ended  
     December 31,
2013(1)
     October 31,
2013
     July 31,
2013
     April 30,
2013
     January 31,
2013
 

Market price range of Forest City Common Stock

           

Class A

              

High

   $ 20.51       $ 20.50       $ 20.25       $ 18.67       $ 17.33   

Low

   $ 18.20       $ 16.91       $ 17.15       $ 15.50       $ 13.97   

Class B

              

High

   $ 20.41       $ 20.41       $ 20.00       $ 18.45       $ 17.22   

Low

   $ 18.30       $ 16.87       $ 17.24       $ 15.73       $ 14.03   

Quarterly dividends declared per share of Forest City Common Stock

   $ —         $ —         $ —         $ —         $ —     

 

(1) On March 29, 2012, our board of directors approved a change to Forest City’s fiscal year-end to December 31 from January 31, effective December 31, 2013.

Following the Merger, shares of REIT common stock will be listed and traded on the NYSE in the same manner as shares of Forest City Common Stock currently are listed and trade on the NYSE. The historical trading prices of shares of Forest City Common Stock are not necessarily indicative of the future trading prices of shares of REIT common stock because, among other things, the current stock price of Forest City Common Stock reflects the current market valuation of Forest City’s current business and assets in its current configuration, including the cash that we expect will be distributed in the 2015 Special Dividend. See “Risk Factors—Risks Related to the REIT Conversion— The current per share market price of Forest City Common Stock may not be indicative of the market price of REIT common stock following the 2015 Special Dividend and the REIT Conversion”.

 

 

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SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial data as of the dates and for the periods indicated for Forest City, which is deemed to be the predecessor of the REIT for accounting purposes.

The selected statement of operations data presented below for the three months ended March 31, 2015 and 2014 have been derived from Forest City’s unaudited consolidated financial statements and related notes thereto incorporated by reference into this proxy statement/prospectus. The selected statement of operations data presented below for the fiscal years ended December 31, 2014 and 2013 and January 31, 2013 and the selected balance sheet data as of December 31, 2014 and 2013 have been derived from Forest City’s audited consolidated financial statements and related notes thereto incorporated by reference into this proxy statement/prospectus. The statement of operations data presented below for the fiscal years ended January 31, 2012 and January 31, 2011 have been derived from Forest City’s audited consolidated financial statements and related notes thereto, which are not incorporated by reference into this proxy statement/prospectus. The information in the following table may not be comparable to the operations of the REIT on a going-forward basis following the REIT Conversion and thus may not be indicative of the REIT’s future performance.

The information set forth below does not provide all of the information contained in Forest City’s financial statements, including the related notes. It is important for you to read the following summary of selected financial data together with the other information contained in Forest City’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as amended ,and Forest City’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the consolidated financial statements and related notes therein. See the section entitled “Additional Information” beginning on page [●] of this proxy statement/prospectus.

 

    Three Months Ended     Year Ended     11 Months Ended     Years Ended  
    March 31,
2015
    March 31,
2014
    December 31,
2014
    December 31,
2013
    January 31,
2013
    January 31,
2012
    January 31,
2011
 
    (in thousands, except share and per share data)  

Operating Results:

         

Total revenues (1) 

  $ 237,082      $ 249,537      $ 966,052      $ 998,272      $ 1,048,067      $ 975,032      $ 1,011,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations attributable to Forest City Enterprises, Inc. (1)

  $ (54,209   $ 3,698      $ (20,557   $ 20,934      $ (19,944   $ (113,754   $ 80,202   

Earnings (loss) from discontinued operations attributable to Forest City Enterprises, Inc. (1)

    —          11,822        12,962        (26,241     56,369        27,268        (22,154
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Forest City Enterprises, Inc.

  $ (54,209   $ 15,520      $ (7,595   $ (5,307   $ 36,425      $ (86,486   $ 58,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings per Common Share:

         

Earnings (loss) from continuing operations attributable to Forest City Enterprises, Inc. (1)

  $ (0.27   $ 0.02      $ (0.10   $ 0.10      $ (0.30   $ (0.77   $ 0.43   

Earnings (loss) from discontinued operations attributable to Forest City Enterprises, Inc. (1)

    —          0.06        0.06        (0.13     0.31        0.16        (0.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Forest City Enterprises, Inc.

  $ (0.27   $ 0.08      $ (0.04   $ (0.03   $ 0.01      $ (0.61   $ 0.31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Diluted Shares Outstanding

    202,963,083        203,311,836        198,480,783        198,696,729        172,621,723        168,170,650        187,794,101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Dividend Declared per share-Forest City Class A Common Stock and Forest City Class B Common Stock

  $ —        $ —        $ —        $ —        $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    March 31,
2015
    March 31,
2014
    December 31,
2014
    December 31,
2013
    January 31,
2013
    January 31,
2012
    January 31,
2011
 
    (in thousands)  

Financial Position:

         

Consolidated assets

  $     8,795,391      $     8,946,808      $     8,814,940      $     8,952,025      $     10,612,432      $     10,504,283      $     12,059,701   

Real estate, at cost (2)

    8,456,522        7,905,278        8,328,987        8,475,571        10,026,010        9,646,870        11,166,539   

Long-term debt, primarily nonrecourse mortgages and notes payable (2)

    4,673,584        5,176,991        4,938,201        5,279,506        6,773,629        6,698,052        8,118,053   

 

(1) Adjusted for discontinued operations. See Note X – Discontinued Operations and Gain (Loss) on Disposition of Rental Properties in the Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as amended, for additional information.
(2) Includes applicable balances associated with land held for divestiture and development project held for sale.

 

 

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SUMMARY UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA

The following table presents selected financial data from the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2014, the unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 2015, and the unaudited pro forma condensed consolidated balance sheet as of March 31, 2015, included in this proxy statement/prospectus. The unaudited pro forma condensed consolidated balance sheet is presented as if the 2015 Special Dividend, the Merger and the other transactions directly related to the REIT Conversion had occurred on March 31, 2015. The unaudited pro forma condensed consolidated statements of operations present the effects of the REIT Conversion as though it occurred on January 1, 2014.

The unaudited pro forma condensed financial data is based on the estimates and assumptions set forth in the notes to such data, which are preliminary and have been made solely for the purposes of developing such pro forma information. See “Unaudited Pro Forma Condensed Consolidated Financial Information”. The unaudited pro forma condensed financial data is not necessarily indicative of the financial position or operating results that would have occurred had the 2015 Special Dividend and the REIT Conversion been completed as of the dates indicated, nor are they necessarily indicative of future financial position or operating results. This information should be read in conjunction with the unaudited pro forma condensed consolidated financial statements and related notes and the historical financial statements and related notes of Forest City and the REIT included in or incorporated by reference into this proxy statement/prospectus.

We currently estimate that the aggregate amount of the expected 2015 Special Dividend will be $100,000,000, the mid-point of the estimated range of the dividend, and we expect to pay such distribution in a combination of cash and shares of Forest City Common Stock, with no more than 20% of the total dividend being paid in cash. All assumptions used in the following pro forma consolidated financial data are described under “Unaudited Pro Forma Condensed Consolidated Financial Information”.

 

     Pro Forma  
     For the year ended
December 31, 2014
    For the three months
ended March 31, 2015
 
     (in thousands)  
Condensed Consolidated Statement of Operations     

Total revenues

   $ 966,052      $ 237,082   

Total expenses

     1,140,209        220,107   
  

 

 

   

 

 

 

Operating income (loss)

  (174,157   16,975   

Other income (loss)

  39,321      (80,127

Income tax (benefit) provision

  (3,518   1,185   

Earnings (loss) from unconsolidated entities, gross of tax

  86,908      9,313   
  

 

 

   

 

 

 

Loss from continuing operations

$ (44,410 $ (55,024
  

 

 

   

 

 

 

Per share data:

Loss from continuing operations attributable to common shareholders

Basic

$ (0.15 $ (0.25
  

 

 

   

 

 

 

Diluted

$ (0.15 $ (0.25
  

 

 

   

 

 

 

 

 

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     Pro Forma as of
March 31, 2015
 
     (in thousands)  

Condensed Consolidated Balance Sheet

  

Real estate, net

   $ 6,850,398   

Cash and equivalents

     170,905   

Restricted cash

     250,557   

Notes and accounts receivable, net

     436,599   

Investments in and advances to unconsolidated entities

     669,605   

Other assets

     397,327   

Deferred income taxes

     51,928   
  

 

 

 

Total Assets

$ 8,827,319   
  

 

 

 

Mortgage debt and notes payable, nonrecourse

$ 4,202,440   

Revolving credit facility

  59,950   

Convertible senior debt

  411,194   

Accounts payable, accrued expenses and other liabilities

  835,263   

Cash distributions and losses in excess of investments in unconsolidated entities

  211,255   
  

 

 

 

Total liabilities

$ 5,720,102   
  

 

 

 

Redeemable noncontrolling interest

  178,050   

Total shareholders equity

  2,481,230   

Noncontrolling interest

  447,937   
  

 

 

 

Total Equity

  2,929,167   
  

 

 

 

Total Liabilities and Equity

$ 8,827,319   
  

 

 

 

 

 

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COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

The following tables set forth selected historical per share data for Forest City and selected unaudited pro forma per share data after giving effect to the 2015 Special Dividend and the REIT Conversion. This information should be read in conjunction with the selected historical financial information included in or incorporated by reference into this proxy statement/prospectus and the historical financial statements and related notes that are included in or incorporated by reference into this proxy statement/prospectus. The unaudited pro forma per share amounts have been computed using the assumptions described in the section entitled “Summary Unaudited Pro Forma Condensed Financial Data”. The unaudited pro forma consolidated financial data are presented for informational purposes only. The unaudited pro forma financial data are not necessarily indicative of the financial position or operating results that would have occurred had the 2015 Special Dividend and the REIT Conversion been completed as of the dates indicated, nor are they necessarily indicative of future financial position or operating results.

Historical Data Per Share

The historical book value per share data presented below is computed by dividing total shareholders’ equity of $1.7 billion and $2.0 billion on December 31, 2014 and March 31, 2015, respectively, by the number of shares outstanding on those dates.

 

     As of or for
the Year Ended
December 31,
2014
    As of or for
the Three Months
Ended March 31,
2015
 

Loss from continuing operations attributable to common shareholders per share:

    

Basic

   $ (.10   $ (.27

Diluted

   $ (.10   $ (.27

Book value per share

   $ 8.63      $ 9.25   

Cash dividends per share

   $ —        $ —     

Unaudited Pro Forma Data Per Share

The pro forma book value per share as of March 31, 2015 is computed by dividing pro forma shareholders’ equity of $2.5 billion by the pro forma number of shares assumed to be outstanding on that date.

 

     Pro Forma  
     As of or for the
Year Ended
December 31,
2014
    As of or for the
Three Months
Ended

March 31, 2015
 

Loss from continuing operations attributable to common shareholders per share:

    

Basic

   $ (.15   $ (.25

Diluted

   $ (.15   $ (.25

Book value per share (1)

     $ 11.49   

Cash dividends per share

   $ —        $ —     

 

(1) Pro forma book value per share is only calculated for the March 31, 2015 conversion date.

 

 

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RISK FACTORS

In addition to the other information in this proxy statement/prospectus, you should carefully consider the following risk factors in determining whether or not to vote in favor of the proposals to be voted upon at the Special Meeting. You should carefully consider the additional risks described in our annual, quarterly and current reports, including those identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as amended, as updated by our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015. This section includes or refers to certain forward-looking statements. The risks and uncertainties described herein may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. See the section entitled “Special Note Regarding Forward-Looking Statements” beginning on page [].

RISKS RELATED TO THE REIT CONVERSION

Forest City’s board of directors may choose to cancel or defer the timing of the Merger

Assuming that the holding company merger proposal and the proposed amendment to the Forest City articles are approved at the Special Meeting, we expect the Merger will take place on or about December 31, 2015. Forest City’s board of directors may, however, defer the timing of the Merger or may even terminate the Merger Agreement and abandon the Merger should it determine that one or more of the conditions precedent has not been met and should not be waived, or that the Merger would not be advisable and in the best interests of Forest City or its shareholders. In the event of such termination and abandonment, the Merger Agreement will become void and none of Forest City, the REIT, FCILP or Merger Sub will have any liability with respect to such termination and abandonment.

Even if the Merger is completed, there can be no assurances that the REIT Conversion will be completed

Whether or not the Merger is completed, there can be no assurances that the REIT Conversion will be completed. Completion of the REIT Conversion remains subject to numerous contingencies, including final approval by Forest City’s board of directors.

Additionally, even if the Merger is effected, the REIT board of directors may abandon or delay one or more of the other transactions contemplated as part of the REIT Conversion if the board of directors of the REIT determines that any such transactions, or the REIT’s qualification as a real estate investment trust under the Code, is not in the best interests of the REIT. See “Terms of the Merger” beginning on page [●] for a more detailed description of the Merger.

If the REIT fails to qualify as a real estate investment trust, the REIT would be subject to U.S. federal income tax as a regular C corporation and would not be able to deduct distributions to shareholders when computing the REIT’s taxable income

Following the Merger, we plan to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. Determining whether we qualify as a real estate investment trust will involve the application of highly technical and complex provisions of the Code to our operations for which there are only limited judicial and administrative interpretations.

The complexity of these provisions and of the applicable regulations that have been promulgated under the Code is greater in the case of an entity holding assets through an operating partnership, as we intend to do. In addition, determining whether we qualify as a real estate investment trust under the Code will involve numerous factual determinations concerning matters and circumstances not entirely within our control.

We have neither requested nor do we plan to request a ruling from the IRS that we will qualify as a real estate investment trust under the Code, and the statements in this proxy statement/prospectus are not binding on the IRS or any court. Therefore, we cannot assure you that we will qualify as a real estate investment trust commencing with the taxable year ending December 31, 2016 or that we will remain so qualified.

 

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If we fail to qualify as a real estate investment trust under the Code, or qualify but subsequently cease to so qualify, we will face serious tax consequences that would substantially reduce the funds available for distribution to our shareholders for each of the years involved because:

 

    we will not be allowed to deduct our distributions to shareholders in computing our taxable income;

 

    we will be subject to U.S. federal and state income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; and

 

    unless we are entitled to relief under the Code, we would be disqualified from qualifying as a real estate investment trust under the Code for the four taxable years following the year during which we were disqualified.

Any such corporate tax liability may require us to borrow funds or liquidate some investments to pay any such additional tax liability, which in turn could have an adverse impact on the value of REIT common stock.

Although we intend to operate so as to qualify as a real estate investment trust, future economic, market, legal, tax or other considerations might cause us to revoke or lose our anticipated real estate investment trust status, which could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy or pay a dividend.

While we expect Sullivan & Cromwell LLP to opine, based on certain representations, that the REIT will be organized in a manner that will enable it to qualify as a real estate investment trust, this opinion will not be binding on the IRS or any court and does not guarantee the REIT will so qualify

We expect that prior to the effective date of this proxy statement/prospectus our counsel, Sullivan & Cromwell LLP, will render an opinion to the REIT to the effect that our proposed organization, ownership and method of operation, as represented by management, will enable the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. Sullivan & Cromwell LLP will not verify those representations and their opinion will assume that such representations are true, accurate and complete, that Forest City and the REIT have operated and will operate in accordance with such representations and that they will take no action inconsistent with such representations. The Sullivan & Cromwell LLP tax opinion will represent counsel’s legal judgment based on the law existing and in effect on the effective date of this proxy statement/prospectus, is not binding on the IRS or any court, and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to U.S. federal income tax laws or regulations, any of which could be applied retroactively. Sullivan & Cromwell LLP will not review the REIT’s eligibility to qualify as a real estate investment trust under the Code on a continuing basis. Accordingly, the opinion of Sullivan & Cromwell LLP will not cover subsequent periods and does not guarantee the REIT’s ability to qualify as real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. There is no assurance that the REIT will so qualify. Sullivan & Cromwell LLP will have no obligation to advise the REIT or the holders of shares of REIT common stock of any subsequent change in the matters stated, represented or assumed in its opinion or of any subsequent change in applicable law.

Furthermore, both the validity of any opinion of Sullivan & Cromwell LLP and our qualifying as a real estate investment trust under the Code will depend on our satisfaction of certain ongoing asset, income, organizational, distribution, shareholder ownership and other requirements. Our compliance with these requirements will depend upon our ability to successfully manage the composition of our income and assets on an ongoing basis. While we believe that the REIT will satisfy these commencing with the taxable year ending December 31, 2016 and thereafter, Sullivan & Cromwell LLP will not review the REIT’s compliance with these tests on a continuing basis.

 

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Even if the REIT qualifies as a real estate investment trust, certain of the REIT’s business activities will be subject to corporate level income tax and foreign taxes, which will continue to reduce the REIT’s cash flows, and the REIT will have potential deferred and contingent tax liabilities

Following the Merger, even if we qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016:

 

    We may be subject to certain U.S. federal, state and local taxes and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income, and state, local or foreign income, franchise, property and transfer taxes. We could in certain circumstances be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Code to maintain our ability to qualify as a real estate investment trust. We plan to hold certain of our assets and operations and to receive certain items of income through one or more TRSs. These assets and operations consist principally of Forest City’s (i) military housing business, (ii) land development projects at Stapleton in Denver, Colorado, and Mesa del Sol in Albuquerque, New Mexico, (iii) condominium development projects at Pacific Park Brooklyn, a mixed-use project in Brooklyn, New York, and (iv) ownership interests in Barclays Center, the arena in Brooklyn, New York, and The Brooklyn Nets. Those TRS assets and operations would continue to be subject, as applicable, to U.S. federal and state corporate income taxes. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes would decrease our earnings and our cash available for distributions to shareholders.

 

    We will be subject to U.S. federal income tax at the highest regular corporate rate—which is 35% as of the date of this proxy statement/prospectus—on all or a portion of the gain recognized from a sale of assets occurring within a specified period (generally, ten years) after the effective date of our real estate investment trust election, to the extent of the built-in gain based on the fair market value of those assets held by us on the effective date of our real estate investment trust election in excess of our then tax basis in those assets. The same rules would apply to any assets we acquire from a C corporation in a carryover basis transaction with built-in gain at the time of the acquisition by us. This gain can be offset by any remaining federal net operating loss carryforwards. Furthermore, if the REIT chooses to dispose of any assets within the specified period, we will attempt to utilize various tax planning strategies, including Section 1031 of the Code like-kind exchanges, to mitigate the exposure to the built-in-gains tax. Gain from a sale of an asset occurring after the specified period ends will not be subject to this corporate level tax.

 

    If we were to make a technical or inadvertent mistake regarding whether certain items of our income satisfy either or both of the Code’s real estate investment trust gross income tests and as a result were to fail either or both such tests (and did not lose our status as a real estate investment trust because such failure was due to reasonable cause and not willful neglect), we would be subject to corporate level tax on the income that does not meet the Code’s real estate investment trust gross income test requirements. Any such taxes we pay will reduce our cash available for distribution to our shareholders.

 

    The IRS and any state or local tax authority may successfully assert liabilities against us for corporate income taxes for taxable years of Forest City prior to January 1, 2016, in which case we will owe these taxes plus applicable interest and penalties, if any. Moreover, any increase in taxable income for these pre-real estate investment trust periods will likely result in an increase in pre-real estate investment trust accumulated earnings and profits, which could either increase the taxable portion of the 2015 Special Dividend or require us to pay an additional taxable special distribution to our shareholders after the relevant determination.

The REIT Conversion will likely result in an adjustment to our deferred tax liability balance that could be significant

The change in tax status in qualifying as a real estate investment trust under the Code will impact our accounting for income taxes, particularly the current deferred tax liability balance. We anticipate that the REIT Conversion will result in an adjustment to our deferred tax liability balance that could be significant.

 

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The impact of our contemplated internal reorganization is still being analyzed and could be material

The cost savings and margin improvement initiatives identified as part of our strategic plan may result in a change to our segment reporting. If we determine it is necessary to change our segment reporting as part of, or following, the REIT Conversion, the impact of such a change may require a significant investment in systems and processes to generate the required information and may delay our ability to produce required reports.

Failure to make sufficient distributions would jeopardize the REIT’s plan to qualify as a real estate investment trust and/or would subject the REIT to U.S. federal income and excise taxes

A company must distribute to its shareholders with respect to each taxable year at least 90% of its taxable income (computed without regard to the dividends paid deduction and net capital gain and net of any available NOLs) in order to qualify as a real estate investment trust under the Code, and 100% of its taxable income (computed without regard to the dividends paid deduction and net capital gain and net of any available NOLs) in order to avoid U.S. federal income and excise taxes. For these purposes, the non-TRS subsidiaries of a company that qualifies as a real estate investment trust under the Code will be treated as part of such company and therefore such company will also be required to distribute out the taxable income of such subsidiaries. Following the Merger and our planned qualification as a real estate investment trust under the Code, to the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our real estate investment trust taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders for a calendar year is less than a minimum amount specified under the Code.

Generally, following the REIT Conversion, we expect to distribute all or substantially all of our real estate investment trust taxable income. However, we may decide to utilize our existing NOLs, if any, to reduce all or a portion of our taxable income in lieu of making corresponding distributions to our shareholders. If our cash available for distribution falls short of our estimates, we may be unable to maintain the proposed quarterly distributions that approximate our taxable income and, as a result, may be subject to U.S. federal income tax on the shortfall in distributions or may fail to qualify as a real estate investment trust under the Code. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of nondeductible expenditures, such as capital expenditures, payments of compensation for which Section 162(m) of the Code denies a deduction, the creation of reserves or required debt service or amortization payments.

Restrictive loan covenants could prevent the REIT from satisfying real estate investment trust distribution requirements

Following the Merger, if we qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, restrictions in our credit facility may prevent us from satisfying our real estate investment trust distribution requirements, and we could fail to qualify as a real estate investment trust under the Code. If these limits do not jeopardize our anticipated qualification as a real estate investment trust under the Code but nevertheless prevent us from distributing 100% of our real estate investment trust taxable income, we would be subject to federal corporate income tax, and potentially a nondeductible excise tax, on the retained amounts. As a result, we will need to amend the credit facility, or obtain a waiver thereunder, to permit our payment of the 2015 Special Dividend and to operate as a real estate investment trust. There is no assurance that we will be able to amend the credit facility, or obtain a waiver, in a manner that enables us to complete the REIT Conversion. To the extent we seek to replace the credit facility, we may enter into a new credit facility containing less favorable terms than our current credit facility; we also may not be able to replace the credit facility on terms satisfactory to us, or at all.

The REIT may be required to borrow funds, sell assets, or raise equity during unfavorable market conditions to qualify as a real estate investment trust

Following the Merger, in order to meet the real estate investment trust distribution requirements and maintain our anticipated qualification as a real estate investment trust under the Code, we may need to borrow funds, sell

 

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assets or raise equity, even if the then-prevailing market conditions are not favorable for these borrowings, sales or offerings. Any insufficiency of our cash flows to cover our real estate investment trust distribution requirements could adversely impact our ability to raise debt, to sell assets, or to offer equity securities in order to fund distributions required to maintain our expected qualification as a real estate investment trust under the Code and to avoid U.S. federal income and excise taxes. Furthermore, the real estate investment trust distribution requirements may increase the financing we need to fund capital expenditures, future growth and expansion initiatives. This would increase our total leverage. In addition, if we fail to comply with certain asset tests described under “Material U.S. Federal Income Tax Considerations” at the end of any calendar quarter, we would have to correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to continue to qualify as a real estate investment trust under the Code (if we so qualify). As a result, we may be required to liquidate otherwise attractive investments. These actions may reduce our income and amounts available for distribution to our shareholders.

Because, following the Merger and the REIT’s planned qualification as a real estate investment trust, we expect to distribute substantially all of our taxable income from investments to our shareholders or lenders, we will continue to need additional capital to make new investments. If additional funds are not available on favorable terms, or at all, our ability to make new investments will be impaired. Issuance of additional securities will result in dilution

If, following the Merger and our planned qualification as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, we distribute substantially all of our taxable income to our shareholders and we desire to make new investments through our Operating Partnership, our business will require a substantial amount of capital. We may acquire additional capital from the issuance of securities senior to REIT common stock, including additional borrowings or other indebtedness or the issuance of additional securities, including limited partnership interests. We may also acquire additional capital through the issuance of additional equity. However, we may not be able to raise additional capital in the future on favorable terms or at all. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. This may materially affect our business and ability to grow and may impact the market’s perception of us and the price of REIT common stock.

Additional issuance of equity securities may result in dilution to our shareholders. Although we expect to deploy additional capital in accretive transactions, such additional dilution may reduce your percentage of ownership of the REIT and voting percentage.

The REIT’s cash distributions are not guaranteed and may fluctuate

Following the Merger and our planned qualification as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, we may have available NOLs that could reduce or substantially eliminate our real estate investment trust taxable income, and thus we may not be required to distribute material amounts of cash to qualify as a real estate investment trust under the Code. We expect that, for the foreseeable future, we will continue to utilize available NOLs to reduce our REIT taxable income.

Upon completion of the Merger, our board of directors will determine on a quarterly basis the amount of cash to be distributed to our shareholders based on a number of factors, including our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, the impact of alternative, more attractive investments as compared to dividends, future acquisitions and divestitures, any stock repurchase program, general market demand for our space available for lease and applicable law. Consequently, our distribution levels may fluctuate.

There are uncertainties relating to the 2015 Special Dividend

In order to complete the REIT Conversion, we are required to distribute to our shareholders all of our pre-real estate investment trust accumulated earnings and profits, as measured for U.S. federal income tax purposes, prior

 

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to the end of the REIT’s first taxable year as a real estate investment trust, which we expect will be the taxable year ending December 31, 2016. Failure to do so could prevent the REIT from qualifying as a real estate investment trust under the Code. While we estimate that we will distribute our pre-real estate investment trust accumulated earnings and profits in the 2015 Special Dividend, the determination of the amount of pre-real estate investment trust accumulated earnings and profits that must be distributed in order for the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016 involves complex and highly technical legal and factual issues. There are substantial uncertainties relating to the computation of our pre-real estate investment trust accumulated earnings and profits, including the possibility that the IRS could, in auditing tax years through 2015, successfully assert that our taxable income should be increased, which would increase our pre-real estate investment trust accumulated earnings and profits. Moreover, although there are procedures available to cure a failure by us to distribute the necessary pre-real estate investment trust accumulated earnings and profits in connection with the REIT Conversion, we cannot now determine whether we will be able to take advantage of such procedures or the economic impact to us of doing so. If it is determined that we had undistributed pre-real estate investment trust accumulated earnings and profits as of the end of any taxable year in which the REIT elects to qualify as a real estate investment trust under the Code, and the REIT is unable to cure the failure to distribute such earnings and profits, then the REIT would fail to qualify as a real estate investment trust under the Code.

The ultimate timing and form of the planned payment of the 2015 Special Dividend will be determined by our board of directors and may be impacted by the pace and timing of certain transactions, possible changes in legislation or tax rules and IRS revenue procedures relating to distributions of earnings and profits and other factors beyond our control. In addition, our actual taxable income and performance for 2015 may be materially different from our current estimates and projections, and may be impacted by the steps we take to prepare for the REIT Conversion. See “Risk Factors—Risks Related to the REIT Conversion—There are uncertainties relating to our planned dispositions of non-core assets” for a further discussion of the potential dilutive effect of, and need to raise additional funds for, the 2015 Special Dividend.

Complying with the requirements to qualify as a real estate investment trust may cause the REIT to forego otherwise attractive opportunities

In order to qualify as a real estate investment trust under the Code, the REIT will have to satisfy tests concerning, among other things, the sources of the REIT’s income, the nature and diversification of the REIT’s assets, the amounts the REIT distributes to its shareholders and the ownership of REIT stock. The REIT may be required to make distributions to shareholders at times when it would be more advantageous to reinvest cash in the REIT’s business or when the REIT does not have funds readily available for distribution. Thus, compliance with the requirements to qualify as a real estate investment trust under the Code may hinder the REIT’s ability to operate solely on the basis of maximizing profits.

In particular, in order to qualify as a real estate investment trust under the Code, the REIT must ensure that at the end of each calendar quarter, at least 75% of the value of the REIT’s assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of the REIT’s investment in securities (other than government securities, securities of any TRS or disregarded entity subsidiary of ours and securities that are qualified real estate assets) generally may not include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of the REIT’s assets (other than government securities, securities of any TRS or disregarded entity subsidiary of ours and securities that are qualified real estate assets) may consist of the securities of any one issuer. If we fail to comply with these requirements at the end of any calendar quarter, we must remedy the failure within 30 days or qualify for certain limited statutory relief provisions to avoid losing our anticipated status as a real estate investment trust under the Code. As a result, we may have to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to REIT shareholders.

 

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Ownership and transfer limitations contained in the REIT Charter may restrict shareholders from acquiring or transferring shares

In order for the REIT to qualify as a real estate investment trust under the Code, no more than 50% of the value of the outstanding shares of the REIT’s stock may be owned, directly or indirectly or through application of certain attribution rules, by five or fewer “individuals” (as defined in the Code) at any time during the last half of a taxable year (other than the first taxable year for which the REIT qualifies as a real estate investment trust under the Code). To facilitate the REIT’s anticipated qualification as a real estate investment trust under the Code, among other purposes, the REIT Charter generally prohibits any person from actually or constructively owning more than 9.8% of the value of outstanding REIT common stock and REIT preferred stock (collectively, the “REIT stock”) or 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of REIT common stock, unless the REIT board of directors exempts the person from such ownership limitations. Absent such an exemption from the REIT’s board of directors, the transfer of REIT stock to any person in excess of the applicable ownership limit, or any transfer of shares of such stock in violation of the other ownership and transfer restrictions contained in the REIT Charter, may be void under certain circumstances, and the intended transferee of such stock will acquire no rights in such shares. These provisions of the REIT Charter may have the effect of delaying, deferring or preventing someone from taking control of the REIT, even though a change of control might involve a premium price for the REIT shareholders or might otherwise be in their best interests.

Complying with the requirements to qualify as a real estate investment trust may limit the REIT’s ability to hedge effectively and increase the cost of the REIT’s hedging, and may cause the REIT to incur tax liabilities

If the REIT qualifies as a real estate investment trust under the Code, certain provisions of the Code will limit the REIT’s ability to hedge liabilities. Generally, following the REIT’s anticipated qualification as a real estate investment trust under the Code, income from hedging transactions that the REIT may enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets and income from certain currency hedging transactions the REIT may enter into related to the REIT’s non-U.S. operations will not constitute “gross income” for purposes of the Code’s real estate investment trust gross income tests, provided certain requirements are satisfied. To the extent that the REIT enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the Code’s real estate investment trust gross income tests. As a result of these rules, the REIT may need to limit its use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of the REIT’s hedging activities because the REIT’s TRSs would be subject to tax on income or gains resulting from hedges entered into by them or expose the REIT to greater risks associated with changes in interest rates than the REIT would otherwise want to bear. In addition, losses in any of the REIT’s TRSs generally will not provide any tax benefit, except for being carried forward for use against future taxable income in the applicable TRS.

The current per share market price of Forest City Common Stock may not be indicative of the market price of REIT common stock following the 2015 Special Dividend and the REIT Conversion

The current per share market prices of shares of either or both classes of Forest City Common Stock may not be indicative of the effect of the 2015 Special Dividend or how the market will value either or both classes of REIT common stock following the REIT Conversion because Forest City is a taxable C corporation and we anticipate that the REIT will qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. The current per share market prices of shares of either or both classes of Forest City Common Stock do not necessarily take the foregoing into account, and the per share market prices of shares of either or both classes of REIT common stock may consequently be lower than the current per share market prices of shares of either or both classes of Forest City Common Stock. Furthermore, one of the factors that may influence the price of REIT common stock will be the yield from distributions on REIT common stock compared to yields on other financial instruments. If, for example, an increase in market interest rates results in higher yields on other financial instruments, then the market price of REIT common stock could be adversely affected.

 

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The market price of REIT common stock will also be affected by general market conditions (as the price of the Forest City Common Stock currently is) and will be potentially affected by the economic and market perception of securities issued by companies that qualify as real estate investment trusts under the Code.

The REIT has no experience operating as a company that qualifies as a real estate investment trust, which may adversely affect the REIT’s financial condition, results of operations, cash flow and ability to satisfy debt service obligations and the per share trading price of REIT common stock

The REIT was formed on May 29, 2015 and has no operating history as a corporation that qualifies as a real estate investment trust under the Code. In addition, the REIT’s senior management team will initially have no experience operating a corporation that qualifies as a real estate investment trust under the Code. The experience of the REIT’s senior management team may not be sufficient to operate the REIT successfully and in a manner that allows the REIT to qualify as a real estate investment trust under the Code. The REIT’s failure to qualify as a real estate investment trust under the Code, or to remain so qualified, could adversely affect the REIT’s financial condition, results of operations, cash flow, per share trading price of REIT common stock and ability to satisfy debt service obligations.

Legislative or other actions affecting entities that qualify as real estate investment trusts, including adverse change in tax laws, could have a negative effect on us or our shareholders

At any time, the federal income tax laws governing entities that qualify as real estate investment trusts or the administrative interpretations of those laws may be amended or changed. Federal, state and local tax laws are constantly under review by persons involved in the legislative process, the IRS, the U.S. Department of the Treasury, and state and local taxing authorities. The shortfall in tax revenues for states and municipalities in recent years may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional taxes on our assets or income following the REIT Conversion. These increased tax costs could adversely affect our financial condition, results of operations and the amount of cash available for payment of dividends. Changes to the tax laws, regulations and administrative interpretations, which may have retroactive application, could adversely affect us or our shareholders.

We cannot predict whether, when, in what forms, or with what effective dates, the tax laws, regulations and administrative interpretations applicable to us or our shareholders may be changed. Accordingly, any such change may significantly affect our ability, following the Merger, to qualify as a real estate investment trust under the Code, or the federal income tax consequences to you or us of the REIT so qualifying.

The REIT board of directors will be able to unilaterally revoke the REIT’s anticipated election to be taxed as a real estate investment trust following the REIT’s anticipated qualification as a real estate investment trust, and this may have adverse consequences for the REIT’s shareholders

The REIT Charter provides that the REIT’s board of directors may revoke or otherwise terminate the REIT’s planned real estate investment trust election, without the approval of the REIT’s shareholders, if the board of directors determines that it is no longer in the REIT’s best interests to elect to be taxed as a real estate investment trust for U.S. federal income tax purposes. If the REIT does not elect to, or revokes its planned election to, be so taxed, the REIT will not be allowed to deduct dividends paid to shareholders in computing its taxable income, and will be subject to federal income tax at regular corporate rates and state and local taxes, which may adversely impact the REIT’s total return to its shareholders.

Issuance of securities by the REIT with claims that are senior to those of holders of shares of REIT common stock may limit or prevent the REIT from paying dividends on REIT common stock

Shares of REIT common stock are equity interests. As such, shares of REIT common stock will rank junior to any indebtedness and other non-equity claims with respect to assets available to satisfy claims on the REIT. The REIT may issue senior securities, which may expose the REIT to risks associated with leverage, including

 

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increased risk of loss. If the REIT issues preferred securities, which will rank senior to shares of REIT common stock in the REIT’s capital structure, the holders of such preferred securities may have separate voting rights and other rights, preferences or privileges more favorable than the rights, preferences and privileges incident to holding shares of REIT Class A common stock and/or shares of REIT Class B common stock, and the issuance of such preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for REIT shareholders or otherwise be in the REIT’s best interest.

In addition, partnership interests or other securities issued by the Operating Partnership may have a senior priority on cash flow or liquidation proceeds generated by the Operating Partnership.

Unlike indebtedness, for which principal and interest customarily are payable on specified due dates, in the case of shares of REIT common stock, dividends are payable only when, as and if authorized by the REIT’s board of directors and declared by the REIT and depend on, among other things, the REIT’s results of operations, financial condition, debt service requirements, distributions to be received from the Operating Partnership following the planned conversion of Forest City to a limited partnership, other cash needs and any other factors the REIT’s board of directors may deem relevant or as required by applicable law. The REIT may incur substantial amounts of additional debt and other obligations that will rank senior to shares of REIT common stock.

We may not be able to obtain the consents or approvals of lenders, joint venture partners, governmental agencies, or other third parties needed to complete the REIT Conversion on the time table contemplated, or at all, and we may be forced to make payments, provide indemnifications or make other accommodations in order to facilitate our obtaining requisite consents or implement other strategies that may be disadvantageous to us

Our ability to undertake the REIT Conversion will depend upon our ability to obtain the necessary third party approvals and consents, which include consents and approvals from our lenders, joint venture partners and government agencies. There can be no guarantee that we will be able to obtain these consents, or that, if we do, we will not need to make certain cash payments, provide indemnifications with respect to structural changes and make other accommodations for such third parties in order to obtain these consents. Any such indemnity or other accommodation may, among other things, reduce our interest in certain properties and/or adversely affect the profitability of certain projects to us. Even if we are able to obtain such consents or approvals, doing so will require a significant amount of management time and attention, which may divert the attention of our management from running our day-to-day business and from accomplishing the other aspects of the REIT Conversion and thus may delay our time table.

Further, if we are unable to obtain certain consents or approvals, we may be forced to implement alternative solutions to permit us to complete the REIT Conversion, such as filing a joint TRS election with certain of our subsidiaries. Such alternative arrangements may be disadvantageous to us, and there can be no guarantee that such arrangements will not cause further adverse impacts to us in the future.

We may not realize the anticipated benefits to our shareholders, including the achievement of significant tax savings for us and regular distributions to our shareholders

Even if we complete the REIT Conversion, we cannot provide assurance that our shareholders will experience benefits attributable to our qualification as a real estate investment trust, including our ability to reduce our corporate level federal tax through distributions to shareholders and to make regular distributions to shareholders. The realization of the anticipated benefits to shareholders will depend on numerous factors, many of which are outside our control.

There are uncertainties relating to our planned dispositions of non-core assets

In May 2015, we announced details of our strategic plan to convert to real estate investment trust status. A key element of this strategy includes our plan to sell certain non-core assets. To date, we have neither entered into

 

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any definitive agreements relating to such asset sales, nor received firm expressions of interest from third party buyers for many of the assets we intend to sell. Consequently, there can be no assurance that we will be able to complete any asset sales on terms that are favorable to us, or at all. Further, even if we are able to undertake the asset sales required to achieve our strategic objectives, negotiating and executing the sale of multiple assets in multiple transactions may require a significant amount of management time and resources. This diversion of management’s attention may hinder our ability to operate our existing and continuing businesses on a day-to-day basis. Further, such asset sales may distract management from other steps required to be completed as part of the REIT Conversion, which may delay our ability to complete the REIT Conversion as planned.

Further, the amount of the 2015 Special Dividend will be directly impacted by the asset sales we complete prior to the REIT Conversion; asset sales that generate taxable gain will increase the amount of the 2015 Special Dividend. As a result, if we are able to make profitable asset sales, the amount of the 2015 Special Dividend will likely grow. Since our current intention is to pay 80% of the 2015 Special Dividend in Forest City Common Stock and 20% in cash, to the extent the aggregate amount of cash and Forest City Common Stock to be distributed in the 2015 Special Dividend increases, we may be required to raise additional cash and the dilutive effect of the 2015 Special Dividend may be increased significantly.

We may not be able to obtain the shareholder approval necessary for us to complete the REIT Conversion, as planned

Holders of Forest City Common Stock will be asked to approve certain actions as part of the REIT Conversion. As of [●], 2015, RMSLP, which is a limited partnership comprised of members of the Ratner, Miller and Shafran families, held [●]% of the issued and outstanding Forest City Class B Common Stock. Although we expect that RMSLP will vote to approve the holding company merger and the proposal to amend the Forest City articles, the approval of RMSLP by itself is not assured and, in any event, is not in and of itself sufficient to approve the holding company merger or the proposal to amend the Forest City articles. In addition, any additional equity offerings and debt-for-equity exchanges, if any, that occur prior to the Record Date may further dilute the ownership of RMSLP. If we do not obtain the necessary shareholder approvals, we may not be able to complete the REIT Conversion as planned or at all.

THE REIT’S CHARTER AND BYLAWS AND MARYLAND LAW MAY HINDER ATTEMPTS TO ACQUIRE THE REIT

Certain provisions of the REIT Charter and REIT Bylaws and Maryland law may inhibit a change in control that shareholders consider favorable and could also limit the market price of REIT common stock

Certain provisions in the REIT Charter and REIT Bylaws and Maryland law may make it more difficult for, or prevent, a third party from acquiring control of the REIT without the approval of the REIT’s board of directors. These provisions:

 

    impose restrictions on ownership and transfer of REIT stock (such provisions being intended to, among other purposes, facilitate the REIT’s anticipated compliance with certain Code requirements relating to ownership of REIT stock);

 

    prevent the REIT’s shareholders from amending the REIT Bylaws;

 

    limit who may call a special meeting of shareholders;

 

    establish advance notice and informational requirements and time limitations on any director nomination or proposal that a shareholder wishes to make at a meeting of shareholders;

 

    do not permit cumulative voting in the election of the REIT’s board of directors, which would otherwise permit less than a majority of shareholders to elect one or more directors; and

 

   

authorize the REIT board of directors to, without shareholder approval, amend the REIT Charter to increase or decrease the aggregate number of REIT shares of stock or the number of shares of stock of

 

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any class or series that the REIT has authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares.

Certain provisions of Maryland law could impede changes in control

Certain provisions of the MGCL may impede a third party from making a proposal to acquire us or inhibit a change of control under circumstances that otherwise could be in the best interests of holders of shares of REIT common stock, including:

 

    “business combination” provisions that, subject to certain exceptions and limitations, prohibit certain business combinations between the REIT and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the REIT’s outstanding voting stock or an affiliate or associate of the REIT who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the REIT’s then outstanding voting stock) or an affiliate thereof for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter impose two supermajority shareholder voting requirements on these combinations;

 

    “control share” provisions that provide that, subject to certain exceptions, holders of “control shares” of the REIT (defined as voting shares which, when aggregated with other shares controlled by the shareholder, entitle the holder to exercise voting power in the election of directors within one of three increasing ranges) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) have no voting rights with respect to the control shares except to the extent approved by the REIT’s shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares; and

 

    additionally, Title 3, Subtitle 8 of the MGCL permits the REIT board of directors, without shareholder approval and regardless of what is currently provided in the REIT Charter or REIT Bylaws, to implement certain corporate governance provisions. See “Certain Takeover Defense Provisions of Maryland Law and the REIT Charter and REIT Bylaws.

As permitted by the MGCL, the REIT intends (1) to elect, by resolution of the REIT board of directors, to exempt from the Maryland Business Combination Act all business combinations between the REIT and any other person, provided that each such business combination is first approved by the REIT board of directors (including a majority of directors who are not affiliates or associates of such person), and (2) to adopt the REIT Bylaws attached hereto as Annex B-2, containing a provision opting out of the Maryland Control Share Acquisition Act.

RISKS RELATED TO THE CONVERSION OF FOREST CITY TO A LIMITED PARTNERSHIP

Following the Merger and the conversion of Forest City to a limited partnership, you will hold shares in a holding company with most of its assets held by the Operating Partnership and the REIT’s ability to make dividends may depend on Operating Partnership distributions

Following the Merger and the other related transactions, the REIT will hold substantially all of its assets, and will conduct substantially all of its business, through the Operating Partnership. Consequently, the REIT’s ability to service its debt obligations and ability to pay dividends on shares of REIT common stock will be strictly dependent upon the earnings and cash flows of the Operating Partnership, the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors and the ability of the Operating Partnership to make intercompany distributions to the REIT. Under the Delaware Revised Uniform Limited Partnership Act, the Operating Partnership will be prohibited from making any distribution to us to the extent that at the time of the distribution, after giving effect to the distribution, the total liabilities of the Operating Partnership (other than some non-recourse liabilities and certain liabilities to the partners in the Operating Partnership) would exceed the fair value of the Operating Partnership’s assets.

 

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In addition, because the REIT will be a holding company, the equity interests of REIT shareholders will be structurally subordinated to all existing and future liabilities and obligations of the Operating Partnership and its subsidiaries. Therefore, in the event of the REIT’s bankruptcy, liquidation or reorganization, claims of the REIT’s shareholders will be satisfied only after all of the REIT’s and the Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, the REIT would not qualify as a real estate investment trust and suffer other adverse consequences

We believe that the Operating Partnership will be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Operating Partnership will not be subject to entity-level federal income tax on its income. Instead, each of its partners, including the REIT, will be required to pay tax on its allocable share of the Operating Partnership’s income. There can be no assurance, however, that the IRS will not challenge the status of the Operating Partnership (or any other limited partnership subsidiary of the REIT) as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership (or any such other limited partnership subsidiary of the REIT) as an entity taxable as a C corporation for U.S. federal income tax purposes, the REIT would be unable to satisfy the gross income tests and certain of the asset tests that must be met in order to qualify as a real estate investment trust under the Code and, accordingly, the REIT would likely be prevented from so qualifying. Also, the failure of the Operating Partnership or any limited partnership subsidiary of the REIT to qualify as a partnership for U.S. federal income tax purposes could cause the partnership to become subject to U.S. federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to the partners in such partnership, including the REIT.

Adoption and implementation of an UPREIT structure could inhibit the REIT from selling properties or retiring debt that would otherwise be in the best interest of the REIT

To ensure that the sellers of properties are able to contribute properties to the Operating Partnership on a tax-deferred basis, contributors of such properties may require the REIT to agree to maintain a certain level of minimum debt at the Operating Partnership level and refrain from selling such properties for a period of time. Adoption and implementation of an UPREIT structure, therefore, could inhibit the REIT from selling properties or retiring debt that would otherwise be in the best interest of the REIT.

The interest of the REIT may be diluted upon the issuance of additional units of the Operating Partnership

Upon the issuance of partnership units in the Operating Partnership to partners other than the REIT and FCILP, the interest of the REIT and FCILP (and therefore, the indirect interest of the REIT’s shareholders) in assets of the Operating Partnership would be diluted. Such dilution would remain if partnership units were redeemed for cash (provided such cash represented the proceeds of a new issuance of shares of REIT common stock) or for shares of REIT Class A common stock, even though the REIT’s interest in the Operating Partnership would increase if partnership units were redeemed for shares of REIT Class A common stock or cash.

Conflicts of interest may arise between the interests of the REIT’s shareholders and the interests of holders of partnership units

The REIT, as the sole general partner of the Operating Partnership, would owe a duty of good faith and fair dealing to the limited partners in the Operating Partnership. In most cases, the REIT expects that the interests of such limited partners will coincide with the interests of the REIT and its shareholders because (a) the REIT will own a substantial amount of the limited partnership interests in the Operating Partnership and (b) the limited partners will generally receive shares of REIT Class A common stock or cash proceeds tied to the share price of REIT Class A common stock upon redemption of their partnership units. Under certain circumstances, however, the rights and interests of the limited partners might conflict with those of the REIT’s shareholders. We expect

 

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that the agreement of limited partnership of the Operating Partnership will provide that in the event the REIT determines, in its sole and absolute discretion, that any such conflict cannot be resolved in a manner not adverse to either the REIT’s shareholders or the Operating Partnership’s limited partners, such conflict will be resolved in favor of the REIT’s shareholders.

The UPREIT structure may increase the costs of managing the REIT and the operational complexity and risk of the REIT’s corporate structure

The conversion of Forest City to a limited partnership may result in the REIT incurring more costs than Forest City is currently incurring, including professional expenses related to general and administrative, accounting, tax, consulting, audit and legal costs. Although we believe that the REIT’s business plan and future expected growth will make up for any increase in general and administrative expenses, there can be no assurance that this will be so. Further, following the conversion of Forest City to a limited partnership, the REIT will be structured as an UPREIT and as such, its operations will be more complex than those of Forest City; this complexity may introduce other operational risks that do not currently exist and cannot reasonably be anticipated, and such risks may have a material adverse impact on the REIT’s business, operations and/or financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus and the documents incorporated by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for our stock and other matters that are based on management’s expectations as of the filing date of this proxy statement/prospectus with the SEC. Statements contained in, or incorporated by reference in, this proxy statement/prospectus that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Such statements reflect management’s current views with respect to financial results related to future events and are not guarantees of future performance. These forward-looking statements are based on assumptions and expectations that may not be realized and are inherently subject to numerous risks and uncertainties, many of which are beyond our ability to control, predict with accuracy and even anticipate; readers are cautioned not to put undue reliance on those forward-looking statements. Future events and actual results, financial or otherwise, may differ materially from the results discussed in the forward-looking statements. Furthermore, there is no assurance that any positive trends suggested or referred to in such statements will continue. When we use words such as “may,” “would,” “could,” “likely,” “should,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “estimate,” “expect,” “predict,” or similar expressions, we identify forward-looking statements. These forward-looking statements include plans, projections and estimates and are found at various places throughout this proxy statement/prospectus and the documents incorporated by reference herein. Examples of forward-looking statements include, but are not limited to, statements we make regarding our intention to qualify as a real estate investment trust under the Code, for U.S. federal income tax purposes following the Merger, realizing the anticipated benefits to shareholders if we so qualify, the impact on us of complying with requirements to so qualify, the amount and timing of any future distributions, including the 2015 Special Dividend and those that we would be required to make in order to so qualify, the impact of issuing equity, debt or both to satisfy the 2015 Special Dividend (as defined below) and other costs incident to effectuating our plan to so qualify, the impact of covenants that could prevent us from satisfying the distribution requirements under the Code that must be met in order for us to so qualify, our lack of experience operating as an entity that so qualifies, the impact of current lending and capital market conditions on our liquidity, our ability to finance or refinance projects or repay our debt, the impact of the slow economic recovery on the ownership, development and management of our commercial real estate portfolio, general real estate investment and development risks, using modular construction as a new construction methodology and owning a factory to produce modular units, vacancies in our properties, risks associated with developing and managing properties in partnership with others, competition, illiquidity of real estate investments, bankruptcy or defaults of tenants, anchor store consolidations or closings, international activities, the impact of terrorist acts and other armed conflicts, risks of owning and operating an arena, risks associated with an investment in a professional sports team, the ability to sell all or a portion of our ownership interests in a professional sports team and arena, our substantial debt leverage and the ability to obtain and service debt, the impact of restrictions imposed by our credit facility and senior debt, exposure to hedging agreements, the level and volatility of interest rates, the continued availability of tax-exempt government financing, the impact of credit rating downgrades, if any, effects of uninsured or underinsured losses, effects of a downgrade or failure of our insurance carriers, environmental liabilities, conflicts of interest, risks associated with the sale of tax credits, downturns in the housing market, the ability to maintain effective internal controls, compliance with governmental regulations, increased legislative and regulatory scrutiny of the financial services industry, changes in federal, state or local tax laws, volatility in the market price of our publicly traded securities, inflation risks, litigation risks, cybersecurity risks and cyber incidents, our ability to achieve our strategic goals, changes in the market price of REIT common stock following the REIT Conversion, our ability to obtain the shareholder approval necessary for us to effect the 2015 Special Dividend and the Merger, our ability to complete non-core asset dispositions, the impact to our deferred tax liability balance if we qualify as a real estate investment trust under the Code following the Merger and our ability to obtain requisite consents needed to complete the REIT Conversion.

 

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Any forward-looking statement we make in this proxy statement/prospectus or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. These and other important factors, including those set forth under the caption “Risk Factors” beginning on page [●] of this proxy statement/prospectus and page 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as amended, as updated by annual, quarterly and other reports and documents we file with the SEC, and that are incorporated by reference herein, may cause actual results to differ materially from those indicated by our forward-looking statements. We have no duty to, and do not intend to, update or revise the forward-looking statements we make in this proxy statement/prospectus, whether as a result of new information, future events or otherwise, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the future events or circumstances described in any forward-looking statement we make in this proxy statement/prospectus or elsewhere might not occur. You are advised to consult the “Risk Factors” section of this proxy statement/prospectus, in which we provide cautionary discussion of risks, uncertainties and assumptions relevant to our business. These are factors that, individually or in the aggregate, management believes could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the PSLRA. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties. 

 

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SIMPLIFIED STRUCTURE OF THE TRANSACTION

As of the date of this proxy statement/prospectus (i) Forest City owns all of the issued and outstanding shares of REIT common stock and (ii) the REIT owns directly and through the REIT’s interest in FCILP, and Forest City owns indirectly by virtue of its ownership of all of the issued and outstanding shares of REIT common stock, all of the issued and outstanding shares of Merger Sub common stock. Following the approval of the Merger Agreement by Forest City shareholders and the satisfaction or waiver of the other conditions to completion of the Merger specified in the Merger Agreement (which are described below), Merger Sub will merge with and into Forest City, with Forest City continuing as the surviving company, and the separate corporate existence of Merger Sub will cease. As a result of the Merger:

 

    each outstanding share of Forest City Class A Common Stock will be converted into one share of REIT Class A common stock, and each outstanding share of Forest City Class B Common Stock will be converted into one share of REIT Class B common stock, and current shareholders of Forest City will become shareholders of the REIT; and

 

    Forest City will survive as a subsidiary of the REIT owned by the REIT directly and through the REIT’s interest in FCILP.

Following the Merger, Forest City will convert to a Delaware limited partnership, with the REIT as its general partner and FCILP as a limited partner, and which we refer to as the Operating Partnership. The Operating Partnership will conduct all of the operations currently conducted by Forest City, and the REIT will control the Operating Partnership in its capacity as its sole general partner.

In order to help you understand the holding company merger proposal, and how the Merger and conversion of Forest City to a limited partnership will affect us and our subsidiaries, the charts below illustrate our structure, in simplified form:

 

    Before the Merger: Our organizational structure before the Merger;

 

    The Merger: The steps involved in, and the effects of, Merger Sub’s merger with and into Forest City and the conversion of shares of Forest City Class A Common Stock into shares of REIT Class A common stock and shares of Forest City Class B Common Stock into shares of REIT Class B common stock;

 

    After the Merger: Our organizational structure following the Merger;

 

    Creation of our Operating Partnership: The steps involved in, and the effects of, the conversion of Forest City from an Ohio corporation to a Delaware limited partnership; and

 

    After the Creation of our Operating Partnership: Our organizational structure following the conversion of Forest City to a limited partnership.

 

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BEFORE THE MERGER

 

 

               LOGO

 

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THE MERGER

 

 

      LOGO

Merger steps

 

(1) Forest City declares and pays the 2015 Special Dividend, part in cash and part in shares of Forest City Common Stock.

 

(2) Immediately prior to the effective time of the Merger, each share of issued and outstanding stock of the REIT owned by Forest City is cancelled and ceases to exist.

 

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(3) Merger Sub merges with and into Forest City, with Forest City surviving.

 

(4) Each share of issued and outstanding Forest City Class A Common Stock is converted into one share of REIT Class A common stock, and each share of issued and outstanding Forest City Class B Common Stock is converted into one share of REIT Class B common stock. At the time of completion of the Merger, each shareholder will hold the same percentage ownership in the REIT as each holder previously held in Forest City.

 

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AFTER THE MERGER

 

 

               LOGO

 

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CREATION OF OUR OPERATING PARTNERSHIP

 

 

               LOGO

 

(1) Forest City converts to a Delaware limited partnership, with the REIT as its general partner and the REIT and FCILP as limited partners. We refer to these steps as the reorganization of Forest City into a limited partnership.

 

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AFTER THE CREATION OF OUR OPERATING PARTNERSHIP

 

LOGO

 

(1)

Forest City Enterprises, L.P. (the Operating Partnership) is the result of the conversion of Forest City, as the surviving company in the Merger, from an Ohio corporation to a Delaware limited partnership; following this conversion, the REIT will be the sole general partner of the Operating Partnership and also will own, directly and through its interest in FCILP, all of the outstanding limited partnership interests in the Operating Partnership. The REIT may identify one or more persons or entities who agree to acquire (through purchase or exchange) and hold limited partnership interests in the Operating Partnership following the REIT Conversion. Nevertheless, the REIT will remain the sole general partner of the Operating Partnership and the Operating Partnership and its assets will still be assets of the REIT in the consolidated financial statements of the REIT. FCILP will be a taxable real estate investment trust subsidiary of the REIT. FCILP’s only asset will be a limited partnership interest in the Operating

 

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  Partnership, which will be less than 1% of the limited partnership interests in the Operating Partnership. FCTRS, LLC will be a TRS of the REIT and is being formed to hold the REIT’s non-real estate investment trust assets and operations, which we expect will consist primarily of our (i) military housing business, (ii) land development projects at Stapleton in Denver, Colorado, and Mesa del Sol in Albuquerque, New Mexico, (iii) condominium development projects at Pacific Park Brooklyn, a mixed-use project in Brooklyn, New York, and (iv) ownership interests in Barclays Center, the arena in Brooklyn, New York, and The Brooklyn Nets.

 

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VOTING AND PROXIES

This proxy statement/prospectus is furnished in connection with the solicitation of proxies by the Forest City board of directors for exercise at the Special Meeting, or any adjournment or postponement thereof.

Date, Time and Place of the Special Meeting

The Special Meeting will be held in the 6th floor Riverview Room of the Ritz-Carlton Hotel, Tower City Center, 1515 West Third Street, Cleveland, Ohio 44113, on [], 2015 at [●], Eastern Time.

Purposes of the Special Meeting

The purposes of the Special Meeting are to consider and vote upon the following proposals:

 

  (1) A proposal to approve and adopt the Merger Agreement, dated as of [●], 2015, by and among Forest City, the REIT, FCILP and Merger Sub; the Merger Agreement provides for the merger of Merger Sub with and into Forest City in a manner in which Forest City will survive as a subsidiary of the REIT and holders of shares of Forest City Common Stock will receive corresponding shares of REIT common stock;

 

  (2) A proposal to adopt an amendment to the Forest City articles to add certain provisions necessary to authorize Forest City to declare and pay the 2015 Special Dividend; and

 

  (3) A proposal to adjourn the Special Meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the Special Meeting to approve either or both of the foregoing proposals.

Both the adoption of the holding company merger proposal and the adoption of the proposed amendment to the Forest City articles require the affirmative vote of the holders of at least two-thirds of the outstanding shares of Forest City Class A Common Stock and at least two-thirds of the outstanding shares of Forest City Class B Common Stock, each voting as a separate class. The adoption of the adjournment proposal requires the affirmative vote from holders of a majority of the voting power of holders of outstanding shares of Forest City Common Stock entitled to vote and present or represented by proxy at the Special Meeting, whether or not a quorum is present.

Our board of directors recommends that you vote “FOR” each of the proposals.

Shareholder Record Date for the Special Meeting

Our board of directors has fixed the close of business on [●], 2015 as the Record Date for determining which Forest City shareholders are entitled to notice of, and to vote those shares by proxy or at the Special Meeting and at any adjournment or postponement thereof. On the Record Date, there were [●] million shares of Forest City Class A Common Stock outstanding and entitled to vote at the Special Meeting and [] holders of record and [] shares of Forest City Class B Common Stock outstanding and entitled to vote at the Special Meeting and [] holders of record.

Quorum

In order to carry out the business of the Special Meeting, shareholders constituting a quorum must be present. For this purpose, a quorum is the presence, either in person or by proxy, of holders of a majority of the issued and outstanding shares of Forest City Common Stock eligible to vote as of the Record Date. For purposes of determining the presence of a quorum, abstentions and broker non-votes, if any, will be included in determining the number of shares present and entitled to vote at the Special Meeting. Failure of a quorum to be present at the Special Meeting will necessitate an adjournment or postponement of the Special Meeting and will subject us to

 

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additional expense. At the Special Meeting, each share of Forest City Class A Common Stock is entitled to one vote and each share of Forest City Class B Common Stock is entitled to ten votes on each matter properly submitted to our shareholders.

Proxies

If you are a shareholder of record at the close of business on the Record Date, you may vote in person at the Special Meeting or by proxy. You have three ways to authorize a proxy to vote your shares:

 

    Submitting a proxy by Mail: sign, date and mail in your proxy card using the accompanying envelope;

 

    Submitting a proxy by Telephone: submit a proxy by calling 1-800-690-6903; or

 

    Submitting a proxy via the Internet: connect to the Internet site at www.proxyvote.com.

If you are a holder of shares of Forest City Common Stock on the Record Date, you may vote by completing, signing and promptly returning the proxy card in the self-addressed stamped envelope provided. All shares of Forest City Common Stock represented by properly executed proxy cards received before or at the Special Meeting will, unless the proxies are revoked, be voted in accordance with the instructions indicated on those proxy cards. If no instructions are indicated on a properly executed proxy card, the shares of Forest City Common Stock represented by the proxy will be voted “FOR” each of the proposals. You are urged to indicate how to vote your shares if you vote by proxy card.

If a properly executed proxy card is returned and the shareholder has abstained from voting on one or more of the proposals, the shares of Forest City Common Stock represented by the proxy will be considered present at the Special Meeting for purposes of determining a quorum, but will not be considered to have been voted on the abstained proposals. With respect to the holding company merger proposal and the proposed amendment to the Forest City articles, abstentions have the same effect as a vote “AGAINST” these respective proposals. For the proposal to adjourn the meeting to solicit additional proxies, abstentions have the same effect as a vote “AGAINST” such proposal.

Under applicable rules and regulations of the NYSE, brokers, banks, trusts or other nominees have the discretion to vote on routine matters, but do not have the discretion to vote on non-routine matters. Each of the proposals to be considered at the Special Meeting constitutes a non-routine matter within the meaning of applicable NYSE rules and regulations. Accordingly, your broker, bank, trust or other nominee will vote your shares of Forest City Common Stock only if you provide instructions on how to vote by following the information provided to you by your broker, bank, trust or other nominee. If you do not provide voting instructions, your shares of Forest City Common Stock will be considered broker non-votes because the broker, bank, trust or other nominee will not have discretionary authority to vote your shares. Broker non-votes, if any, will be counted for purposes of determining whether a quorum is present. Your failure to provide voting instructions to your broker, bank, trust or other nominee will have the same effect as a vote “AGAINST” the holding company merger proposal and the proposed amendment to the Forest City articles, but broker non-votes will have no effect on the adjournment proposal.

Revoking Your Proxy

If you deliver a duly executed proxy, you may revoke your proxy prior to the close of voting at the Special Meeting. You may revoke your proxy in any of the following five ways:

 

    revoke your proxy at the Internet site www.proxyvote.com by 11:59 p.m. on [], 2015;

 

    call 1-800-690-6903 by 11:59 p.m. on [●], 2015;

 

    deliver a duly executed proxy bearing a later date;

 

    deliver a written revocation to our Corporate Secretary; or

 

    vote in person at the Special Meeting.

 

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You will not revoke a proxy merely by attending the Special Meeting. To revoke a proxy, you must take one of the five actions described above. If your shares of Forest City Common Stock are held through a broker, bank, trust or other nominee, you should contact them to change your vote.

Adjournment or Postponement

Although it is not currently expected, we intend to ask our shareholders to approve the adjournment of the Special Meeting prior to considering the holding company merger proposal and proposal to amend the Forest City articles if we believe there are not sufficient votes to approve either or both of the proposals. If our shareholders approve this adjournment proposal, we plan to adjourn the Special Meeting and use the time to solicit additional proxies, if necessary.

Additionally, at any time prior to convening the Special Meeting, we may postpone the meeting if we believe that a quorum will not be present at the Special Meeting or as otherwise permitted by the Forest City organizational documents and applicable law.

Solicitation of Proxies

We will bear all expenses incurred in connection with the printing and mailing of this proxy statement/prospectus. We will also request banks, brokers, trusts and other nominees holding shares of Forest City Common Stock beneficially owned by others to send this proxy statement/prospectus to, and obtain proxies from, the beneficial owners and we will, upon request, reimburse the holders for their reasonable expenses in so doing. Solicitation of proxies by mail may be supplemented by telephone, other electronic means and personal solicitation by our officers and our employees. No additional compensation will be paid to our officers and employees for those solicitation efforts.

We have hired D.F. King to assist in the solicitation of proxies from brokers, nominees, institutions and individuals. We will pay D.F. King a fee of $20,000, plus reasonable expenses, for these services.

Other Matters

We are not aware of any business to be acted on at the Special Meeting, except as described in this proxy statement/prospectus. If any other matters are properly presented at the Special Meeting the persons appointed as proxies or their substitutes will vote or act on such matters in their discretion and according to applicable law and regulations unless the proxy indicates otherwise.

 

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BACKGROUND OF THE REIT CONVERSION

As part of an ongoing strategic review of our business, our board of directors and senior management regularly evaluate ways to maximize shareholder value through alternative organizational structures and financing, capital and tax strategies. As part of this effort, we began an internal evaluation of the feasibility of Forest City reorganizing its business operations so as to qualify as a real estate investment trust under the Code. Our board of directors began meeting with senior management in early 2014 to discuss undertaking an evaluation of the benefits of Forest City reorganizing its business operations so as to qualify as a real estate investment trust under the Code. Following these discussions, our board of directors engaged outside legal, financial and tax advisors to provide us with counsel regarding the highly technical and complex rules that must be satisfied in order for a corporation to qualify as a real estate investment trust under the Code, and assess the potential impact of Forest City reorganizing its business operations in order to so qualify would have on our shareholders, our company and our long-term growth objectives. We retained the law firms of Sullivan & Cromwell LLP and Thompson Hine LLP as legal advisors, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“BofA Merrill Lynch”), Goldman, Sachs & Co., Greenhill & Co. and a business consulting firm as financial advisors, and PricewaterhouseCoopers LLP as tax and accounting advisors to conduct this comprehensive review.

In May 2014, at a regular meeting of our board of directors, management discussed with our board of directors our progress and challenges in delivering on certain strategic objectives, including targeted asset sales in non-core markets, entering into strategic joint ventures and working to reduce debt. Shortly after the May 2014 board of directors meeting, we held a strategic planning session attended by over 30 leaders of Forest City, including members of the Forest City board of directors and management, to further evaluate the impact and progress of our current strategies with respect to, among other things, capital allocation, organizational structure and maximizing shareholder value.

The robust and insightful discussion at the May 2014 strategic planning session led us to engage Goldman, Sachs & Co. as Forest City’s financial advisor to provide financial advice and assist the board of directors in its evaluation and analysis on how Forest City could best maximize value for all shareholders, including by undertaking a reorganization so as to qualify as a real estate investment trust under the Code. Following the May 2014 session, senior management met and spoke regularly with our advisors to review numerous issues concerning the possibility of us reorganizing our business operations, including valuation perspectives, balance sheet considerations and continued access to capital markets.

In August 2014, Goldman, Sachs & Co. discussed with our board of directors various scenarios for reorganizing Forest City’s business operations in connection with a possible real estate investment trust election under the Code. Following a lengthy discussion, the board of directors asked management to continue to carefully analyze how Forest City could maximize value for all shareholders by reorganizing its business operations, including qualifying as a real estate investment trust under the Code. Our board of directors also determined that it would be desirable for us to qualify as a real estate investment trust commencing with the taxable year ending December 31, 2016 due to our potential use of all or substantially all of our available net operating loss carryforwards in the taxable year beginning January 1, 2015.

In the period following August 2014, we, along with our advisors, continued to discuss the rationale for a possible real estate investment trust election under the Code, the requirements to qualify as a real estate investment trust under the Code, including the applicable income and asset tests, distribution requirements and the requirement to distribute our pre-real estate investment trust earnings and profits. We and our advisors also carefully analyzed the impact of a real estate investment trust election on the relationships with our strategic joint venture and other third party partners, as well as the legal implications of a real estate investment trust election with respect to, among other things, partnership agreements, lease agreements and our outstanding convertible debt. Management, along with both PricewaterhouseCoopers LLP and Sullivan & Cromwell LLP, also analyzed the tax implications of a possible real estate investment trust election.

 

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In September 2014, our board of directors engaged BofA Merrill Lynch to provide additional analysis on certain strategic alternatives available to Forest City, including the possible conversion to a real estate investment trust under the Code. In October 2014, we engaged a business consulting firm to review and advise our board of directors on Forest City’s organizational structure. In the same month, we also engaged Greenhill & Co. to provide independent research and insight on Forest City’s alternatives to maximize shareholder value, including the possible qualification as a real estate investment trust under the Code.

At the regularly scheduled meeting of the board of directors in November 2014, management and our advisors provided our board of directors with a detailed update on the analysis which they had conducted. Our advisors made presentations to the board of directors about several topics related to maximizing shareholder value, qualifying as a real estate investment trust under the Code and a potential reorganization of Forest City’s business operations. Our legal advisors provided an in-depth review of the fiduciary duties of the board of directors in connection with the foregoing and responded to questions from our board of directors and management about the implications of qualifying as a real estate investment trust under the Code and undertaking corporate restructuring measures that would be necessary to so qualify. Our financial advisors reviewed with our board of directors the results of the financial modeling approved by our senior management and the business consulting company that we retained proposed strategies to our board of directors on possible organizational structures that could be implemented to increase the prospect for recognition of shareholder value. At the conclusion of these discussions, our board of directors unanimously decided to further evaluate the UPREIT structure, and tasked the business consulting company that we retained to further review our plans and identify value-creating opportunities for our shareholders. In addition to the regularly scheduled meeting of the board of directors in November 2014, our board of directors subsequently held four informational sessions to discuss, among other matters, the progress of the research and analysis relating to the potential REIT Conversion.

After the November 2014 board of directors meeting, our management and advisors continued to assess the potential REIT Conversion, including the potential impact the Merger and the conversion of Forest City to a limited partnership would have on our third party agreements and relationships and our outstanding debt. Our legal advisors initiated a comprehensive review of our agreements to determine whether any third party consents would be required in connection with the Merger and the REIT Conversion, and our financial and tax advisors continued their review of the financial and tax implications, respectively, of the foregoing on us.

On January 13, 2015, at a special meeting of our board of directors, after a robust discussion and review of the potential benefits and detriments and the procedural requirements specified above with senior management and several of our legal, financial, tax and accounting advisors, our board of directors unanimously approved the commencement of the steps necessary for the Merger, conversion of Forest City to a limited partnership, and the REIT Conversion to be undertaken, with the consummation of each to be subject to final board approval.

We also are developing, for use in connection with the Merger, a substantial internal reorganization, including modifying accounting, information and real estate systems and identifying entities which we expect will serve as TRSs and disregarded entity subsidiaries of the REIT.

On June 26, 2015, after extensive consultation with our outside legal and financial advisors as described above, our board of directors reviewed and unanimously approved the Merger Agreement and the proposed amendment to the Forest City articles.

We believe that undertaking the REIT Conversion, including the Merger and conversion of Forest City to a limited partnership, will increase the prospect for the recognition of shareholder value. See “Reasons for the Merger and the REIT Conversion”.

 

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REASONS FOR THE MERGER AND THE REIT CONVERSION

Our board of directors has unanimously determined that the REIT Conversion, including the Merger and the transactions immediately preceding and immediately following the Merger, are advisable, fair to, and in the best interests of, Forest City and our shareholders. In reaching this determination, our board of directors consulted with management and numerous advisors, including BofA Merrill Lynch, Goldman, Sachs & Co., Greenhill & Co., PricewaterhouseCoopers LLP, a business consulting firm and our legal advisors. The factors considered by the board of directors in reaching its determination included the following:

 

    Strong parallels between Forest City and certain real estate investment trust sector characteristics. Our board of directors believes that we have significant real estate holdings with attractive characteristics. In addition, the majority of our revenues and profits are derived from rents from real property. Moreover, we believe that most of our real estate industry peer companies qualify and elect to be taxed as real estate investment trusts under the Code.

 

    Qualifying as a real estate investment trust may increase shareholder value. We believe that the REIT’s qualification as a real estate investment trust under the Code could increase the prospect for recognition of shareholder value by reducing corporate level taxes on most of the REIT’s domestic income, which in turn may increase the amount of future distributions to the REIT’s shareholders.

 

    We believe shareholders will benefit from our establishment of regular cash distributions. Undertaking the REIT Conversion may increase the prospect for recognition of shareholder value by, among other things, increasing the likelihood of positive returns on invested capital to holders of REIT common stock through the payment of regular cash dividends, resulting in a yield-oriented stock.

 

    If the REIT qualifies as a real estate investment trust, the REIT may have a larger potential base of shareholders than Forest City does today. If the REIT qualifies as a real estate investment trust under the Code, the REIT’s potential shareholder base may expand beyond Forest City’s current shareholder base to include investors who focus on investments in real estate investment trusts and investors who are interested in regular dividend yields, which may improve the liquidity of REIT common stock.

 

    The Merger will allow for the effective adoption and implementation of the REIT Restrictions. Shares of REIT stock will be subject to certain transfer and ownership restrictions that are designed to facilitate the REIT’s anticipated compliance with certain of the U.S. federal income tax law requirements that the REIT must satisfy in order to qualify as a real estate investment trust under the Code.

 

    Following the Merger, we will be a Maryland corporation, which the Forest City board believes is advisable and in the best interests of Forest City shareholders. Forest City’s board of directors has concluded that, when compared with Ohio, Maryland has more comprehensive and flexible laws governing entities that qualify as real estate investment trusts under the Code and courts with more experience in addressing issues pertinent to entities that so qualify. Maryland has laws specific to real estate investment trusts, including (a) provisions that validate charter restrictions on the ownership and transfer of stock, which are necessary to satisfy the U.S. federal income tax requirements for qualification as a real estate investment trust, and (b) provisions that permit the issuance of shares to holders for the specific purpose of satisfying the U.S. federal income tax requirements for qualification as a real estate investment trust regarding share ownership. Maryland also has a separate statute governing real estate investment trusts that are organized as a trust, and while this statute does not apply to corporations, like the REIT, we believe it helps provide greater certainty with respect to the treatment of a real estate investment trust under state law. Moreover, Maryland law offers additional protections for director and officer indemnification, which should facilitate the REIT’s efforts to attract and retain qualified directors and officers. In addition, Maryland law offers additional protections in the event of an unsolicited takeover attempt, which may better protect shareholder interests. Moreover, the fact that approximately 80% of the public companies that qualify as real estate investment trusts under the Code are currently formed under Maryland law would mean that shareholders would hold stock of an entity with corporate governance arrangements more in line with that of its peer group following the REIT Conversion.

 

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Our board of directors weighed the advantages of the REIT Conversion against disadvantages and potential risks, which include the fact that in order to qualify as a real estate investment trust under the Code, the REIT will be unable to retain earnings as it will be required each year to distribute to shareholders at least 90% of its taxable income (determined without regard to the dividends paid deduction and by excluding any net capital gain) and that the REIT will need to comply with complex and highly technical provisions to qualify as a real estate investment trust under the Code, which may hinder the REIT’s ability to make certain attractive investments, including investments in the businesses to be conducted by the Operating Partnership. In addition, our board of directors considered the potential risks discussed in “Risk Factors—Risks Related to the REIT Conversion”.

The foregoing discussion does not include all of the information and factors considered by our board of directors. Our board of directors did not quantify or otherwise assign relative weights to the particular factors considered, but instead conducted an overall analysis of the information presented to and considered by it in reaching its determination.

 

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TERMS OF THE MERGER

The following is a summary of the material terms of the Merger Agreement. For a complete description of all of the terms of the Merger, you should refer to the copy of the Merger Agreement that is attached to this proxy statement/prospectus as Annex A and incorporated herein by reference. You should read carefully the Merger Agreement in its entirety as it is the legal document that will govern the Merger.

Structure and Completion of the Merger

The REIT is a newly formed, wholly-owned direct subsidiary of Forest City. FCILP is a newly formed, wholly-owned direct subsidiary of the REIT. Merger Sub is a newly formed Ohio corporation and is a wholly-owned subsidiary of the REIT owned in part directly and in part through the REIT’s interest in FCILP. The Merger Agreement provides that Merger Sub will merge with and into Forest City, at which time the separate corporate existence of Merger Sub will cease. The Merger Agreement further provides that immediately prior to the Effective Time, each share of stock of the REIT issued and outstanding (all of which will be owned by Forest City) will automatically be cancelled and cease to exist. Forest City will survive the Merger and will be a wholly-owned subsidiary of the REIT owned directly and through the REIT’s interest in FCILP. At the Effective Time, each outstanding share of Forest City Class A Common Stock will be converted into one share of REIT Class A common stock, and each outstanding share of Forest City Class B Common Stock will be converted into one share of REIT Class B common stock.

A vote to approve the holding company merger proposal will also be a vote to approve, among other things, the powers, privileges, preferences, rights, qualifications, limitations and restrictions of the shares of REIT common stock that will be held by REIT shareholders following the Merger, as set forth in the MGCL and as contained in the REIT Charter and REIT Bylaws.

The respective powers, privileges, preferences, rights, qualifications, limitations and restrictions, including voting rights, of the REIT common stock received in the Merger will be equivalent in most major respects to the respective powers, privileges, preferences, rights, qualifications, limitations and restrictions relating to Forest City Common Stock, except that such shares will be subject to the REIT Restrictions and the rights of shareholders will be governed by Maryland law and the REIT Charter and REIT Bylaws.

The board of directors of Forest City and the board of directors of the REIT have approved the Merger Agreement and declared it to be advisable. Subject to the receipt of shareholder approval of the Merger Agreement and the satisfaction or waiver of the other conditions to completion of the Merger, the Merger will become effective at the time the certificate of merger is submitted for filing and accepted by the Secretary of State of the state of Ohio in accordance with the ORC or at such later time as specified in the certificate of merger. We anticipate that the Merger will be completed on or about December 31, 2015. See “Terms of the Merger—Conditions to Completion of the Merger”. However, the Forest City board of directors reserves the right to cancel or defer the timing of the Merger, even if Forest City shareholders approve the holding company merger proposal, if it determines that one or more of the conditions precedent specified in the Merger Agreement has not been met and should not be waived, or that the Merger is no longer advisable and in the best interests of Forest City and its shareholders.

Surrender of Stock Certificates

Surrender of Certificates. [●] will act as exchange agent for the Merger. As soon as reasonably practicable after the completion of the Merger, the exchange agent will mail to each registered holder of certificated shares of Forest City Common Stock a letter of transmittal containing instructions for surrendering each such shareholder’s certificate which represented shares of Forest City Common Stock in exchange for evidence of shares in book entry form of REIT Class A common stock or REIT Class B common stock, as applicable. The surrendered certificates will thereafter be cancelled. Upon the effectiveness of the Merger, each certificate representing shares

 

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of Forest City Common Stock will be deemed for all purposes to evidence a right to receive the same number of shares of REIT Class A or Class B Common Stock, as applicable, until such certificate is exchanged as described in this paragraph.

If you currently hold shares of Forest City Common Stock in uncertificated form, you will receive a notice of the completion of the Merger and your shares of REIT common stock received in connection with the Merger will continue to exist in uncertificated form.

Lost Certificates. If any Forest City certificate is lost, stolen or destroyed, the owner of the certificate must provide an appropriate affidavit of that fact to the exchange agent and, if required by the REIT, post a reasonable bond as indemnity against any claim that may be made against the REIT with respect to such lost certificate.

Stock Transfer Books. At the completion of the Merger, Forest City will close its stock transfer books, and no subsequent transfers of capital stock will be recorded thereon.

Other Effects of the Merger

We expect the following to occur in connection with the Merger:

 

    Corporate Office. Following the Merger, our corporate office will continue to be located in Cleveland, Ohio. We will not establish any offices or operations in Maryland as a result of the Merger other than a principal office in Maryland as required under Maryland law.

 

    Organizational Documents of the REIT. Prior to the Merger, the REIT will have amended and restated its charter and bylaws to read in substantially the form attached as Annex B-1 and Annex B-2, respectively, of this proxy statement/prospectus. See also “Description of REIT Stock”.

 

    Directors and Officers. Each of the directors of Forest City immediately prior to the Merger will be a director of the REIT immediately after the Merger and will serve on identical standing committees of the REIT board of directors and for an identical term or until his or her successor is qualified and elected. The individuals serving as principal executive officer, principal financial officer and principal accounting officer of Forest City immediately prior to the Merger will hold the same positions at the REIT immediately following the Merger. Other executive officers of Forest City may have different responsibilities as executive officers of the REIT as a result of certain organizational changes and several officers of Forest City who are not principal officers or “named executive officers” have indicated that they may retire following the Merger. Forest City does not anticipate any material impact from these changes and expects that any resulting vacant positions will be filled internally in the ordinary course of business.

 

    Stock Incentive Plans, Deferred Compensation Plans, Cash Incentive Plans and 401(k) Plan. The REIT will assume Forest City’s 1994 Stock Plan (as amended and restated as of March 17, 2013 and further amended on December 17, 2013), which we refer to as the Plan, and all rights of participants to acquire shares of Forest City Class A Common Stock under the Plan will be converted into rights to acquire shares of REIT Class A common stock in accordance with the terms of the Plan. The REIT will also assume Forest City’s 2005 Deferred Compensation Plan for Nonemployee Directors (as amended and restated effective January 1, 2008) and Forest City’s Deferred Compensation Plan for Nonemployee Directors, as well as Forest City’s cash-based incentive plans, which include the Forest City Executive Short-Term Incentive Plan (as amended and restated as of March 14, 2013), the Forest City Executive Long-Term Incentive Plan (as amended and restated as of March 14, 2013), the Forest City Senior Management Short-Term Incentive Plan and the Forest City Senior Management Long-Term Incentive Plan. In addition, following the Merger, participants in Forest City’s 401(k) plans, which currently provide participants with the option to invest in shares of Forest City Class A Common Stock, will instead have the option to invest in shares of REIT Class A common stock on the same terms otherwise provided for in the respective plans.

 

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    Distributions. Forest City’s obligations, if any, with respect to any distributions to Forest City shareholders that have been declared by Forest City but not paid prior to the Merger will be assumed by the REIT; provided, however, that if Forest City declares the planned 2015 Special Dividend prior to the Merger, Forest City will pay the 2015 Special Dividend prior to the Merger.

 

    Listing of REIT common stock. We expect that REIT Class A common stock and REIT Class B common stock will both trade on the NYSE under our current symbols “FCE.A” and “FCE.B”, respectively, following the Merger.

Conditions to Completion of the Merger

The respective obligations of Forest City, the REIT, FCILP and Merger Sub to complete the Merger are conditioned on the satisfaction or, where permitted, waiver by Forest City, of the following conditions:

 

    the Merger Agreement shall have been duly adopted by the requisite vote of Forest City shareholders at the Special Meeting;

 

    Forest City’s board of directors shall have determined that no legislation or proposed legislation with a reasonable possibility of being enacted will have the effect of (a) impairing in any material respect the ability of the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, (b) increasing in any material respect the federal tax liabilities of the REIT resulting from so qualifying or (c) amending Sections 856 through 860 of the Code in a manner that reduces in any material respect the expected benefits to the REIT of so qualifying;

 

    Forest City’s board of directors shall not have determined that the Merger or the REIT’s anticipated qualification as a real estate investment trust under the Code is no longer advisable and in the best interests of Forest City and its shareholders;

 

    the REIT shall have amended and restated its charter and bylaws to read in substantially the form attached hereto as Annex B-1 and Annex B-2, respectively;

 

    Forest City shall have received an opinion from Sullivan & Cromwell LLP to the effect that (i) the Merger and the subsequent steps taken to convert Forest City to a limited partnership will qualify as a reorganization within the meaning of Section 368 of the Code and (ii) commencing with the REIT’s taxable year ending December 31, 2016, the REIT’s organization and proposed method of operations will enable it to meet the requirements for qualification and taxation as a real estate investment trust under the Code;

 

    the NYSE shall have approved the listing of the shares of both classes of REIT common stock to be issued in connection with the Merger, subject to official notice of issuance;

 

    Forest City shall have received all required governmental approvals to the transactions contemplated prior to and in connection with the REIT Conversion, except for such approvals that, if not obtained, would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of the REIT and its subsidiaries taken as a whole following the REIT Conversion;

 

    Forest City shall have received all required third party consents and approvals in respect of the transactions contemplated prior to and in connection with the REIT Conversion, except for such consents and/or approvals that, if not obtained, would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of the REIT and its subsidiaries taken as a whole following the REIT Conversion; and

 

    the registration statement of which this proxy statement/prospectus is a part shall have been declared effective by the SEC and shall not be the subject of any stop order or proceeding initiated by the SEC seeking a stop order.

 

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Termination of the Merger Agreement

Forest City’s board of directors has the right to terminate the Merger Agreement and abandon or delay the timing of the Merger prior to its completion, before or after approval of the holding company merger proposal by Forest City’s shareholders.

We have no current intention of abandoning the Merger following the Special Meeting if shareholder approval is obtained and the other conditions to completion of the Merger are satisfied or waived.

Regulatory Approvals and Third Party Consents

We are not aware of any federal, state, local or foreign regulatory requirements that must be complied with or regulatory approvals that must be obtained prior to completion of the Merger, other than compliance with applicable federal and state securities laws and the filing and acceptance of a certificate of merger as required under the ORC.

Under the Merger Agreement, our obligation to complete the Merger is conditioned on the satisfaction or waiver of the closing condition that we shall have received all required third party consents to the Merger except for such consents as, if not obtained, would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of the REIT and its subsidiaries taken as a whole. In order to satisfy this closing condition, we must obtain consents to the Merger from certain of our outside partners, members of our joint ventures, certain lenders and other parties prior to completion of the Merger. These consents are required due to contractual restrictions in our agreements with such parties.

Absence of Dissenters’ (or Appraisal) Rights

Pursuant to the ORC, Forest City shareholders will not be entitled to dissenters’ rights of appraisal as a result of the Merger or the adoption of the proposed amendment to the Forest City articles.

Restrictions on Transfer of REIT Common Stock Issued as a Result of the Merger

The shares of REIT common stock to be issued in connection with the Merger will, subject to the REIT Restrictions, be freely transferable under the Securities Act, except for shares issued to any shareholder who may be deemed to be an “affiliate” of the REIT for purposes of Securities Act Rule 144. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under the common control with, the REIT and may include the executive officers, directors and significant shareholders of the REIT.

Accounting Treatment of the Merger

For accounting purposes, the Merger will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities by the REIT is the carryover basis of Forest City. Shareholders’ equity of the REIT will be that carried over from Forest City, after giving effect to the planned 2015 Special Dividend.

 

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CONVERSION OF FOREST CITY TO A LIMITED PARTNERSHIP

The Merger is just one step in a series of transactions that will result in the REIT and Forest City being organized as an UPREIT. The UPREIT structure is widely used by public companies that qualify as real estate investment trusts under the Code.

Following conversion of Forest City to a limited partnership, the REIT will be the sole general partner and a limited partner of the Operating Partnership, and FCILP will be the other limited partner of the Operating Partnership.

Following the Merger, we intend to undertake the following steps to convert Forest City to a limited partnership: (1) cause Forest City to file with the Secretary of State of the state of Ohio a certificate of conversion, (2) cause Forest City to file with the Secretary of state of the state of Delaware (i) a certificate of conversion and (ii) a certificate of limited partnership, (3) thereafter cause the REIT and FCILP to adopt an initial partnership agreement for Forest City and (4) thereafter cause FCILP to make a TRS election.

After Forest City is converted to a limited partnership, the REIT will control the Operating Partnership as the sole general partner of the Operating Partnership. Our interest in the Operating Partnership will generally entitle us to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to our percentage ownership of the aggregate outstanding partnership units. Following the conversion of Forest City to a limited partnership, the REIT will initially own a majority of the limited partnership interests of the Operating Partnership and FCILP will own a minority of the limited partnership interests of the Operating Partnership. The REIT may identify one or more persons or entities who agree to purchase and hold limited partnership interests in the Operating Partnership following the REIT Conversion.

Following the Merger and the other related transactions, the REIT will hold substantially all of its assets, and will conduct substantially all of its business, through the Operating Partnership. Accordingly, the REIT’s cash flow and ability to pay dividends to the REIT’s shareholders will depend on the cash flow of the Operating Partnership and the ability of its direct and indirect subsidiaries to first satisfy their obligations to creditors.

If Forest City is converted to a limited partnership, we believe that the Operating Partnership will (a) be deemed to be the same entity as Forest City for all purposes under the laws of the state of Delaware, (b) continue to have all of the rights, privileges and powers of Forest City, except for such changes that result from being subject to Delaware law and becoming subject to the Delaware certificate of limited partnership, and (c) continue to possess all of the properties of and debts owed to Forest City and (d) continue to have all of the debts, liabilities and obligations of Forest City.

The UPREIT structure will enable the REIT to acquire and hold its properties through an entity that is not treated as a corporation for U.S. federal income tax purposes, which, we believe, will provide the REIT with greater flexibility in negotiating future acquisitions because it will enable the REIT to offer certain tax advantages to sellers of assets and to investors who prefer to receive partnership units as consideration rather than cash or publicly-traded shares. The implementation of an UPREIT structure will be an important milestone in our previously announced overall business strategy.

 

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DIVIDEND AND DISTRIBUTION POLICY

After the Merger and the REIT Conversion, we expect that we will declare distributions quarterly commencing in the first quarter of 2016. The amount, timing, form and frequency of distributions, however, may be adjusted at the discretion of the REIT’s board of directors and will be declared based upon various factors, many of which are beyond our control, including:

 

    our financial condition, operating cash flows and taxable income;

 

    retention of cash to pursue acquisitions, development opportunities and other investments;

 

    our operating and other expenses;

 

    debt service requirements;

 

    capital expenditure requirements;

 

    the amount of distributions that the REIT must make in order to qualify as a real estate investment trust under the Code and reduce any income and excise taxes that the REIT otherwise would be required to pay;

 

    limitations on distributions in our existing and future debt instruments and under applicable law;

 

    limitations on our ability to fund distributions using cash generated through the Operating Partnership; and

 

    other factors that our board of directors may deem relevant.

To qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, the REIT will have to distribute to the REIT’s shareholders an amount at least equal to 90% of its real estate investment trust taxable income (determined before the deduction for dividends paid and excluding any net capital gain). See “Material U.S. Federal Income Tax Considerations”. 

It is possible that, at least initially, the REIT’s distributions will exceed the REIT’s then current and accumulated earnings and profits as determined for U.S. federal income tax purposes. Therefore, a portion of these distributions may represent a return of capital for U.S. federal income tax purposes. Distributions in excess of the REIT’s current and accumulated earnings and profits will not be taxable to a taxable U.S. shareholder under current U.S. federal income tax law to the extent those distributions do not exceed the shareholder’s adjusted tax basis in the shares of REIT common stock held by such shareholder, but rather will reduce the adjusted tax basis of such shares of REIT common stock. Therefore, the gain (or loss) recognized on a subsequent sale of those shares of REIT common stock or upon the REIT’s liquidation will be increased (or decreased) accordingly. To the extent those distributions exceed a taxable U.S. shareholder’s adjusted tax basis in shares of REIT common stock held by him or her, they generally will be treated as a capital gain realized from the taxable disposition of those shares. The percentage of the REIT’s shareholder distributions that exceeds the REIT’s current and accumulated earnings and profits may vary substantially from year to year. For a more complete discussion of the tax treatment of distributions to holders of shares of REIT common stock, see “Material U.S. Federal Income Tax Considerations”.

We anticipate that distributions will generally be paid from cash from operations after debt service requirements and non-discretionary capital expenditures. To the extent that our cash available for distribution is insufficient to allow us to satisfy the distribution requirements that must be satisfied in order to qualify as a real estate investment trust under the Code, which we plan to satisfy for the taxable year ending December 31, 2016, we currently intend to borrow funds or issue equity to make distributions consistent with this policy. Our ability to fund distributions through borrowings is subject to continued compliance with debt covenants, as well as the availability of borrowing capacity under our lending arrangements. If the operations of the Operating Partnership do not generate sufficient cash flows and we are unable to borrow, we may be required to reduce our anticipated quarterly cash distributions. We intend to review the alternative funding sources available to us for distributions from time to time. For information regarding risk factors that could materially adversely affect our actual results of operations, see “Risk Factors”.

 

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DISTRIBUTION OF PRE-REIT ACCUMULATED E&P

Forest City has historically been treated as a taxable C corporation for U.S. federal income tax purposes. As a C corporation, any taxable income in any given taxable year not distributed to Forest City shareholders or otherwise offset by net operating losses in later taxable years resulted in accumulated earnings and profits for U.S. federal income tax purposes. An entity that elects to be taxed as a real estate investment trust for U.S. federal income tax purposes is not permitted to retain earnings and profits accumulated during years when such entity or its predecessor was taxed as a C corporation. In order for the REIT to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, the REIT (or Forest City, in its capacity as the predecessor of the REIT for U.S. federal income tax purposes) must distribute to its shareholders on or before December 31, 2016 the previously undistributed accumulated earnings and profits of the REIT (and Forest City, as the predecessor of the REIT for U.S. federal income tax purposes) attributable to the taxable periods ending on or prior to January 1, 2016. To distribute fully such pre-real estate investment trust accumulated earnings and profits as well as the other items of taxable income described above, Forest City (or the REIT, as applicable) expects to declare and pay the 2015 Special Dividend. The 2015 Special Dividend is expected to be paid in the fourth quarter of 2015. We currently estimate the total amount of the 2015 Special Dividend will range from $75,000,000 to $125,000,000.

We expect that the 2015 Special Dividend will be an elective stock dividend pursuant to which: (i) each holder of shares of Forest City Class A Common Stock (or REIT Class A common stock, as applicable) as of the record date of the 2015 Special Dividend who held no shares of Forest City Class B Common Stock (or REIT Class B common stock, as applicable) as of such date will have the option to receive their portion of the 2015 Special Dividend all in shares of Forest City Class A Common Stock (or REIT Class A common stock, as applicable), (ii) each holder of shares of Forest City Class B Common Stock (or REIT Class B common stock, as applicable) as of the record date of the 2015 Special Dividend who held no shares of Forest City Class A Common Stock (or REIT Class A common stock, as applicable) as of such date will have the option to receive their portion of the 2015 Special Dividend all in shares of Forest City Class B Common Stock (or REIT Class B common stock, as applicable) and (iii) each holder of shares of both classes of Forest City Common Stock (or REIT common stock, as applicable) as of the record date of the 2015 Special Dividend will have the option to receive their portion of the 2015 Special Dividend all in shares of both classes of Forest City Common Stock (or REIT common stock, as applicable) in proportion to their holdings of both classes of Forest City Common Stock (or REIT common stock, as applicable) as of the record date for the 2015 Special Dividend. As an alternative to receiving their pro rata portion of the 2015 Special Dividend all in shares of either or both classes of Forest City Common Stock (or REIT common stock, as applicable), each holder of either or both classes of shares of Forest City Common Stock (or REIT common stock, as applicable) as of the record date of the 2015 Special Dividend will have the option to receive their pro rata portion of the 2015 Special Dividend all in cash.

We expect that the total amount of cash payable in the 2015 Special Dividend will be limited to a maximum amount of 20% of the value of the total distribution. Consequently, if the number of shareholders that elect to receive all cash in the 2015 Special Dividend would result in the payment of cash in an aggregate amount that is in excess of this maximum amount, shareholders electing to receive all cash will receive a pro-rated portion of their share of the 2015 Special Dividend in cash such that the total amount of cash payable in the 2015 Special Dividend will not exceed 20% of the value of the total distribution. The balance of the portion of the 2015 Special Dividend payable to a shareholder who receives a pro-rated portion of their share of the 2015 Special Dividend in cash will be paid in the pro-rated number of shares of the class or classes of Forest City Common Stock such shareholder would have received had such shareholder elected to receive shares of Forest City Common Stock rather than cash in the 2015 Special Dividend.

The timing and form of the 2015 Special Dividend, which may or may not occur, will be determined by the board of directors of Forest City (or the board of directors of the REIT, as applicable) and may be impacted by potential tax law changes and other factors beyond our control; provided, however, that if Forest City declares the 2015 Special Dividend prior to the Merger, then Forest City will pay the 2015 Special Dividend prior to the Merger.

 

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The terms of the Forest City 1994 Stock Plan (as amended and restated as of March 17, 2013 and further amended on December 17, 2013), which we refer to as the Plan, require the Compensation Committee of Forest City’s board of directors (or the REIT’s board of directors, as applicable) to provide for an equitable adjustment to all equity awards that have been awarded but not exercised under the Plan by the record date for the 2015 Special Dividend to prevent dilution or enlargement of the rights of grantees of awards under the Plan that otherwise would result from the 2015 Special Dividend. The Compensation Committee, in its sole discretion, will determine the manner of effecting the required equitable adjustment.

The 2015 Special Dividend may be increased by an amount that the board of directors of Forest City (or the board of directors of the REIT, as applicable) determines is appropriate to facilitate the REIT’s qualification as a real estate investment trust under the Code, which may result in a distribution amount in excess of the minimum amount necessary for the REIT to so qualify. See the sections entitled “—Risks Related to the REIT Conversion—There are uncertainties relating to the 2015 Special Dividend” and “Material U.S. Federal Income Tax Considerations”.

 

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OUR BUSINESS

Set forth below is a description of the business of Forest City. The REIT, a wholly-owned subsidiary of Forest City, was incorporated in Maryland on May 29, 2015 and you will hold shares of REIT common stock following the Merger. As of the date of this proxy statement/prospectus, the REIT has no assets or liabilities other than those incident to its formation and participation in the transactions contemplated by the Merger Agreement and has not conducted any activities other than those incident to the foregoing.

Forest City Enterprises, Inc.

Forest City principally engages in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. Forest City has approximately $8.8 billion in consolidated assets in 24 states and the District of Columbia at March 31, 2015. Forest City’s core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia, and the greater metropolitan areas of New York City, San Francisco and Washington, D.C. Forest City has offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and its corporate headquarters is in Cleveland, Ohio.

Forest City operates through three strategic business units, which represent four reportable operating segments (collectively, the “Real Estate Groups”):

 

    Commercial Group, Forest City’s largest strategic business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings and mixed-use projects. Additionally, it operates Barclays Center, a sports and entertainment arena located in Brooklyn, New York, which is reported as a separate operating segment (“Arena”).

 

    Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. Additionally, it owns interests in entities that develop and manage military family housing.

 

    Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers at its Stapleton project in Denver, Colorado.

 

    Corporate Activities is the other reportable operating segment, which includes Forest City’s equity method investment in The Brooklyn Nets (the “Nets”), a member of the National Basketball Association (“NBA”).

Commercial Group

Forest City has developed and/or acquired retail projects for more than 60 years and office and mixed-use projects for more than 40 years. The Commercial Group’s portfolio is in both urban and suburban locations in 14 states and the District of Columbia. The Commercial Group targets markets where it uses its expertise to develop complex projects, often employing public and/or private partnerships. A summary of Commercial Group properties is as follows:

 

     Number of Properties      Gross Leasable Area (in square feet)  

Operating Properties:

     

Regional Malls

     14         7,800,000   

Specialty Retail Centers

     24         4,269,000   

Office Buildings

     38         10,687,000   

Under Construction:

     

Office Buildings

     2         410,000   

Regional Mall Expansion

             32,000   
  

 

 

    

 

 

 

Total

  78      23,198,000   
  

 

 

    

 

 

 

 

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In its office development activities, Forest City is primarily a build-to-suit developer that works with tenants to meet their requirements. Forest City’s office development has focused primarily on mixed-use projects in urban developments, often built in conjunction with hotels and/or retail centers or as part of a major office or life science campus. As a result of this focus on urban developments, Forest City continues to concentrate future office and mixed-use developments largely in its core markets.

Forest City opened its first community retail center in 1948 and its first enclosed regional mall in 1962. Since then, it has developed regional malls and specialty retail centers. The specialty retail centers include urban retail, entertainment-based, neighborhood and power centers (collectively, “specialty retail centers”).

Regional malls are developed in collaboration with anchor stores that typically own their facilities as an integral part of the mall structure but do not typically generate significant rental revenue to Forest City. In contrast, anchor stores at specialty retail centers generally are tenants under long-term leases that typically provide significant rental revenue to Forest City.

Forest City has also pioneered the concept of bringing specialty retailing to urban locations previously ignored by major retailers. With high population densities and disposable income levels at or near those of the suburbs, urban development is advantageous for Forest City, for the tenants who realize high sales per square foot and for the cities that benefit from the new jobs and incremental tax revenues.

The following tables provide lease expiration and significant tenant information relating to the Commercial Group’s retail and office properties.

 

Retail Lease Expirations as of December 31, 2014  

Expiration

Year

   Number of
Expiring

Leases
     Square Feet of
Expiring
Leases (1)
     Percentage of Total
Leased GLA
    Contractual Rent
Expiring (2)
     Percentage of
Total
Contractual
Rent
    Average
Contractual
Rent per Square

Foot Expiring (1)
 

2015        

     257         786,615         8.05   $ 20,458,120         8.23   $ 44.10   

2016        

     260         1,081,508         11.07        29,485,080         11.86        48.75   

2017        

     231         880,124         9.01        27,554,599         11.08        58.03   

2018        

     154         815,004         8.34        18,244,287         7.34        38.31   

2019        

     173         1,196,274         12.25        25,367,259         10.20        36.08   

2020        

     103         832,105         8.52        19,112,953         7.69        41.26   

2021        

     96         656,323         6.72        18,403,614         7.40        46.50   

2022        

     110         889,541         9.11        28,003,377         11.26        48.34   

2023        

     79         663,396         6.79        20,022,897         8.05        44.38   

2024        

     92         533,037         5.46        12,830,683         5.16        46.97   

Thereafter        

     79         1,433,781         14.68        29,114,866         11.73        34.66   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total        

  1,634      9,767,708      100.00 $ 248,597,735      100.00 $ 43.50   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Office Lease Expirations as of December 31, 2014  

Expiration

Year

   Number of
Expiring
Leases
     Square Feet of
Expiring
Leases (1)
     Percentage of Total
Leased GLA
    Contractual Rent
Expiring(2)
     Percentage of
Total
Contractual
Rent
    Average
Contractual
Rent per Square
Foot Expiring(1)
 

2015        

     74         634,120         6.55   $ 12,681,903         3.63   $ 21.56   

2016        

     82         1,008,614         10.41        27,634,871         7.91        40.16   

2017        

     54         458,924         4.74        11,240,700         3.22        33.52   

2018        

     45         1,195,496         12.34        45,985,407         13.17        44.72   

2019        

     49         1,068,258         11.03        33,603,411         9.62        41.86   

2020        

     12         1,211,500         12.51        44,816,501         12.83        49.75   

2021        

     12         502,496         5.19        14,354,203         4.11        33.49   

2022        

     14         323,485         3.34        12,721,136         3.64        42.85   

2023        

     12         598,139         6.17        35,333,042         10.12        59.56   

2024        

     22         1,293,222         13.35        57,510,445         16.47        46.69   

Thereafter        

     21         1,393,142         14.37        53,332,322         15.28        41.04   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total        

  397      9,687,396      100.00 $ 349,213,941      100.00 $ 42.52   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Square feet of expiring leases and average contractual rent per square foot are operating statistics representing 100% of the square footage and contractual rental income per square foot from expiring leases.
(2) Contractual rent expiring is an operating statistic and is not comparable to rental revenue, a GAAP financial measure. The primary differences arise because contractual rent is calculated at Forest City’s ownership share and excludes adjustments for the impacts of straight-line rent, amortization of intangible assets related to in-place leases, above and below market leases and overage rental payments (which are not reasonably estimable). Contractual rent per square foot includes base rent, common area maintenance and real estate taxes. In addition, contractual rent per square foot for retail leases includes fixed additional charges for marketing/promotional charges.

 

Significant Retail Tenants as of December 31, 2014  
(Based on contractual rent of 1% or greater at Forest City’s ownership share)   

Tenant

  

Primary DBA

   Number of Leases      Leased
Square Feet
     Percentage of
Total Retail
Square Feet
 

Regal Entertainment Group

   Regal Cinemas, Edwards Theatres, United Artists Theatres      5         381,461         3.91

Dick’s Sporting Goods, Inc.

   Dick’s Sporting Goods      6         366,811         3.76   

Bass Pro Shops, Inc.

   Bass Pro Outdoor World      2         364,500         3.73   

Target Corporation

   Target      2         362,498         3.71   

The Gap Inc.

   Banana Republic, Gap, Old Navy, Athleta      27         328,249         3.36   

AMC Entertainment, Inc.

   AMC Theaters      3         260,886         2.67   

The TJX Companies, Inc.

   Marshalls, T.J. Maxx      7         230,552         2.36   

H&M Hennes & Mauritz AB

   H&M      11         215,504         2.21   

L Brands, Inc.

   Bath and Body Works, Victoria’s Secret, Pink      33         210,281         2.15   

Abercrombie & Fitch Co.

   Abercrombie & Fitch, Hollister      20         142,377         1.46   

Foot Locker, Inc.

   FootLocker, Lady FootLocker, Kids FootLocker, FootAction USA, Champs Sports      27         117,610         1.20   

Costco Wholesale Corporation

   Costco      1         110,074         1.13   

Express, Inc.

   Express      12         107,780         1.10   

Best Buy Co., Inc.

   Best Buy      5         105,450         1.08   

 

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Significant Retail Tenants as of December 31, 2014  

Tenant

  

Primary DBA

   Number of Leases      Leased
Square Feet
     Percentage of
Total Retail
Square Feet
 

Fitness International

   LA Fitness, Fitness International      3         93,227         0.95   

American Eagle Outfitters, Inc.

   American Eagle Outfitters, Aerie      12         69,895         0.72   

Signet Jewelers

   Kay Jewelers, Zales Jewelers, Piercing Pagoda, Jared The Galleria of Jewelry      24         39,584         0.41   
     

 

 

    

 

 

    

 

 

 

Subtotal

  200      3,506,739      35.91   
     

 

 

    

 

 

    

 

 

 

Others

  1,434      6,260,969      64.09   
     

 

 

    

 

 

    

 

 

 

Total

  1,634      9,767,708      100.00
     

 

 

    

 

 

    

 

 

 

 

Significant Office Tenants as of December 31, 2014  
(Based on contractual rent of 2% or greater at Forest City’s ownership share)   

Tenant

   Leased
Square
Feet
     Percentage of
Total Office
Square Feet
 

City of New York

     1,088,576         11.24

Millennium Pharmaceuticals, Inc.

     567,641         5.86  

U.S. Government

     444,933         4.59  

WellPoint, Inc.

     392,514         4.05  

JP Morgan Chase & Co.

     361,422         3.73   

Bank of New York

     323,043         3.33   

National Grid

     297,788         3.07   

Novartis International AG

     208,391         2.15   

Morgan Stanley & Co.

     202,980         2.10   

Clearbridge Advisors, LLC, a Legg Mason Company

     201,028         2.08   

Johns Hopkins University

     163,364         1.69   

Covington & Burling, LLP

     160,565         1.66   

Seyfarth Shaw, LLP

     96,909         1.00   
  

 

 

    

 

 

 

Subtotal

  4,509,154      46.55   
  

 

 

    

 

 

 

Others

  5,178,242      53.45   
  

 

 

    

 

 

 

Total

  9,687,396      100.00
  

 

 

    

 

 

 

See the sections of Forest City’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as amended, and Forest City’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commercial Group”, incorporated by reference into this proxy statement/prospectus, for additional operating statistics.

Arena

Forest City owns and operates the Barclays Center, a 670,000 square foot world-class arena and home to the Nets (the “Arena”). The Arena will be the home of the New York Islanders hockey team, a member of the National Hockey League, beginning in the upcoming 2015-2016 season, and expects to host more than 200 cultural and sporting events annually.

 

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Forest City has a controlling financial interest in the Arena through a financing lease obligation with an agency of the state of New York (the “Arena Lease”). The same state agency issued $511,000,000 PILOT Bonds for the purpose of paying for construction cost, servicing interest during the construction period and establishing the required collateral reserves. The Arena Lease has an initial term of 37 years, with six 10-year renewal options and a final two-year renewal option. Lease payments primarily consist of amounts to cover the debt service payments of the PILOT Bonds, which mature at the expiration of the 37-year Arena Lease. Also, included in each lease payment is an amount equal to 10% of the debt service payment that goes into escrow to be used for certain operating and maintenance costs as defined in the applicable agreements. The Arena and related Arena Lease are accounted for as a financing lease obligation on our consolidated financial statements. Payments under the Arena Lease are secured by a mortgage that encumbers the Arena and are allocated between principal and interest in a manner which produces a constant interest rate of approximately 8% over the term of the Arena Lease. The liability balance on our consolidated balance sheet at December 31, 2014 related to the Arena Lease amounted to $402,540,000. Lease payments over the next five years are expected to be $29,762,000, $33,148,000, $33,938,000, $34,667,168 and $35,335,591, respectively.

The Arena is reported as a separate segment in our consolidated financial statements as of December 31, 2014 that are incorporated by reference in our Annual Report on Form 10-K. The Arena has total assets of $955,570,000 as of December 31, 2014 of which $864,675,000 is included in depreciable real estate. The Arena is depreciated over 34.5 years on a straight-line basis, which correlates to the remaining initial term of the Arena Lease and the license agreement with the Nets to occupy the Arena.

For U.S. federal income tax purposes, our tax basis in the Arena is $340,684,900.

As of the date of this proxy statement/prospectus, we have no current active plans for major renovation, improvement or development of the Barclays Center, other than ongoing repair and maintenance, although our plans may change in this regard.

Subject to the limitations described under the “Risk Factors” section of Forest City’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, we believe the insurance policy covering the Barclays Center is appropriate and adequate given the relative risk of loss and the cost of the coverage.

Residential Group

The Residential Group owns, develops, acquires, leases and manages residential rental properties in 21 states and the District of Columbia. Forest City has been engaged in apartment community development for over 60 years. Its residential portfolio includes middle-market apartments, upscale urban properties, adaptive re-use developments and subsidized senior housing. The Residential Group also owns, develops and manages military family housing. A summary of Residential Group properties is as follows:

 

     Number of Properties      Number of Units  

Apartment Communities

     77         25,374   

Subsidized Senior Housing

     39         6,669   

Under Construction

     7         2,225   
  

 

 

    

 

 

 
  123      34,268   

Military Housing

  10      14,559   
  

 

 

    

 

 

 

Total

  133      48,827   
  

 

 

    

 

 

 

Land Development Group

The Land Development Group relates to the Stapleton project in Denver, Colorado. The Stapleton project is one of the nation’s largest urban redevelopments with substantial future entitlements, including apartments, retail and

 

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office space as well as single family neighborhoods, where Forest City sells residential lots to homebuilders. Forest City controls the future development opportunity at Stapleton through an option agreement. As of December 31, 2014, Forest City owns 260 acres of undeveloped land (including 125 saleable acres) and a purchase option for 849 acres at Stapleton over the next 4 years.

Through December 31, 2014, Forest City had purchased 2,086 acres at Stapleton. In addition to the developable land available through purchase options, there are 1,116 acres reserved for regional parks and open space, of which 917 acres are currently under construction or have been completed. At December 31, 2014, Stapleton also had over 2.1 million square feet of retail space, over 400,000 square feet of office space, over 1.7 million square feet of other commercial space and 1,131 apartment units completed, with another 393 apartment units under construction.

In addition to sales activities of the Land Development Group, Forest City also sells land acquired by its Commercial and Residential Groups adjacent to their respective projects. Those sales and related costs are included in the revenues and expenses of such groups.

The Nets

Our ownership interest in the Nets and Barclays Center is through Nets Sports & Entertainment (“NS&E”). NS&E owns 20% of the Nets and 55% of Barclays Center. Forest City owns approximately 62% of NS&E, with the remaining 38% of NS&E being owned by minority partners. Forest City has also made certain loans to the minority members of NS&E and such loans are required to be repaid to us prior to the minority partners of NS&E being entitled to participate in the distributable cash flow from any sale. Forest City consolidates its interest in Arena LLC and accounts for its investment in the Nets on the equity method of accounting. The Nets are not a core investment for Forest City and are reported in the Corporate Activities segment.

During the six months ended December 31, 2014, Forest City began discussions with several interested parties for the potential sale of its ownership interests in the Nets. In the course of those discussions, certain parties have also expressed interest in acquiring all or a portion of Forest City’s ownership interests in Barclays Center. Neither NS&E nor Forest City has entered into any binding agreement concerning the sale of these ownership interests and cannot give assurance that it will close on the sale of a portion or all of these ownership interests on terms favorable to it or at all. As of the date of this proxy statement/prospectus, we are continuing to discuss the disposition of NS&E’s ownership interests in these two assets.

NS&E did not fund the Nets capital calls related to the 2013-2014 and 2014-2015 NBA basketball seasons, respectively. This did not constitute a default under the agreements related to Forest City’s investment in the Nets because, in 2013, NS&E entered into a forbearance agreement with the majority partner. Under the forbearance agreement, the majority partner agreed to fund NS&E’s portion of Nets capital calls through July 12, 2015 and forbear the majority partner’s right to dilute NS&E’s ownership interests in the Nets for a period of two years in exchange for a fee. In July 2015, NS&E and the majority partner amended the forbearance agreement to extend the forbearance period to August 12, 2015 for an additional fee. Upon expiration of the forbearance period on August 12, 2015, NS&E is required to repay the majority partner approximately $25,000,000 plus related fees. In addition, NS&E is obligated to fund approximately $6,300,000 for its share of a Nets capital call for the upcoming 2015-2016 NBA basketball season by August 12, 2015. If NS&E does not fund the forbearance amounts, related fees and the 2015-16 Nets capital call by August 12, 2015, NS&E’s ownership interests in the Nets will be diluted from 20% to approximately 8%. Based on continuing discussions with interested parties regarding the potential disposal of NS&E’s ownership interests, management believes the value of its current 20% ownership interest exceeds the funding requirement necessary to maintain that 20% ownership interest.

Competition

The real estate industry is highly competitive in many markets in which Forest City operates. There are numerous other developers, managers and owners of commercial and residential real estate and undeveloped land

 

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competing with Forest City nationally, regionally and/or locally, some of whom may have greater financial resources and market share than Forest City. They compete with Forest City for management and leasing opportunities, land for development, properties for acquisition and disposition, and for anchor stores and tenants for properties. Forest City may not be able to successfully compete in these areas. In addition, competition could over-saturate markets and as a result, Forest City may not have sufficient cash to meet the nonrecourse debt service requirements on certain of its properties. Although Forest City may attempt to negotiate a restructuring or extension of nonrecourse mortgage debt, it may not be successful, which could cause a property to be transferred to a mortgagee.

Forest City’s multi-family rental residential real estate not only competes against other rental buildings in the area, but other housing options, such as condominiums and single home ownership. If trends shift more to home ownership instead of rental, Forest City’s results of operations, cash flows and realizable value of assets upon sale could be materially and adversely affected.

Tenants at Forest City’s 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. Forest City’s competitors and those of its tenants could have a material adverse effect on Forest City’s ability to lease space in its properties and on the rents it can charge or the concessions it may have to grant. These factors could materially and adversely affect Forest City’s results of operations, cash flows, and realizable value of its assets upon sale.

Barclays Center has one anchor tenant in the Nets and a future anchor tenant (2015-2016 season) in the New York Islanders but faces competition from other stadiums, arenas, theaters and entertainment venues for high quality sporting events, concerts and entertainment events. Reduced fan interest in the Nets and/or the Islanders could result in lower attendance at the teams’ home games. In addition, if Forest City’s competitors attract more of the high quality concerts and other entertainment events, it may have more open dates and/or less profitable events. Any combination of these negative events could materially affect Forest City’s results of operations, cash flows, and the value of the underlying arena.

Number of Employees

Forest City had 2,626 full-time and 239 part-time employees as of December 31, 2014.

Forest City Realty Trust, Inc.

The REIT, a Maryland corporation, is a newly formed, direct, wholly-owned subsidiary of Forest City. Forest City formed the REIT for the purpose of participating in the transactions contemplated by the Merger Agreement. Prior to the Merger, the REIT will have no assets or operations other than those incident to its formation and its participation in the transactions contemplated by the Merger Agreement.

FCILP, LLC

FCILP is a wholly-owned direct subsidiary of the REIT organized under the laws of the state of Delaware. Prior to the Merger, FCILP will have no assets or operations other than those incident to its formation and its participation in the transactions contemplated by the Merger Agreement.

FCE Merger Sub, Inc.

Merger Sub is an Ohio corporation and is a wholly-owned subsidiary of the REIT owned in part directly and in part through the REIT’s interest in FCILP. Prior to the Merger, Merger Sub will have no assets or operations other than those incident to its formation and its participation in the transactions contemplated by the Merger Agreement. After the Merger, Merger Sub will cease to exist.

 

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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of the REIT’s anticipated policies with respect to distributions, investments, financing, lending and certain other activities following the REIT Conversion. Following the REIT Conversion, these policies will be periodically reconsidered by the REIT’s board of directors without notice to, or a vote of, the REIT’s shareholders.

Dividend Policy

If the REIT qualifies as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, we intend to pay regular quarterly dividends to our shareholders. See “Dividend and Distribution Policy”.

Investment Policy

Investments in Real Estate or Interests in Real Estate

Following the Merger, we expect to convert Forest City to a limited partnership, which we refer to as the Operating Partnership. We will control the Operating Partnership as the sole general partner. We expect to conduct substantially all of our business through the Operating Partnership and will own substantially all of our assets through the Operating Partnership, whether directly or indirectly through subsidiaries of the Operating Partnership.

Our investment objective is to seek the highest risk adjusted returns on invested capital for our shareholders by simultaneously increasing recurring free cash flow per share and our return on invested capital. To achieve this, we expect we would continue to deploy our capital through our annual capital expenditure program and strategic acquisitions, subject to available funds and market conditions.

We currently expect to develop or acquire real estate assets based on their anticipated total return, which consists of income and any capital appreciation. We currently expect to be a long-term owner in the properties we approach investments with a long-term investment view, but we may sell properties at any time, subject to real estate investment trust provisions of the Code, including the prohibited transaction rules, if our management determines it is in our best interests to do so.

Subject to certain asset tests that the REIT will have to satisfy to qualify as a real estate investment trust under the Code, there are no limitations on (a) the percentage of the REIT’s assets that may be invested in any one property, venture or type of security, (b) the number of properties in which the REIT may invest, or (c) the concentration of the REIT’s investments in a single geographic region. The REIT’s board of directors may establish limitations, and other policies, as it deems appropriate from time to time. See “—Taxation of the REIT as a Real Estate Investment Trust—Requirements for Qualification—Asset Tests” for more information about the asset tests we must satisfy to qualify as a real estate investment trust under the Code.

Although we would only expect to encumber our properties with a single senior mortgage, the REIT will have no limit on the number or amount of mortgages that may be placed on any of our properties.

Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

Following the Merger and the conversion of Forest City to a limited partnership, we generally expect to engage in joint venture investments with other investors through the Operating Partnership. We may also invest, through the Operating Partnership, in the securities of other issuers in connection with acquisitions of indirect interests in properties (normally general or limited partnership interests in special purpose partnerships owning properties). Subject to the percentage of ownership limitations and the income and asset tests necessary to qualify as a real

 

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estate investment trust under the Code, we currently intend to limit our investments in issuers to those that own commercial and/or residential real estate or land in the United States where such investments would be consistent with our investment objectives. Through the Operating Partnership, we may in the future acquire some, all or substantially all of the securities or assets of other entities that qualify as real estate investment trusts under the Code or similar entities where that investment would be consistent with our investment policies and anticipated qualification as a real estate investment trust under the Code. We do not anticipate investing, either directly or through the Operating Partnership, in other issuers of securities for the purpose of exercising control (except with respect to our plan to control the Operating Partnership through our anticipated ownership of the general partnership interest and a majority of the limited partnership interests in the Operating Partnership) or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale, but we may engage in these activities in the future.

We do not intend that our beneficial ownership of securities will require us to register as an “investment company” under the Investment Company Act of 1940, as amended, and we intend to divest securities before any such registration would be required. We do not intend to engage, directly or indirectly, in trading, underwriting, agency distribution or sales of securities of other issuers.

Investments in Other Securities

Other than as described above, we do not intend to invest, either directly or through the Operating Partnership, in any additional securities.

Investments in Mortgages

We do not plan to invest, either directly or through the Operating Partnership, in real estate mortgages, although we are not prohibited from doing so.

Dispositions

We may dispose of some of the assets we hold, whether such assets are held directly or through the Operating Partnership, if management or our board of directors, as appropriate, determines that such action would be advisable and in the best interests of the REIT and its shareholders.

Financing Policy

Our financing policies will largely depend on the nature and timeline of our investment opportunities and the prevailing economic and market conditions. If our board of directors determines that additional funding is desirable, we may raise funds through:

 

    senior or subordinated debt financings, including accessing U.S. debt capital markets, drawing from the revolving portion of our credit facility and bank borrowings;

 

    preferred or common equity offerings; and

 

    any combination of the above methods.

We anticipate providing the proceeds from any of the above transactions to the Operating Partnership in exchange for partnership interests therein. We intend to retain the maximum possible cash flow to fund the investments we make, either directly or through the Operating Partnership, subject to provisions in the Code requiring distribution of real estate investment trust taxable income to enable us to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016, and to minimize our income and excise tax liabilities. We intend to utilize our cash on hand and availability under the revolving portion of our credit facility to fund future discretionary investments. We will not have a formal policy limiting the amount of indebtedness that we may incur, but we anticipate that we will be subject to certain restrictions in

 

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our capacity as successor to certain indentures pursuant to which Forest City issued debt and under our credit facility with regard to permitted indebtedness. In the future, we may seek to extend, expand, reduce or renew our credit facility, obtain new or additional credit facilities or lines of credit, or issue new unsecured or secured debt that may contain limitations on indebtedness or operations. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including overall prudence, the purchase price of assets to be acquired with debt financing, the estimated market value of our assets upon refinancing, our ability to generate cash flow, both directly and through the Operating Partnership, to cover our expected debt service and restrictions under our existing debt arrangements. See the sections of Forest City’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as amended, and Forest City’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition and Liquidity”.

Lending Policy

We expect that we may make loans or guarantee the debt of the Operating Partnership and future direct or indirect subsidiaries to the extent they require debt financing to fund acquisitions and capital expenditures.

Equity Capital Policies

Subject to applicable law and the requirements for NYSE listed companies, our board of directors may authorize, without the approval of our shareholders, the obtaining of additional capital through the issuance of equity securities of the REIT or the Operating Partnership. Pursuant to the REIT Charter, we will have authority to issue up to 371,000,000 shares of REIT Class A common stock, 56,000,000 shares of REIT Class B common stock and 20,000,000 shares of preferred stock.

As permitted under the MGCL, the REIT Charter authorizes the REIT board of directors, with the approval of a majority of the entire board and without shareholder approval, to amend the REIT Charter to increase or decrease the aggregate number of shares of REIT stock or the number of shares of any class or series of shares of REIT stock that the REIT is authorized to issue.

The REIT Charter also authorizes the REIT board of directors to classify and reclassify any unissued shares of REIT common stock or preferred stock into other classes or series of stock, including one or more classes or series of stock that have priority over either or both classes of REIT common stock with respect to distributions or upon liquidation, and authorizes the REIT to issue the newly classified shares. Prior to the issuance of shares of each new class or series, the REIT board of directors is required by Maryland law and by the REIT Charter to set, subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series. These actions may be taken without the approval of holders of REIT common stock unless such approval is required by applicable law, the terms of any other class or series of REIT stock or the rules of any stock exchange or automated quotation system on which any shares of REIT stock are listed or traded. Therefore, the REIT board of directors could authorize the issuance of shares of common or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for REIT common stock or otherwise be in the best interests of the REIT shareholders.

The REIT believes that the power of the REIT board of directors (i) to approve amendments to the REIT Charter to increase or decrease the number of authorized shares of REIT stock or the number of authorized shares of any class or series of REIT stock, (ii) to authorize the REIT to issue additional authorized but unissued shares of common or preferred stock and to classify or reclassify unissued shares of common or preferred stock and (iii) thereafter to authorize the REIT to issue such classified or reclassified shares of stock will provide the REIT with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise.

 

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Existing shareholders will have no preemptive right to additional shares issued in any offering, and any offering might cause a dilution of investment. The REIT may in the future seek to offer equity securities as a source of discretionary investment funding for the REIT or the Operating Partnership when (a) it is a requirement of a seller, (b) the size of a strategic transaction would increase our leverage beyond what the board of directors or management believes to be appropriate or (c) it is otherwise determined appropriate by the REIT board of directors.

In certain cases, the REIT or the Operating Partnership may issue securities in exchange for real property or interests in real property.

The REIT may, under certain circumstances, purchase shares of REIT common stock in the open market or in private transactions with its shareholders, if those purchases are approved by the REIT board of directors.

Reports to Shareholders

Following the Merger, we will be subject to the information reporting provisions of the Exchange Act, which require us to file annual and periodic reports, proxy statements and other information, including audited financial statements, with the SEC.

Other Activities

Following the REIT Conversion, we intend to operate and to invest so as to qualify as a real estate investment trust under the Code unless our board of directors determines that it is no longer advisable and in the best interests of the REIT to so qualify.

Interested Director and Officer Transactions

Pursuant to the MGCL, a contract or other transaction between the REIT and any of its directors or between the REIT and any other corporation, firm or other entity in which any of the REIT directors is a director or has a material financial interest is not void or voidable solely because of such common directorship or interest, the presence of such director at the meeting of the board of directors or committee of the board of directors at which the contract or transaction is authorized, approved or ratified or the counting of the director’s vote in favor thereof; provided that:

 

    the fact of the common directorship or interest is disclosed or known to the REIT board of directors or a committee thereof, and the REIT board of directors or a committee thereof authorizes, approves or ratifies the contract or transaction by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum;

 

    the fact of the common directorship or interest is disclosed or known to the REIT shareholders entitled to vote thereon, and the contract or transaction is authorized, approved or ratified by a majority of the votes cast by the shareholders entitled to vote other than the votes of shares owned of record or beneficially by the interested director or corporation, firm or other entity; or

 

    the contract or transaction is fair and reasonable to the REIT.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated statements of operations for the year ended December 31, 2014 and the three months ended March 31, 2015 and unaudited pro forma consolidated balance sheet as of March 31, 2015 give effect to the REIT Conversion described in the section entitled “Simplified Structure of the Transaction”. For a description of the entities involved in the Merger, see “Summary—The Principal Parties”.

The unaudited pro forma consolidated balance sheet is presented as if the REIT Conversion, including the 2015 Special Dividend, had occurred on March 31, 2015. The unaudited pro forma consolidated statements of operations present the effects of the REIT Conversion as though it had occurred on January 1, 2014. The unaudited pro forma consolidated financial data are based on the estimates and assumptions set forth in the notes to such statements, which are preliminary and have been made solely for the purposes of developing such pro forma information. The unaudited pro forma consolidated financial data are not necessarily indicative of the financial position or operating results that would have been achieved had the REIT Conversion, including the 2015 Special Distribution, been completed as of the dates indicated, nor are they necessarily indicative of future financial position or operating results. The historical financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the REIT Conversion, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the consolidated results of the REIT. This information should be read in conjunction with the historical financial statements and related notes included in, or incorporated into, this proxy statement/prospectus.

The unaudited pro forma condensed consolidated statements of operations and condensed consolidated balance sheet do not reflect the following:

 

    one-time professional and consulting fees directly related to the REIT Conversion and Merger of $6,000,000 currently estimated to be incurred subsequent to the date of this proxy statement/prospectus; and

 

    the potential effect of lower cash balances these REIT transactions have on interest income, higher borrowing costs or foregone investment opportunities.

In addition, the amounts of quarterly distributions are not reflected in the condensed consolidated balance sheet, as it is presented as if the REIT Conversion had occurred on March 31, 2015.

To qualify as a REIT, at least 90% of taxable income of our qualified real estate investment trust subsidiaries (“QRSs”), determined without regard to the dividends paid election and by excluding any net capital gain, is required to be distributed to stockholders. Upon making a REIT election, we anticipate that we may have NOLs that can be carried forward and utilized to reduce the amount of future required distributions.

The pro forma financial results assume that 100% of taxable income from our QRSs has been distributed and that all relevant REIT qualifying tests, as dictated by the Code and IRS rules and interpretations, were met for the entire year.

For accounting purposes, the Merger will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in the REIT is the carryover basis of Forest City. Stockholders’ equity of the REIT will equal that carried over from Forest City, after giving effect to the 2015 Special Distribution and the reversal of the QRSs’ deferred tax assets and liabilities no longer expected to be realized or settled as a result of converting to a REIT.

 

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Forest City Enterprises, Inc. and Subsidiaries

Unaudited Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2014

 

     Actual     Adjustments         Pro Forma  
     (in thousands, except per share data)  

Revenues

        

Rental

   $ 526,966      $ —          $ 526,966   

Tenant recoveries

     118,035        —            118,035   

Service and management fees

     50,522        —            50,522   

Parking and other

     53,765        —            53,765   

Arena

     116,695        —            116,695   

Land sales

     68,102        —            68,102   

Military Housing

     31,967        —            31,967   
  

 

 

   

 

 

     

 

 

 

Total revenues

  966,052      —        966,052   
  

 

 

   

 

 

     

 

 

 

Expenses

Property operating and management

  384,119      —        384,119   

Real estate taxes

  78,637      —        78,637   

Ground rent

  9,387      —        9,387   

Arena operating

  76,096      —        76,096   

Cost of land sales

  23,457      —        23,457   

Military Housing operating

  11,481      —        11,481   

Corporate general and administrative

  51,116      (3,300 (D)   47,816   
  

 

 

   

 

 

     

 

 

 
  634,293      (3,300   630,993   

Depreciation and amortization

  230,466      —        230,466   

Write-offs of abandoned development projects and demolition costs

  1,655      —        1,655   

Impairment of real estate

  277,095      —        277,095   
  

 

 

   

 

 

     

 

 

 

Total expenses

  1,143,509      (3,300   1,140,209   
  

 

 

   

 

 

     

 

 

 

Operating income (loss)

  (177,457   3,300      (174,157

Interest and other income

  42,780      —        42,780   

Net loss on disposition of partial interest in development project

  (20,298   —        (20,298

Net gain on disposition of full or partial interest in rental properties

  30,281      —        30,281   

Net gain on change in control of interests

  230,660      —        230,660   

Interest expense

  (234,405   —        (234,405

Amortization of mortgage procurement costs

  (8,518   —        (8,518

Gain (loss) on extinguishment of debt

  (1,179   —        (1,179
  

 

 

   

 

 

     

 

 

 

Earnings (loss) before income taxes

  (138,136   3,300      (134,836
  

 

 

   

 

 

     

 

 

 

Income tax expense (benefit)

Current

  4,931      (1,734 (B)   3,197   

Deferred

  (22,127   15,412    (B)   (6,715
  

 

 

   

 

 

     

 

 

 
  (17,196   13,678      (3,518
  

 

 

   

 

 

     

 

 

 

Earnings (loss) from unconsolidated entities, gross of tax

Equity in earnings

  90,032      —        90,032   

Impairment

  (3,124   —        (3,124
  

 

 

   

 

 

     

 

 

 
  86,908      —        86,908   
  

 

 

   

 

 

     

 

 

 

Earnings (loss) from continuing operations

$ (34,032 $ (10,378 $ (44,410
  

 

 

   

 

 

     

 

 

 

Basic and diluted earnings (loss) per common share

Earnings (loss) from continuing operations attributable to common shareholders

$ (0.10 $ (0.05 $ (0.15
  

 

 

   

 

 

     

 

 

 

Weighted average common shares outstanding:

Basic and diluted

  198,480,783      3,588,767    (A)   202,069,550   
  

 

 

   

 

 

     

 

 

 

 

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Forest City Enterprises, Inc. and Subsidiaries

Unaudited Pro Forma Consolidated Statement of Operations

For the Three Months Ended March 31, 2015

 

     Actual     Adjustments          Pro Forma  
     (in thousands, except per share data)  

Revenues

         

Rental

   $ 141,106      $ —           $ 141,106   

Tenant recoveries

     30,725        —             30,725   

Service and management fees

     9,620        —             9,620   

Parking and other

     11,876        —             11,876   

Arena

     28,820        —             28,820   

Land sales

     8,663        —             8,663   

Military Housing

     6,272        —             6,272   
  

 

 

   

 

 

      

 

 

 

Total revenues

  237,082      —        237,082   
  

 

 

   

 

 

      

 

 

 

Expenses

Property operating and management

  93,018      —        93,018   

Real estate taxes

  20,788      —        20,788   

Ground rent

  2,628      —        2,628   

Arena operating

  19,958      —        19,958   

Cost of land sales

  2,311      —        2,311   

Military Housing operating

  2,225      —        2,225   

Corporate general and administrative

  13,503      —        13,503   

REIT conversion and reorganization costs

  6,212      (2,350 (D)   3,862   
  

 

 

   

 

 

      

 

 

 
  160,643      (2,350   158,293   

Depreciation and amortization

  61,814      61,814   
  

 

 

   

 

 

      

 

 

 

Total expenses

  222,457      (2,350   220,107   
  

 

 

   

 

 

      

 

 

 

Operating income (loss)

  14,625      2,350      16,975   

Interest and other income

  9,704      —        9,704   

Interest expense

  (52,576   —        (52,576

Amortization of mortgage procurement costs

  (2,101   —        (2,101

Gain (loss) on extinguishment of debt

  (35,154   —        (35,154
  

 

 

   

 

 

      

 

 

 

Earnings (loss) before income taxes

  (65,502   2,350      (63,152
  

 

 

   

 

 

      

 

 

 

Income tax expense (benefit)

Current

  (1,744   3,823    (B)   2,079   

Deferred

  2,559      (3,453 (B)   (894
  

 

 

   

 

 

      

 

 

 
  815      370      1,185   
  

 

 

   

 

 

      

 

 

 

Earnings (loss) from unconsolidated entities, gross of tax

Equity in earnings

  9,313      —        9,313   
  

 

 

   

 

 

      

 

 

 

Earnings (loss) from continuing operations

$ (57,004   1,980    $ (55,024
  

 

 

   

 

 

      

 

 

 

Basic and diluted earnings (loss) per common share

Earnings (loss) from continuing operations attributable to common shareholders

$ (0.27 $ 0.02    $ (0.25
  

 

 

   

 

 

      

 

 

 

Weighted average common shares outstanding:

Basic and diluted

  202,963,083      3,588,767    (A)   206,551,850   
  

 

 

   

 

 

      

 

 

 

 

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Forest City Enterprises, Inc. and Subsidiaries

Unaudited Pro Forma Consolidated Balance Sheet

As of March 31, 2015

 

     Actual     Adjustments          Pro Forma  
     (in thousands)  

Assets

         

Real Estate

         

Completed rental properties

   $ 7,822,881      $ —           $ 7,822,881   

Projects under construction and development

     536,966        —             536,966   

Land inventory

     96,675        —             96,675   
  

 

 

   

 

 

      

 

 

 

Total Real Estate

  8,456,522      —        8,456,522   

Less accumulated depreciation

  (1,606,124   (1,606,124
  

 

 

   

 

 

      

 

 

 

Real Estate, net

  6,850,398      —        6,850,398   

Cash and equivalents

  190,905      (20,000 (A)   170,905   

Restricted cash

  250,557      —        250,557   

Notes and accounts receivable, net

  436,599      —        436,599   

Investments in and advances to unconsolidated entities

  669,605      —        669,605   

Other assets

  397,327      —        397,327   

Deferred income taxes

  —        51,928    (C)   51,928   
  

 

 

   

 

 

      

 

 

 

Total Assets

$ 8,795,391    $ 31,928    $ 8,827,319   
  

 

 

   

 

 

      

 

 

 

Liabilities and Equity

Liabilities

Mortgage debt and notes payable, nonrecourse

$ 4,202,440    $ —      $ 4,202,440   

Revolving credit facility

  59,950      —        59,950   

Convertible senior debt

  411,194      —        411,194   

Accounts payable, accrued expenses and other liabilities

  832,313      2,950    (D)   835,263   

Cash distributions and losses in excess of investments in unconsolidated entities

  211,255      —        211,255   

Deferred income taxes

  486,101      (486,101 (C)   —     
  

 

 

   

 

 

      

 

 

 

Total Liabilities

  6,203,253      (483,151   5,720,102   

Redeemable Noncontrolling Interest

  178,050      178,050   

Commitments and Contingencies

  —        —        —     

Equity

Shareholders’ Equity

Preferred stock – without par value; 13,600,000 shares authorized, no shares issued

  —        —        —     

Common Stock – $.33 1/3 par value

Class A, 371,000,000 shares authorized, 194,880,873 shares issued and 193,501,911 shares outstanding

  64,960      19    (A)   1,968   
  (63,011 (E)

Class B, convertible, 56,000,000 shares authorized, 18,942,503 issued and outstanding; 26,257,961 issuable

  6,314      3    (A)   193   
  (6,124 (E)
  

 

 

   

 

 

      

 

 

 

Total common stock

  71,274      (69,113   2,161   

Additional paid-in capital

  1,469,273      53,965    (A)   1,592,373   
  69,135    (E)

Retained earnings

  508,989      (100,000 (A)   944,068   
  538,029    (C)
  (2,950 (D)

 

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     Actual     Adjustments          Pro Forma  
     (in thousands)  

Less treasury stock, at cost; 1,378,962 Class A shares

     (26,013     26,013      (A)      —     
  

 

 

   

 

 

      

 

 

 

Shareholders’ equity before accumulated other comprehensive loss

  2,023,523      515,079      2,538,602   

Accumulated other comprehensive loss

  (57,372   (57,372
  

 

 

   

 

 

      

 

 

 

Total Shareholders’ Equity

  1,966,151      515,079      2,481,230   

Noncontrolling interest

  447,937      447,937   
  

 

 

   

 

 

      

 

 

 

Total Equity

  2,414,088      515,079      2,929,167   
  

 

 

   

 

 

      

 

 

 

Total Liabilities and Equity

$ 8,795,391    $ 31,928    $ 8,827,319   
  

 

 

   

 

 

      

 

 

 

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

  (A) 2015 Special Dividend

In conjunction with the proposed REIT Conversion, we currently estimate the total amount of the 2015 Special Dividend will range from $75,000,000 to $125,000,000 and expect to pay with a combination of cash and Forest City Common Stock during the fourth quarter of 2015. The final calculation of the 2015 Special Dividend to be distributed is complex factually and legally. As such, any changes to the amount of the 2015 Special Dividend will impact the pro forma financial statements. Forest City Common Stock issued in connection with the 2015 Special Dividend is assumed to be issued out of Treasury Stock to the extent available, with the remaining Forest City Common Stock assumed to be issued from available authorized, but unissued Forest City Common Stock. As a result, using the closing prices of Forest City Class A Common Stock and Forest City Class B Common Stock as of July 1, 2015 of $22.29 and $22.31, respectively, a total of 196,770,948 and 19,262,232 shares of Forest City Class A Common Stock and Forest City Class B Common Stock, respectively, were assumed to have been issued and outstanding for the applicable periods. The pro forma results assume a 2015 Special Dividend of $100,000,000, the mid-point of the estimated range of the dividend, using a combination of 20% cash, or $20,000,000 and 80% Forest City Common Stock, or $80,000,000. The 2015 Special Dividend required to be paid will be affected by our earnings and profits for the year ended December 31, 2015, which could vary significantly based on the level of our operating asset sales and any resulting taxable gains. We will not make a 2015 Special Dividend if we do not have any pre-real estate investment trust accumulated earnings and profits.

 

  (B) Income Taxes

As a result of the assumed real estate investment trust election on January 1, 2014, income taxes would no longer be payable on certain of our business activities. The following business activities were considered to be part of the non-taxable activities of a real estate investment trust and therefore, no tax liability was assumed:

 

    operating income from tenant leases;

 

    sales of operating assets that meet real estate investment trust safe harbor rules;

 

    general and administrative costs associated with the above activities;

 

    interest costs associated with non recourse mortgage debt collateralized by the properties generating the above operating income, interest on our revolving credit facility, and interest on our convertible senior debt; and

 

    an allocation of corporate administrative costs.

The following activities were assumed to be a part of a TRS. The income from these activities was assumed to be taxed at the Company’s estimated effective tax rate:

 

    operating income from the Arena, certain land sales, predominately Stapleton, and Military Housing activities;

 

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    income from impermissible services, including certain service and management fees;

 

    general and administrative costs associated with the above activities;

 

    interest costs associated with non recourse mortgage debt collateralized by the assets generating the above operating income; and

 

    an allocation of corporate administrative costs.

The result reduces income tax benefit by $13,678,000 for the year ended December 31, 2014 and increases income tax expense by $370,000 for the three months ended March 31, 2015.

 

  (C) Deferred Tax Assets and Liabilities

The proposed REIT Conversion will create a one-time reversal of certain deferred tax assets and liabilities related to activities no longer subject to income taxes at the REIT level. The pro forma results include the reversal of net deferred liabilities of $486,101,000 and recording a net deferred tax asset of $51,928,000 associated with assets held by the TRS. However, the actual reversal upon real estate investment trust election will vary depending on the assets within a TRS at the time of the actual REIT conversion. The reversal has no effect on the calculation of the 2015 Special Dividend noted on footnote (A), as deferred taxes are recorded for GAAP basis only and the 2015 Special Dividend is calculated using our tax basis. This adjustment, when recorded, will be recorded through the income statement, however it is not reflected in our unaudited pro forma consolidated income statements for the year ended December 31, 2014, or the three months ended March 31, 2015. Currently, we believe the deferred tax asset resulting from the REIT Conversion and Merger is realizable based on future estimated taxable income; however, facts and circumstances could be different at the time of conversion and a valuation allowance may be required at that time.

 

  (D) REIT Conversion and Merger Costs

The unaudited pro forma consolidated statements of operations eliminate certain costs directly associated with the REIT Conversion and Merger. These costs are one-time in nature and are exclusive of certain costs that Forest City expects to continue to incur on an ongoing basis to maintain real estate investment trust compliance. During the year ended December 31, 2014, and the three months ended March 31, 2015, Forest City incurred $3,300,000 and $2,350,000, respectively, of such one-time costs directly associated with the REIT Conversion and Merger. Amounts remaining on the Unaudited Pro Forma Consolidated Statement of Operations for the three months ended March 31, 2015 in the REIT conversion and reorganization costs financial statement line item relate to costs incurred on an internal reorganization structuring project and are not directly associated with the REIT Conversion and Merger.

A pro forma adjustment of $2,950,000 reflects the costs associated with the REIT Conversion and Merger that were incurred after March 31, 2015, as the pro forma consolidated balance sheet assumes that the REIT Conversion occurred on March 31, 2015. Forest City estimates that it may incur an additional $6,000,000 of one-time operating costs associated with the REIT Conversion and Merger through the end of 2015.

 

  (E) Effect of Merger on Common Stock and Additional Paid in Capital

Immediately following the Merger, each outstanding share of Forest City Class A and Class B Common Stock, $.33 1/3 par value, will have been converted into one share of REIT Class A and Class B common stock, $.01 par value, respectively. The change in par value results in a reduction of $63,011,000 and $6,124,000 of Class A and Class B Common Stock, respectively, and a corresponding increase to Additional paid-in capital of $69,135,000.

 

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LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of

Forest City Realty Trust, Inc.

In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Forest City Realty Trust, Inc. at May 29, 2015 in conformity with accounting principles generally accepted in the United States of America. The balance sheet is the responsibility of the Company’s management. Our responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit of this statement in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, and evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Cleveland, OH

July 10, 2015

 

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Forest City Realty Trust, Inc.

Balance Sheet

May 29, 2015

 

Assets

Cash

$ 1,000   
  

 

 

 

Total Assets

$ 1,000   
  

 

 

 

Liabilities and Shareholder’s Equity

Liabilities

$ —     

Shareholder’s equity

Common stock, $0.01 par value, 10,000,000 shares authorized, 100 shares issued and outstanding

  1   

Additional paid-in-capital

  999   
  

 

 

 

Total Shareholder’s Equity

  1,000   
  

 

 

 

Total Liabilities and Shareholder’s Equity

$ 1,000   
  

 

 

 

Forest City Realty Trust, Inc.

Note to the Balance Sheet

 

A. Organization

Forest City Realty Trust, Inc., formerly known as FCRT, Inc., was incorporated on May 29, 2015, under the laws of the state of Maryland and is authorized to issue 10,000,000 shares of $0.01 par value common stock. Forest City Realty Trust, Inc., a wholly owned subsidiary of Forest City Enterprises Inc., (“FCE”), was created to effect the merger described below.

Prior to the merger, Forest City Realty Trust, Inc., will conduct no business other than incident to the merger. In the merger, a subsidiary of Forest City Realty Trust, Inc. will merge with and into FCE with FCE becoming a subsidiary of Forest City Realty Trust, Inc. Upon the effectiveness of the merger, each outstanding share of Class A and Class B common stock of FCE will be converted into one share of Forest City Realty Trust, Inc., Class A and Class B common stock, respectively, and the shares in Forest City Realty Trust, Inc. held by FCE prior to the merger will be cancelled. Forest City Realty Trust, Inc., will, by virtue of the merger, directly or indirectly own all of the assets and business formerly owned by FCE.

Also effective at the time of the merger, Forest City Realty Trust, Inc., will amend and restate its articles of incorporation. The restated articles will be similar in most respects to the FCE articles of incorporation in effect prior to the merger, except that they will include restrictions on transfer and ownership of Forest City Realty Trust, Inc. common stock to facilitate compliance with the rules applicable to Real Estate Investments Trusts and additional provisions arising out of differences between Ohio and Maryland corporate law. The members of the board of directors of Forest City Realty Trust, Inc. following the merger will consist of the same individuals who constitute the FCE board immediately prior to the merger and the executive officers of Forest City Realty Trust will consist of the same individuals who are executive officers of FCE immediately prior to the merger, although some of the officers (not including the principal executive officer, principal financial officer or principal accounting officer ) may have different responsibilities after the merger or may retire.

The accompanying balance sheet and note have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

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DESCRIPTION OF REIT STOCK

The following summarizes the material terms of REIT stock as will be set forth in the REIT Charter and REIT Bylaws, which will govern the rights of holders of REIT stock if the holding company merger proposal is approved by Forest City’s shareholders and the Merger is thereafter completed. Copies of the form of the REIT Charter and REIT Bylaws are attached as Annex B-1 and Annex B-2, respectively, to this proxy statement/prospectus. While we believe that the following description covers the material terms of the REIT stock, it may not contain all of the information that is important to you. We encourage you to read carefully this entire document, the REIT Charter and REIT Bylaws and the other documents we refer to for a more complete understanding of the REIT stock following the Merger.

Authorized Capital

The REIT Charter authorizes the REIT to issue up to 447,000,000 shares of stock, consisting of 371,000,000 shares of Class A common stock, par value $0.01 per share, 56,000,000 shares of Class B common stock, par value $0.01 per share, and 20,000,000 shares of REIT preferred stock, par value $0.01 per share. Upon completion of the Merger, [] shares of REIT Class A common stock, [] shares of REIT Class B common stock and no shares of REIT preferred stock are expected to be issued and outstanding.

As permitted by Maryland law, the REIT Charter authorizes the REIT board of directors, with the approval of a majority of the entire board of directors and without any action by the REIT’s shareholders, to amend the REIT Charter to increase or decrease the aggregate number of authorized shares of REIT stock or the number of authorized shares of any class or series of REIT stock.

Under Maryland law, shareholders generally are not personally liable for the REIT’s debts or obligations solely as a result of their status as shareholders.

REIT Common Stock

All of the shares of REIT Class A common stock and REIT Class B common stock offered by this proxy statement/prospectus will be duly authorized, and, when issued, will be fully paid and nonassessable. Subject to the preferential rights, if any, of holders of any other class or series of shares of REIT stock and to the provisions of the REIT Charter relating to the restrictions on ownership and transfer of REIT stock, holders of shares of REIT common stock are entitled to receive distributions when authorized by the REIT board of directors and declared by the REIT out of assets legally available for distribution to shareholders and will be entitled to share ratably in assets legally available for distribution to shareholders in the event of the REIT’s liquidation, dissolution or winding up after payment of or adequate provision for all of its known debts and liabilities.

Subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, except as may be otherwise specified in the terms of any class or series of REIT stock, and, except as noted below, each outstanding share of REIT Class A common stock entitles the holder to one vote and each outstanding share of REIT Class B common stock entitles the holder to ten votes on each matter on which holders of REIT stock are entitled to vote, and, except as may be provided with respect to any other class or series of REIT stock, the holders of shares of REIT Class A common stock and REIT Class B common stock will possess the exclusive voting power.

In the election of directors, subject to the rights, if any, of holders of any class or series of REIT preferred stock to elect or remove one or more additional directors, the holders of REIT Class A common stock voting as a separate class will be entitled to elect 25% of the entire REIT board of directors immediately after such election rounded up to the nearest whole number of directors, whom we refer to as the REIT Class A directors, and holders of REIT Class B common stock voting as a separate class will be entitled to elect the remaining directors up for election in any year in which directors are to be elected by the REIT shareholders, whom we refer to as the

 

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REIT Class B directors; provided, however, if on the close of business on the record date for any shareholders meeting at which REIT directors are to be elected, (i) the total number of issued and outstanding shares of REIT Class A common stock is less than 10% of the aggregate number of issued and outstanding shares of REIT Class A common stock and REIT Class B common stock, then all the directors to be elected at such meeting will be elected by the holders of REIT Class A common stock and REIT Class B common stock voting together as a single class, or (ii) the total number of outstanding shares of REIT Class B common stock is less than 500,000, then the holders of REIT Class A Common Stock will continue to have the right, voting as a separate class, to elect 25% of the entire REIT board of directors immediately after such election rounded up to the nearest whole number of directors and the right to vote together with the holders of the REIT Class B common stock to elect the remaining members of the board of directors up for election in any year in which directors are to be elected by the REIT shareholders, provided further that, in each instance, subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, each share of REIT Class A common stock will entitle the holder thereof to one vote and each share of REIT Class B common stock will entitle the holder thereof to ten votes.

The holders of shares of REIT Class A common stock and REIT Class B common stock will vote as separate classes:

 

    for the election of directors (subject to exceptions described above);

 

    to amend the REIT Charter or REIT Bylaws or approve a merger or consolidation of the REIT with or into another entity if the amendment, merger or consolidation would adversely alter the rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class; and

 

    on all matters as to which class voting may be required by applicable Maryland law.

Holders of shares of REIT Class A common stock and, except for the conversion rights discussed below, holders of shares of REIT Class B common stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the REIT. Subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock and the exceptions discussed below, shares of REIT Class A common stock and REIT Class B common stock will have equal distribution, liquidation and other rights. Holders of shares of REIT Class B common stock will be entitled to convert, at any time and at their election, each share of REIT Class B common stock into one share of REIT Class A common stock. Shares of REIT Class A common stock are not convertible.

The REIT Charter provides that if (i) the REIT board of directors authorizes and the REIT declares any stock dividend with respect to any class of REIT common stock, the REIT must at the same time declare a proportionate stock dividend with respect to each other class of REIT common stock and (ii) the shares of any class of REIT common stock are combined or subdivided, the shares of each other class of REIT common stock must be combined or subdivided in an equivalent manner. In the discretion of the REIT board of directors, dividends payable in shares of REIT Class A common stock may be paid with respect to shares of any class of REIT common stock, but dividends payable in shares of REIT Class B common stock may be paid only with respect to shares of REIT Class B common stock.

If the holding company merger proposal is approved by Forest City’s shareholders and the Merger is completed, and the REIT Conversion is thereafter completed, we currently intend to thereafter pay regular quarterly cash dividends. See “Dividend and Distribution Policy”.

Power to Increase or Decrease Authorized Shares of Stock, Reclassify Unissued Shares of Stock and Issue Additional Shares of Common and Preferred Stock

As permitted under the MGCL, the REIT Charter authorizes the REIT board of directors, with the approval of a majority of the entire board and without shareholder approval, to amend the REIT Charter to increase or decrease

 

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the aggregate number of shares of REIT stock or the number of shares of any class or series of shares of REIT stock that the REIT is authorized to issue. In addition, the REIT Charter authorizes the REIT board without shareholder approval to authorize the issuance from time to time of shares of REIT stock of any class or series, including preferred stock.

The REIT Charter also authorizes the REIT board of directors to classify and reclassify any unissued shares of REIT common stock or preferred stock into other classes or series of stock, including one or more classes or series of stock that have priority over the REIT Class A common stock and the REIT Class B common stock with respect to distributions or upon liquidation, and authorize the REIT to issue the newly classified shares. Prior to the issuance of shares of each new class or series, the REIT board of directors is required by Maryland law and by the REIT Charter to set, subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series. These actions may be taken without the approval of holders of REIT common stock unless such approval is required by applicable law, the terms of any other class or series of REIT stock or the rules of any stock exchange or automated quotation system on which any shares of REIT stock are listed or traded. Therefore, the REIT board of directors could authorize the issuance of shares of common or preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for REIT common stock or otherwise be in the best interests of the REIT shareholders. Upon completion of the Merger, no shares of REIT preferred stock are expected to be issued and outstanding, and the REIT board of directors has no present plans to authorize the issuance of any such shares of REIT preferred stock.

The REIT believes that the power of the REIT board of directors (i) to approve amendments to the REIT Charter to increase or decrease the number of authorized shares of REIT stock or the number of authorized shares of any class or series of REIT stock, (ii) to authorize the REIT to issue additional authorized but unissued shares of common or preferred stock and to classify or reclassify unissued shares of common or preferred stock and (iii) thereafter to authorize the REIT to issue such classified or reclassified shares of stock will provide the REIT with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs that might arise.

Restrictions on Ownership and Transfer

In order for the REIT to qualify as a real estate investment trust under the Code, REIT stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (other than the first year for which we plan to elect to be taxed as a real estate investment trust under the Code). Also, not more than 50% of the value of the outstanding shares of REIT stock (after taking into account certain options to acquire shares of REIT stock) may be owned, directly or indirectly or through application of certain attribution rules, by five or fewer individuals at any time during the last half of a taxable year (other than the first taxable year for which we elect to be taxed as a real estate investment trust under the Code).

The REIT Charter includes restrictions concerning the ownership and transfer of shares of REIT stock. The REIT board of directors may, from time to time, grant waivers from these restrictions, in its sole discretion. The relevant sections of the REIT Charter provide that, subject to the exceptions described below, no person or entity may own, or be deemed to own, beneficially or by virtue of the applicable constructive ownership provisions of the Code, more than 9.8%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of REIT common stock (the “common stock ownership limit”) or 9.8% in value of the outstanding shares of all classes or series of REIT stock (the “aggregate stock ownership limit”). We refer to the common stock ownership limit and the aggregate stock ownership limit collectively as the “ownership limits.” We refer to the person or entity that, but for operation of the ownership limits or another restriction on ownership and transfer of REIT stock as described below, would beneficially own or constructively own shares of REIT stock in violation of such limits or restrictions and, if appropriate in the context, a person or entity that would have been the record owner of such shares of REIT stock as a “prohibited owner.”

 

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The applicable constructive ownership rules under the Code are complex and may cause shares of REIT stock owned beneficially or constructively by a group of related individuals and/or entities to be treated as owned beneficially or constructively by one individual or entity. As a result, the acquisition of less than 9.8%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of REIT common stock, or less than 9.8% in value of the outstanding shares of all classes and series of REIT stock (or the acquisition by an individual or entity of an interest in an entity that owns, beneficially or constructively, shares of REIT stock), could, nevertheless, cause that individual or entity, or another individual or entity, to own beneficially or constructively shares of REIT stock in excess of the ownership limits.

The REIT board of directors, in its sole discretion, may exempt, prospectively or retroactively, a particular shareholder from the ownership limits or establish a different limit on ownership (the “excepted holder limit”) if the REIT board of directors determines that:

 

    no individual’s beneficial or constructive ownership of REIT stock will result in the REIT being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise failing to qualify as a real estate investment trust under the Code; and

 

    such shareholder does not and will not own, actually or constructively, an interest in a tenant of the REIT (or a tenant of any entity owned or controlled by the REIT) that would cause the REIT to own, actually or constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant (or the REIT board of directors determines that revenue derived from such tenant will not affect the REIT’s ability to qualify as a real estate investment trust under the Code).

Any violation or attempted violation of any such representations or undertakings will result in such shareholder’s shares of REIT stock being automatically transferred to a charitable trust. As a condition of granting the waiver or establishing the excepted holder limit, the REIT board of directors may require an opinion of counsel or a ruling from the IRS, in either case in form and substance satisfactory to the REIT board of directors, in its sole discretion, in order to determine or ensure the REIT’s status as a real estate investment trust under the Code and such representations and undertakings from the person requesting the exception as the REIT board of directors may require in its sole discretion to make the determinations above. The REIT board of directors may impose such conditions or restrictions as it deems appropriate in connection with granting such a waiver or establishing an excepted holder limit.

In connection with granting a waiver of the ownership limits or creating an excepted holder limit or at any other time, the REIT board of directors may from time to time increase or decrease the common stock ownership limit, the aggregate stock ownership limit or both, for one or more persons, unless, after giving effect to such increase, five or fewer individuals could beneficially own, in the aggregate, more than 49.9% in value of the outstanding shares of REIT stock or the REIT would otherwise fail to qualify as a real estate investment trust under the Code. A reduced ownership limit will not apply to any person or entity whose percentage ownership of REIT common stock or REIT stock of all classes and series, as applicable, is, at the effective time of such reduction, in excess of such decreased ownership limit until such time as such person’s or entity’s percentage ownership of REIT common stock or REIT stock of all classes and series, as applicable, equals or falls below the decreased ownership limit, but any further acquisition of shares of REIT common stock or stock of all classes or series, as applicable, will violate the decreased ownership limit.

The REIT Charter further prohibits:

 

    any person from beneficially or constructively owning, applying certain attribution rules of the Code, shares of REIT stock that would result in the REIT being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause the REIT to fail to qualify as a real estate investment trust under the Code; and

 

    any person from transferring shares of REIT stock if the transfer would result in shares of REIT stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code).

 

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Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of REIT stock that will or may violate the ownership limits or any of the other restrictions on ownership and transfer of REIT stock described above, or who would have owned shares of REIT stock transferred to the trust as described below, must immediately give written notice to the REIT of such event or, in the case of an attempted or proposed transaction, give the REIT at least 15 days’ prior written notice and provide the REIT with such other information as the REIT may request in order to determine the effect of such transfer on the REIT’s status as a real estate investment trust under the Code.

If any transfer of shares of REIT stock would result in shares of REIT stock being beneficially owned by fewer than 100 persons, the transfer will be null and void and the intended transferee will acquire no rights in the shares. In addition, if any purported transfer of shares of REIT stock or any other event would otherwise result in any person violating the ownership limits or an excepted holder limit established by the REIT board of directors, or in the REIT being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise failing to qualify as a real estate investment trust under the Code, then that number of shares (rounded up to the nearest whole share) that would cause the violation will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected by the REIT, and the intended transferee or other prohibited owner will acquire no rights in the shares. The automatic transfer will be effective as of the close of business on the business day prior to the date of the violative transfer or other event that results in a transfer to the trust. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the applicable ownership limits or the REIT being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or the REIT otherwise failing to qualify as a real estate investment trust under the Code then the REIT Charter provides that the transfer of the shares will be null and void and the intended transferee will acquire no rights in such shares.

Shares of REIT stock held in the trust will be issued and outstanding shares. The prohibited owner will not benefit economically from ownership of any shares of REIT stock held in the trust and will have no rights to distributions and no rights to vote or other rights attributable to the shares of REIT stock held in the trust. The trustee of the trust will exercise all voting rights and receive all distributions with respect to shares held in the trust for the exclusive benefit of the charitable beneficiary of the trust. Any distribution made before the REIT discovers that the shares have been transferred to a trust as described above must be repaid by the recipient to the trustee upon demand by the REIT. Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee will have the authority to rescind as void any vote cast by a prohibited owner before the REIT’s discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary of the trust. However, if the REIT has already taken irreversible corporate action, then the trustee may not rescind and recast the vote.

Shares of REIT stock transferred to the trustee are deemed offered for sale to the REIT, or the REIT’s designee, at a price per share equal to the lesser of (i) the price paid by the prohibited owner for the shares (or, in the case of a devise or gift, the market price at the time of such devise or gift) and (ii) the market price on the date the REIT accepts, or the REIT’s designee, accepts such offer. The REIT may reduce the amount so payable to the trustee by the amount of any distribution that the REIT made to the prohibited owner before the REIT discovered that the shares had been automatically transferred to the trust and that are then owed by the prohibited owner to the trustee as described above, and the REIT may pay the amount of any such reduction to the trustee for distribution to the charitable beneficiary. The REIT has the right to accept such offer until the trustee has sold the shares of REIT stock held in the trust as discussed below. Upon a sale to the REIT, the interest of the charitable beneficiary in the shares sold terminates, and the trustee must distribute the net proceeds of the sale to the prohibited owner and must distribute any distributions held by the trustee with respect to such shares to the charitable beneficiary.

If the REIT does not buy the shares, the trustee must, within 20 days of receiving notice from the REIT of the transfer of shares to the trust, sell the shares to a person or entity designated by the trustee who could own the

 

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shares without violating the ownership limits or the other restrictions on ownership and transfer of REIT stock. After the sale of the shares, the interest of the charitable beneficiary in the shares transferred to the trust will terminate and the trustee must distribute to the prohibited owner an amount equal to the lesser of (i) the price paid by the prohibited owner for the shares (or, if the prohibited owner did not give value for the shares in connection with the event causing the shares to be held in the trust (for example, in the case of a gift, devise or other such transaction), the market price of the shares on the day of the event causing the shares to be held in the trust) and (ii) the sales proceeds (net of any commissions and other expenses of sale) received by the trust for the shares. The trustee may reduce the amount payable to the prohibited owner by the amount of any distribution that the REIT paid to the prohibited owner before the REIT discovered that the shares had been automatically transferred to the trust and that are then owed by the prohibited owner to the trustee as described above. Any net sales proceeds in excess of the amount payable to the prohibited owner must be paid immediately to the charitable beneficiary, together with any distributions thereon. In addition, if, prior to the discovery by the REIT that shares of stock have been transferred to a trust, such shares of stock are sold by a prohibited owner, then such shares will be deemed to have been sold on behalf of the trust and, to the extent that the prohibited owner received an amount for or in respect of such shares that exceeds the amount that such prohibited owner was entitled to receive, such excess amount will be paid to the trustee upon demand. The prohibited owner has no rights in the shares held by the trustee.

In addition, if the REIT board of directors determines that a transfer or other event has taken place that would violate the restrictions on ownership and transfer of REIT stock described above, the REIT board of directors may take such action as it deems advisable to refuse to give effect to or to prevent such transfer, including causing the REIT to redeem shares of REIT stock, refusing to give effect to the transfer on the REIT books or instituting proceedings to enjoin the transfer.

Every owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of REIT stock, within 30 days after the end of each taxable year, must give the REIT written notice stating the shareholder’s name and address, the number of shares of each class and series of REIT stock that the shareholder beneficially owns and a description of the manner in which the shares are held. Each such owner must provide to the REIT in writing such additional information as the REIT may request in order to determine the effect, if any, of the shareholder’s beneficial ownership on the REIT’s status as a real estate investment trust and to ensure compliance with the ownership limits. In addition, any person or entity that is a beneficial owner or constructive owner of shares of REIT stock and any person or entity (including the shareholder of record) who is holding shares of REIT stock for a beneficial owner or constructive owner must, on request, provide to the REIT such information as the REIT may request in order to determine the REIT’s status as a real estate investment trust and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance and to ensure compliance with the ownership limits.

These restrictions on ownership and transfer of REIT stock will not apply if the REIT board of directors determines that it is no longer in the REIT’s best interests to attempt to qualify, or to continue to qualify, as a real estate investment trust or that compliance is no longer required.

The restrictions on ownership and transfer of REIT stock described above could delay, defer or prevent a transaction or a change in control that might involve a premium price for REIT common stock or otherwise be in the best interests of the REIT’s shareholders.

Transfer Agent and Registrar

The transfer agent and registrar for REIT common stock will be Wells Fargo Shareowner Services, a division of Wells Fargo Bank, N.A., Mendota Heights, Minnesota.

 

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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE REIT CHARTER AND REIT BYLAWS

The following summary of certain provisions of Maryland law and the REIT Charter and REIT Bylaws does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and the REIT Charter and REIT Bylaws, copies of which are attached as Annex B-1 and Annex B-2, respectively, to this proxy statement/prospectus.

The REIT Board of Directors

The REIT board of directors will initially consist of thirteen directors. Immediately following the Merger, the REIT board of directors will consist of the same individuals who comprise the Forest City board of directors immediately prior to the Merger.

The REIT Charter provides that the number of REIT directors may only be increased or decreased pursuant to the REIT Bylaws. The REIT Bylaws provide that the number of REIT directors may be established, increased or decreased by the REIT board of directors but, unless the REIT Bylaws are amended, may not be fewer than eleven nor more than 15.

Election of Directors; Removals; Vacancies

Under the REIT Charter, subject to the rights, if any, of holders of any class or series of REIT preferred stock to elect or remove one or more additional directors, the holders of REIT Class A common stock voting as a separate class are entitled to elect 25% of the entire REIT board of directors immediately after such election rounded up to the nearest whole number of directors and holders of REIT Class B common stock voting as a separate class are entitled to elect the remaining directors up for election in any year in which directors are to be elected by the REIT shareholders; provided, however, if on the close of business on the record date for any shareholders meeting at which REIT directors are to be elected, (i) the total number of issued and outstanding shares of REIT Class A common stock is less than 10% of the aggregate number of issued and outstanding shares of REIT Class A common stock and REIT Class B common stock, then all the directors to be elected at such meeting will be elected by the holders of REIT Class A common stock and REIT Class B common stock voting together as a single class, or (ii) the total number of outstanding shares of REIT Class B common stock is less than 500,000 shares, then the holders of REIT Class A common Stock will continue to have the right, voting as a separate class, to elect 25% of the entire REIT board of directors immediately after such election rounded up to the nearest whole number of directors and the right to vote together with the holders of the REIT Class B common stock to elect the remaining members of the board of directors up for election in any year in which directors are to be elected by the REIT shareholders, provided further that, in each instance, subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, each share of REIT Class A common stock will entitle the holder thereof to one vote and each share of REIT Class B common stock will entitle the holder thereof to ten votes.

The REIT Class A directors will be elected by a plurality of the votes cast by the holders of REIT Class A common stock in the election of directors and the REIT Class B directors will be elected by a plurality of the votes cast by the holders of REIT Class B common stock in the election of directors; provided, however, in the event that the holders of REIT Class A common stock and REIT Class B common stock vote together as a class to elect one or more REIT directors, such directors will be elected by a plurality of all the votes cast in the election of directors by the holders of REIT Class A common stock and REIT Class B common stock vote together as a class. Each REIT director will be elected by the REIT shareholders as set forth above to serve until the next annual meeting of shareholders and until his or her successor is duly elected and qualifies. There will be no cumulative voting in the election of REIT directors. Consequently, when voting as separate classes, the holders of a majority of the outstanding shares of REIT Class A common stock will be able to elect all of the REIT Class A directors then standing for election, the holders of a majority of the outstanding shares of REIT Class B common stock will be able to elect all of the REIT Class B directors then standing for election, and the holders of the remaining shares of REIT common stock will not be able to elect any directors.

 

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The REIT Bylaws provide that a majority of the directors elected by the holders of REIT Class A common stock may fill any REIT Class A director vacancy, and a majority of the directors elected by the holders of REIT Class B common stock may fill any REIT Class B director vacancy, in each instance, that is created by an increase in the number of directors or by any other cause, even if the number of REIT Class A directors or number of REIT Class B directors is less than a quorum of the REIT board of directors. Any individual elected to fill a vacancy as a director will serve until the next annual meeting of shareholders and until his or her successor is duly elected and qualifies.

The REIT Charter provides that, subject to the rights of holders of shares of one or more classes or series of REIT preferred stock to elect or remove one or more directors, (a) any REIT Class A director may be removed as a director at any time (i) for cause (as defined in the REIT Charter) by the affirmative vote of holders of shares of REIT Class A common stock entitled to cast a majority of all the votes entitled to be cast generally in the election of Class A directors or, (ii) without cause, by the affirmative vote of holders of shares of REIT Class A common stock entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of REIT Class A directors, and (b) any REIT Class B director may be removed as a director at any time by the affirmative vote of holders of shares of REIT Class B common stock entitled to cast a majority of the votes entitled to be cast generally in the election of REIT Class B directors, with or without cause. The REIT Charter further provides that notwithstanding an election by the REIT to be subject to the provisions of Subtitle 8 (as discussed below) relating to a classified board and a two-thirds vote requirement for removing directors, a REIT director may only be removed in accordance with the standards set forth in the REIT Charter (as described above).

Business Combinations

Under the MGCL, certain “business combinations” (including a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any interested shareholder, or an affiliate of such an interested shareholder, are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. Maryland law defines an interested shareholder as:

 

    any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or

 

    an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation.

A person is not an interested shareholder if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. In approving a transaction, however, the board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by it.

After such five-year period, any such business combination must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

 

    80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

    two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested shareholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested shareholder.

These supermajority approval requirements do not apply if, among other conditions, the corporation’s common shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares.

 

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These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a Maryland corporation’s board of directors prior to the time that the interested shareholder becomes an interested shareholder. Pursuant to the statute, the REIT intends to elect, by resolution of the REIT board of directors, to exempt from the Maryland Business Combination Act all business combinations between the REIT and any other person, provided that such business combination is first approved by the REIT board of directors (including a majority of directors who are not affiliates or associates of such person). As a result, any person described above may be able to enter into business combinations with the REIT that may not be in the best interests of the REIT’s shareholders, without compliance by the REIT with the supermajority vote requirements and other provisions of the statute.

The REIT cannot assure you that the REIT board of directors will not opt to be subject to such business combination provisions in the future. However, an alteration or repeal of this resolution will not have any effect on any business combinations that have been consummated or upon any agreements existing at the time of such modification or repeal.

Control Share Acquisitions

The MGCL provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, excluding shares of stock of the corporation in respect of which any of the following persons is entitled to exercise or direct the exercise of the voting power of such shares in the election of directors: (i) a person who has made or proposes to make the control share acquisition; (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock owned by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (A) one-tenth or more but less than one-third; (B) one-third or more but less than a majority or (C) a majority or more of all voting power. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making an “acquiring person statement” as described in the MGCL), may compel the corporation’s board of directors to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any shareholders meeting.

If voting rights are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem for fair value any or all of the control shares (except those for which voting rights have previously been approved). Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or, if a meeting of shareholders is held at which the voting rights of such shares are considered and not approved, as of the date of the meeting. If voting rights for control shares are approved at a shareholders meeting and the acquirer becomes entitled to exercise or direct the exercise of a majority of all voting power, all other shareholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.

The control share acquisition statute does not apply to (i) shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction or (ii) acquisitions approved or exempted by the charter or bylaws of the corporation.

 

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As permitted by the MGCL, the REIT Bylaws contain a provision opting out of the Maryland Control Share Acquisition Act. This provision may be amended or eliminated at any time in the future by the REIT board of directors.

Subtitle 8

Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions of the MGCL which provide, respectively, for:

 

    a classified board;

 

    a two-thirds vote requirement for removing a director;

 

    a requirement that the number of directors be fixed only by vote of the board of directors;

 

    a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred; or

 

    a majority requirement for the calling of a special meeting of shareholders.

The REIT has not elected to be subject to any of the provisions of Subtitle 8. Through provisions in the REIT Charter and REIT Bylaws unrelated to Subtitle 8, the REIT already will require, unless called by its chairman, chief executive officer, president or board of directors, the written request of shareholders entitled to cast a majority of all votes entitled to be cast at such a meeting on such matter to call a special meeting on any matter.

Approval of Extraordinary Actions; Amendments to the REIT Charter and REIT Bylaws

Under the MGCL, a Maryland corporation generally may not dissolve, merge or consolidate with, or convert to, another entity, sell all or substantially all of its assets or engage in a statutory share exchange unless the action is declared advisable by the board of directors and approved by the affirmative vote of shareholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter, unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is specified in the corporation’s charter. The REIT Charter provides that these actions must be approved by a majority of all of the votes entitled to be cast on the matter.

The REIT Charter generally may be amended only if such amendment is declared advisable by the REIT board of directors and approved by the affirmative vote of shareholders entitled to cast a majority of the votes entitled to be cast on the matter, except that amendments to the provisions of the REIT Charter related to the removal of directors or to the vote required to amend such provisions may be amended only with the approval of shareholders entitled to cast at least two-thirds of all of the votes entitled to be cast on the matter.

In addition, the holders of shares of REIT Class A common stock and REIT Class B common stock, voting as separate classes, have the right to approve, by the affirmative vote of the holders of a majority of the outstanding shares of the affected class, any merger or consolidation of the REIT with or into another entity or amendment to the REIT Charter or REIT Bylaws that would adversely alter the rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class.

The REIT Charter and REIT Bylaws provide that except for amendments (i) that would adversely alter the rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class, which amendments must be approved by the holders of a majority of the outstanding shares of the affected class, voting as a separate class to the exclusion of any other unaffected class of stock, or (ii) relating to the minimum number of directors on the REIT board of directors and the vote required to amend such provisions, which amendments must be approved by the affirmative vote of at least two-thirds of the votes cast

 

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on the matter by the holders of REIT Class A common stock and REIT Class B common stock, voting together as a single class, the REIT board of directors has the exclusive power to adopt, alter or repeal any provision of the REIT Bylaws and to make new bylaws.

Meetings of Shareholders

Under the REIT Bylaws, annual meetings of shareholders will be held each year at a date and time determined by the REIT board of directors. Special meetings of shareholders may be called only by the REIT’s chairman, chief executive officer, president or the REIT board of directors. Additionally, the REIT Bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the shareholders requesting the meeting, a special meeting of shareholders to act on any matter that may properly be considered at a meeting of shareholders must also be called by the REIT’s secretary upon the written request of the shareholders entitled to cast not less than a majority of all the votes entitled to be cast on such matter at the meeting. Only matters set forth in the notice of the special meeting may be considered and acted upon at such a meeting.

Advance Notice of Director Nominations and New Business

The REIT Bylaws provide that nominations of individuals for election as directors and proposals of business to be considered by shareholders at any annual meeting may be made only (1) pursuant to the REIT’s notice of the meeting, (2) by or at the direction of the REIT board of directors or (3) by any shareholder who was a shareholder of record at the record date set by the REIT board for the purpose of determining shareholders entitled to vote at the meeting, at the time of giving the notice required by the REIT Bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of each of the individuals so nominated or on such other proposed business and who has complied with the advance notice procedures of the REIT Bylaws. Shareholders generally must provide notice to the REIT’s secretary not earlier than the 150th day or later than the close of business on the 120th day before the first anniversary of the date that the REIT’s proxy statement is released to the shareholders for the preceding year’s annual meeting of shareholders.

Only the business specified in the notice of the meeting may be brought before a special meeting of shareholders. Nominations of individuals for election as directors at a special meeting of shareholders may be made only (1) by or at the direction of the REIT board of directors, (2) by a shareholder that has requested that a special meeting be called for the purpose of electing directors in compliance with the REIT Bylaws and that has supplied the information required by the REIT Bylaws about each individual whom the shareholder proposes to nominate for election of directors or (3) if the special meeting has been called in accordance with the REIT Bylaws for the purpose of electing directors, by any shareholder who was a shareholder of record at the record date set by the REIT board for purposes of determining shareholders entitled to vote at the meeting, at the time of giving the notice required by the REIT Bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice procedures of the REIT Bylaws. Shareholders generally must provide notice to the REIT’s secretary not earlier than the 120th day before such special meeting or later than the later of the close of business on the 90th day before the special meeting or the tenth day after the first public announcement of the date of the special meeting and the nominees proposed by the REIT’s board of directors to be elected at the meeting.

A shareholder’s notice must contain certain information specified by the REIT Bylaws about the shareholder, its affiliates and any proposed business or nominee for election as a directors, including information about the economic interest of the shareholder, its affiliates and any proposed nominee in the REIT.

Exclusive Forum

The REIT Bylaws provide that, unless the REIT board of directors agrees otherwise, (a) any derivative action or proceeding, (b) any action asserting a claim of breach of any duty owed by any of the REIT’s directors, officers or other employees to the REIT or to the REIT’s shareholders, (c) any action asserting a claim against the REIT

 

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or any of the REIT’s directors, officers or other employees pursuant to the MGCL, the REIT Charter or the REIT Bylaws and (d) claims governed by the internal affairs doctrine must be brought in the Circuit Court for Baltimore City, Maryland (or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division).

Limitations of Liability and Indemnification of Directors and Officers

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. The REIT Charter contains such a provision that eliminates such liability to the maximum extent permitted by Maryland law.

The MGCL requires a Maryland corporation (unless the charter provides otherwise, which the REIT Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:

 

    the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;

 

    the director or officer actually received an improper personal benefit in money, property or services; or

 

    in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

A corporation may not indemnify a director or officer in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by or on behalf of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon receipt of:

 

    a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and

 

    a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct.

The REIT Charter authorizes the REIT to obligate the REIT, and the REIT Bylaws obligate the REIT, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:

 

    any present or former director or officer of the REIT who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity; or

 

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    any individual who, while a director or officer of the REIT and at the REIT’s request, serves or has served as a director, officer, trustee, member, manager, managing or partner of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity.

The REIT Charter and REIT Bylaws also permit the REIT to indemnify and advance expenses to any person who served a predecessor of the REIT in any of the capacities described above and any employee or agent of the REIT or a predecessor of the REIT.

The REIT intends to enter into customary indemnification agreements with the REIT’s directors and executive officers that will require the REIT, among other things, to indemnify the REIT’s directors and executive officers against certain liabilities that may arise by reason of their status as directors or officers to the maximum extent permitted by Maryland law and provide for the advancement of expenses in connection therewith.

At the Effective Time, the REIT intends to maintain directors’ and officers’ liability insurance which will indemnify the REIT’s directors and officers against damages arising out of certain kinds of claims which might be made against them based on acts and things done (or not done) by them while acting in their capacity as directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act may be provided to directors, officers or persons controlling the REIT pursuant to the foregoing provisions, in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Restrictions on Ownership and Transfer of the REIT’s Stock

Except with regard to persons exempted by the REIT board of directors from the ownership and transfer restrictions of the REIT Charter, no person may beneficially or constructively own more than 9.8% (in value or number of shares, whichever is more restrictive) of the outstanding REIT common stock or more than 9.8% (in value) of all classes or series of REIT stock. See “Description of REIT Stock—Restrictions on Ownership and Transfer”.

REIT Qualification

The REIT Charter provides that the REIT board of directors may revoke or otherwise terminate the REIT’s real estate investment trust election under the Code, without approval of the REIT’s shareholders, if it determines that it is no longer in the REIT’s best interests to continue to be qualified as a real estate investment trust election under the Code.

 

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COMPARISON OF RIGHTS OF SHAREHOLDERS OF FOREST CITY AND THE REIT

The following is a summary comparison of material differences between the rights of Forest City shareholders under the ORC and the Forest City articles and regulations, on the one hand, and the rights of REIT shareholders under the MGCL and the REIT Charter and REIT Bylaws, on the other hand. The summary set forth below is not intended to be an exhaustive discussion of the foregoing and may not contain all the information that is important to you. In addition, the summary is qualified in its entirety by reference to the full text of the ORC, the Forest City articles and regulations, the MGCL and the REIT Charter and REIT Bylaws. We encourage you to carefully read the Forest City articles and regulations and the REIT Charter and REIT Bylaws in their entirety. For information on how to obtain the Forest City articles and regulations, see “Additional Information”. A copy of the proposed amendment to the Forest City articles can be found in the section of this proxy statement/prospectus entitled “Proposal to Amend the Forest City Articles of Incorporation” beginning on page [•]and a copy of the forms of the REIT Charter and REIT Bylaws are attached as Annex B-1 and Annex B-2, respectively, to this proxy statement/prospectus.

GENERAL

As a holder of Forest City Common Stock, your rights are governed by the ORC and the Forest City articles and regulations. If the Merger is completed, shareholders of Forest City will become shareholders of the REIT and your rights as a holder of shares of REIT common stock will be governed by the MGCL and the REIT Charter and REIT Bylaws. There are several differences between Ohio and Maryland law, as well as between the organizational documents of Forest City and the REIT.

The REIT Charter and REIT Bylaws may contain provisions that could have the effect of delaying, deferring or preventing a transaction or a change in control of the REIT by means of a tender offer, proxy contest or otherwise that might involve a premium price for holders of shares of REIT common stock or otherwise be in the best interests of REIT shareholders. See “Comparison of Rights of Shareholders of Forest City and the REIT—Certain Takeover Defense Provisions of Maryland Law and the REIT Charter and REIT Bylaws”.

 

Forest City

  

The REIT

Corporate Structure
Forest City is an Ohio corporation that is taxed as a C corporation for U.S. federal income tax purposes. The rights of Forest City shareholders are governed by the ORC and the Forest City organizational documents.    The REIT is a Maryland corporation that will be organized in a manner designed to enable it to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. The rights of REIT shareholders are governed by the MGCL and the REIT Charter and REIT Bylaws.
Standard of Conduct
The ORC requires that a director perform his or her duties in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A violation of this standard of conduct in any action brought against a director must be proved by clear and convincing evidence.    The MGCL requires that a director perform his or her duties in good faith, in a manner the director reasonably believes to be in the best interests of the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, under the MGCL, any act of a director of a corporation is presumed to satisfy this standard of conduct, and any act of a director relating to or affecting an acquisition or a

 

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Forest City

  

The REIT

   potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.
Authorized Capital
The Forest City articles authorize Forest City to issue up to 447,000,000 shares of capital stock consisting of 371,000,000 shares of Class A Common Stock, par value $.33 13 per share, 56,000,000 shares of Class B Common Stock, par value $.33 13 per share, and 20,000,000 shares of undesignated preferred stock, without par value. As of [●], 2015, [●] shares of Forest City Class A Common Stock were issued and outstanding, and [●] shares of Forest City Class B Common Stock were issued and outstanding. As of the same date, there were no shares of Forest City preferred stock outstanding.    The REIT Charter authorizes the REIT to issue up to 447,000,000 shares of stock, consisting of 371,000,000 shares of Class A common stock, par value $0.01 per share, 56,000,000 shares of Class B common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value $0.01 per share.
Classification and Issuance of Stock
The ORC provides that a corporation’s board of directors may, without shareholder approval, authorize the issuance of shares of capital stock, and may determine the time when, the terms under which and the consideration for which the corporation may issue the shares. In addition, the Forest City articles authorize the Forest City board of directors to issue shares of preferred stock in one or more series and to adopt amendments to the Forest City articles, without shareholder approval, to fix or change the express terms of the preferred shares, including the series, designation and the authorized number of shares, the voting rights, the terms and rates of any dividend and distribution rights, the liquidation price, the redemption rights and prices, sinking fund requirements, conversion rights, and restrictions on the issuance of shares of the same series or any other series.    As permitted under the MGCL, the REIT Charter authorizes the REIT board of directors, without shareholder approval, to classify and reclassify any unissued shares of REIT stock into other classes or series of stock and authorizes the REIT to issue the newly classified shares. Prior to the issuance of shares of each new class or series, the REIT board of directors is required by Maryland law and by the REIT Charter to set, subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series.
Amendment of Articles or Charter
Under the ORC, amendments to the Forest City articles require the affirmative vote of the holders of at least a majority of the outstanding shares of Forest City capital stock entitled to vote thereon, considered for these purposes as one class. Pursuant to the Forest City articles, any amendment to the Forest City articles which would adversely alter the relative rights, preferences, privileges or restrictions granted or imposed with respect to the shares of a class must be approved by the affirmative vote of at least two-thirds of the outstanding shares of the affected class. The Forest    Under the MGCL, a Maryland corporation generally may not amend its charter unless declared advisable by its board of directors and approved by the affirmative vote of shareholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter, unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is specified in the corporation’s charter. The REIT Charter provides that amendments (other than amendments to the provisions of the REIT Charter related to the removal of directors, or to the vote

 

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Forest City

  

The REIT

City articles also permit the Forest City board of directors to amend the articles without shareholder approval to fix or change the terms of any unissued or treasury shares of preferred stock or to the extent permitted under the ORC.   

required to amend such provisions, which must be approved by at least two-thirds of the votes entitled to be cast on the amendment) generally may be approved by a majority of all of the votes entitled to be cast on the matter.

 

In addition, the holders of shares of REIT Class A common stock and REIT Class B common stock, voting as separate classes, must approve, by the affirmative vote of the holders of a majority of the outstanding shares of the affected class, any amendment to the REIT Charter that would adversely alter the rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class.

 

Under the MGCL, a Maryland corporation may also provide in its charter that the board of directors, with the approval of a majority of the entire board, and without action by the shareholders, may amend the charter to increase or decrease the aggregate number of shares of stock that the corporation is authorized to issue or the number of shares of stock of any class or series that the corporation is authorized to issue. The REIT Charter provides the REIT board of directors with such power.

Amendment of Regulations or Bylaws
The Forest City regulations provide that the regulations may be amended, or new regulations adopted, (i) at any shareholder meeting called for that purpose by the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of Forest City entitled to vote thereon, voting as a single class, (ii) without a shareholder meeting, by the written consent of at least two-thirds of the outstanding shares of capital stock of Forest City entitled to vote thereon, voting as a single class, or (iii) by the Forest City board of directors, to the extent permitted by the ORC. Any amendment to the Forest City regulations which would adversely alter the relative rights, preferences, privileges or restrictions granted or imposed with respect to the shares of a class of Forest City stock must be approved by the affirmative vote of at least two-thirds of the outstanding shares of the affected class.    As permitted by the MGCL, the REIT Charter and REIT Bylaws provide that the REIT board of directors has the exclusive power to adopt, alter or repeal any provision of the REIT Bylaws and to make new bylaws, except for amendments (i) that would adversely alter the rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class, which amendments must be approved by the holders of a majority of the outstanding shares of the affected class, voting as a separate class to the exclusion of any other unaffected class of stock, and (ii) relating to the minimum number of directors on the REIT board of directors and the vote required to amend such provisions, which amendments must be approved by the affirmative vote of at least two-thirds of the votes cast on the matter by the holders of REIT Class A common stock and REIT Class B common stock, voting together as a single class.

 

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Forest City

  

The REIT

Right to Call Special Shareholder Meetings
The Forest City regulations provide that special meetings of shareholders may be called by order of the board of directors or the Corporate Secretary of Forest City if a request in writing for such a meeting is delivered to the Corporate Secretary signed by the holders of record of not less than 25% of the shares of Forest City outstanding capital stock that is entitled to vote. The Forest City board of directors may reschedule any previously scheduled annual or special meeting of the shareholders.    The REIT’s chairman, chief executive officer, president or the REIT board of directors may call special meetings of shareholders. Additionally, the REIT Bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the shareholders requesting the meeting, a special meeting of shareholders to act on any matter that may properly be considered at a meeting of shareholders must also be called by the REIT’s secretary upon the written request of the shareholders entitled to cast not less than a majority of all the votes entitled to be cast on such matter at the meeting.
Extraordinary Actions
The Forest City articles provide that, notwithstanding any provision of the ORC requiring for any purpose the affirmative vote of shareholders entitled to exercise two-thirds or any other proportion of the voting power of Forest City or of any class or classes of shares thereof, the affirmative vote of a majority of all of the votes entitled to be cast on a matter are required to approve such matter, except for certain actions which would adversely alter the relative rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class, which must also be approved by the holders of at least two-thirds of the outstanding shares of the affected class.    Under the MGCL, a Maryland corporation generally may not dissolve, merge or consolidate with, or convert to, another entity, sell all or substantially all of its assets or engage in a statutory share exchange unless the action is declared advisable by the board of directors and approved by the affirmative vote of shareholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter, unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is specified in the corporation’s charter. The REIT Charter provides that these actions must be approved by a majority of all of the votes entitled to be cast on the matter except for certain transactions that would adversely alter the rights, preferences, privileges or restrictions granted or imposed with respect to the particular class relative to the shares of any other class, which must also be approved by the holders of shares entitled to cast a majority of the outstanding votes of the affected class, voting as a separate class to the exclusion of any other unaffected class of stock.
Shareholder Action by Consent
Under the ORC, unless prohibited by Forest City’s organizational documents, any action that may be authorized or taken at a meeting of the shareholders may be authorized or taken without a meeting by the affirmative vote or approval of, and in a writing or writings signed by, all of the shareholders who would be entitled to notice of a meeting of the shareholders held for such purpose. The Forest City organizational documents do not expressly prohibit shareholders from taking any action without a meeting.    Under the MGCL, holders of common stock may take action only at an annual or special meeting of shareholders or by unanimous consent in lieu of a meeting unless the charter provides for a lesser percentage. The REIT Charter will permit shareholder action by consent in lieu of a meeting to the extent permitted by the REIT Bylaws. The REIT Bylaws will provide that, if the action is advised and submitted to the shareholders for approval by the REIT board, shareholder action may be taken without

 

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Forest City

  

The REIT

   a meeting if a consent, setting forth the action so taken, is given in writing or by electronic transmission by shareholders entitled to cast not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting of shareholders.
Number of Directors
The authorized number of the members of Forest City’s board of directors is currently set at thirteen directors, but may be increased at any time by Forest City’s shareholders at any meeting of shareholders called to elect directors at which a quorum is present, by the affirmative vote of the holders of shares representing a majority of the voting power of Forest City Common Stock. The Forest City regulations also authorize the board of directors to change the number of directors to a number not to be less than three or more than sixteen directors by resolution adopted by the board of directors at a meeting at which a quorum is present.    The REIT Charter provides that the number of REIT directors may only be increased or decreased pursuant to the REIT Bylaws. The REIT Bylaws provide that the number of REIT directors may be established, increased or decreased by the REIT board of directors but, unless the REIT Bylaws are amended, may not be fewer than eleven nor more than 15.
Election of Directors
Under the Forest City articles, the holders of Forest City Class A Common Stock voting as a separate class are entitled to elect 25% of the authorized number of members of the Forest City board of directors rounded up to the nearest whole number and holders of Forest City Class B Common Stock voting as a separate class are entitled to elect the remaining Forest City directors elected in any year; provided, however, that if on the record date for any shareholder meeting at which directors of Forest City are to be elected, (i) the total number of issued and outstanding shares of Forest City Class A Common Stock (exclusive of treasury shares) is less than 10% of the aggregate number of issued and outstanding shares of Forest City Class A Common Stock and Forest City Class B Common Stock (exclusive of treasury shares), then all the directors of Forest City to be elected at such meeting will be elected by the holders of Forest City Common Stock voting together as a single class, or (ii) the total number of outstanding shares of Forest City Class B Common Stock is less than 500,000 shares, then the holders of Forest City Class A Common Stock will continue to have the right to elect 25% of the board of directors rounded up to the nearest whole number and the right to vote together with the holders of the Forest City Class B Common Stock to elect the remaining members of the Forest City board of directors; provided further that, in each instance, each share of Forest City Class A    Under the REIT Charter, subject to the rights, if any, of holders of any class or series of REIT preferred stock to elect or remove one or more additional directors, the holders of REIT Class A common stock voting as a separate class are entitled to elect 25% of the entire REIT board of directors immediately after such election rounded up to the nearest whole number of directors and holders of REIT Class B common stock voting as a separate class are entitled to elect the remaining directors up for election in any year in which directors are to be elected by the REIT shareholders; provided, however, if on the close of business on the record date for any shareholders meeting at which REIT directors are to be elected, (i) the total number of issued and outstanding shares of REIT Class A common stock is less than 10% of the aggregate number of issued and outstanding shares of REIT Class A common stock and REIT Class B common stock, then all the directors to be elected at such meeting shall be elected by the holders of REIT Class A common stock and REIT Class B common stock voting together as a single class, or (ii) the total number of outstanding shares of REIT Class B common stock is less than 500,000 shares, then the holders of REIT Class A Common Stock will continue to have the right, voting as a separate class, to elect 25% of the entire REIT board of directors immediately after such election rounded up to the

 

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Common Stock will have one vote and each share of Forest City Class B Common Stock will have ten votes.

 

In addition, the ORC permits cumulative voting for the election of directors. To invoke cumulative voting, notice in writing must be given by any Forest City shareholder entitled to vote in the election of directors to the President, a Vice President or the Corporate Secretary of Forest City not less than 48 hours before the time fixed for the meeting that the Forest City shareholder desires cumulative voting with respect to the election of directors by a class of shareholders to which such shareholder belongs, and if an announcement of the giving of the notice is made upon the convening of the meeting by the Chairman or Corporate Secretary or by or on behalf of the shareholder giving the notice. If cumulative voting is in effect for a class, each holder of shares of that class will have the right to accumulate the voting power that such shareholder possesses at the election with respect to shares of that class. This means that each holder of shares of Forest City Class A Common Stock or Forest City Class B Common Stock, as the case may be, will have as many votes as equal the number of shares of that class of Forest City Common Stock owned by the holder multiplied by the number of directors to be elected by the holders of that class of Forest City Common Stock. These votes may be distributed among the total number of directors to be elected by the holders of that class of Forest City Common Stock or distributed among any lesser number, in the proportion as the holder may desire.

  

nearest whole number of directors and the right to vote together with the holders of the REIT Class B common stock to elect the remaining members of the board of directors up for election in any year in which directors are to be elected by the REIT shareholders, provided further that, in each instance, subject to the provisions of the REIT Charter regarding the restrictions on ownership and transfer of REIT stock, each share of REIT Class A common stock will entitle the holder thereof to one vote and each share of REIT Class B common stock will entitle the holder thereof to ten votes.

 

Under the MGCL, unless the charter or bylaws of a corporation provide otherwise, a plurality of all the votes cast at a meeting of shareholders at which a quorum is present is sufficient to elect a director. The REIT Class A directors will be elected by a plurality of the votes cast by holders of REIT Class A common stock in the election of directors and the REIT Class B directors will be elected by a plurality of the votes cast by holders of REIT Class B common stock in the election of directors; provided, however, in the event that the holders of REIT Class A common stock and REIT Class B common stock vote together as a class to elect one of more REIT directors, such directors will be elected by a plurality of all the votes cast in the election of directors by the holders of REIT Class A common stock and REIT Class B common stock voting together as a single class. Holders of REIT common stock will have no right to cumulative voting in the election of directors. Consequently, when voting as separate classes, the holders of a majority of the outstanding shares of REIT Class A common stock will be able to elect all of the REIT Class A directors then standing for election, the holders of a majority of the outstanding shares of REIT Class B common stock will be able to elect all of the REIT Class B directors then standing for election, and the holders of the remaining shares of REIT common stock will not be able to elect any directors.

 

Each REIT director will be elected by the REIT shareholders to serve until the next annual meeting of shareholders and until his or her successor is duly elected and qualifies.

 

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Quorum at Shareholders Meetings
The Forest City regulations provide that the holders of record of a majority of the issued and outstanding voting shares of Forest City, present in person or by proxy, constitutes a quorum for a meeting of Forest City shareholders.    The REIT Bylaws provide that at any meeting of shareholders, the presence in person or by proxy of shareholders entitled to cast a majority of all the votes entitled to be cast at such meeting on any matter constitutes a quorum.
Inspection Rights
Under the ORC, all shareholders of Forest City, upon written demand to Forest City stating the specific purpose thereof, have the right to examine, for any reasonable and proper purpose, the Forest City articles, the Forest City regulations, books and records of account, minutes and records of shareholders, and voting trust agreements of Forest City that are on file with Forest City, and to make copies or extracts thereof. In addition, upon the request of any shareholder at any meeting of shareholders, Forest City must produce to the requesting shareholder an alphabetically arranged list, or classified list, of the shareholders of record as of the applicable record date, with the shareholders entitled to vote, their respective addresses and the number and class of shares held by each.    Under the MGCL, any shareholder or his or her agent upon written request may inspect and copy the following corporate documents: (1) the bylaws; (2) minutes of the proceedings of shareholders; (3) the corporation’s annual statement of affairs; (4) any voting trust agreements deposited with the corporation and (5) a statement showing all stock and securities issued by the corporation during a specified period of not more than 12 months before the date of the request. In addition, one or more persons who together are and for at least six months have been shareholders of record of at least 5% of the outstanding stock of any class of stock of a Maryland corporation may inspect and copy the corporation’s books of account and stock ledger and may present a written request for a statement of the corporation’s affairs.
Appraisal Rights
Under the ORC, dissenting shareholders are entitled to appraisal rights in connection with certain amendments to a corporation’s articles of incorporation and the lease, sale, exchange, transfer or other disposition of all or substantially all of the assets of a corporation. In addition, the following shareholders of Ohio corporations are entitled to appraisal rights: (i) shareholders of a corporation being merged, consolidated or converted into a surviving or new entity, (ii) shareholders of a corporation that survives a merger who are entitled to vote on the adoption of an agreement of merger, (iii) shareholders of the acquiring corporation in a combination or a majority share acquisition who are entitled to vote on the adoption of the transaction and (iv) shareholders of a subsidiary corporation (at least 90%-owned by its parent corporation) into which the parent corporation is merged. Such appraisal rights, however, are not available to (A) shareholders of a surviving corporation merging into a domestic corporation or shareholders of an acquiring corporation in the case of a combination or majority share   

Under Title 3, Section 2 of the MGCL, a holder of shares of stock of a corporation has the right to demand and receive payment of the fair value of the shareholder’s stock from the successor if (i) the corporation consolidates or merges with another corporation, (ii) the corporation’s stock is to be acquired in a statutory share exchange, (iii) the corporation transfers all or substantially all of its assets in a manner requiring shareholder approval, (iv) the corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the shareholder’s rights, unless the right to do so is reserved in the corporation’s charter, (v) the transaction is subject to certain provisions of the Maryland Business Combination Act or (vi) the corporation is converted in accordance with the MGCL.

 

Maryland law provides that a shareholder may not demand the fair value of the shareholder’s stock and

 

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acquisition, if the shares are listed on a national security exchange both as of the day immediately preceding the date of the vote on the proposal and immediately following the effective time of the merger and there are no proceedings pending to delist the shares from the national securities exchange as of the effective time of the transaction, or (B) shareholders in the case of a merger or consolidation into a surviving or new entity or shareholders of a domestic corporation being converted into another entity, if the shares were listed on a national exchange on the day immediately pending the date of the vote on such transaction and the consideration for the transaction is shares (or cash and shares) listed on a national security exchange immediately following the effective time of the transaction and no proceedings are pending to delist the shares from the national securities exchange as of the effective time of the transaction.   

is bound by the terms of the transaction if, among other things, (A) the stock is listed on a national securities exchange on the record date for determining shareholders entitled to vote on the matter or, in certain mergers, the date notice is given or waived (except certain mergers where stock held by directors and executive officers is exchanged for merger consideration not available generally to shareholders), (B) the stock is that of the successor in the merger, unless either (1) the merger alters the contract rights of the stock as expressly set forth in the charter and the charter does not reserve the right to do so or (2) the stock is to be changed or converted in whole or in part in the merger into something other than either stock in the successor or cash, scrip or other rights or interests arising out of provisions for the treatment of fractional shares of stock in the successor, (C) the stock is not entitled to vote on the transaction or (D) the charter provides that the holders of the stock are not entitled to exercise the rights of an objecting shareholder.

 

The REIT Charter provides that holders of REIT stock or any other security of the REIT will not be entitled to exercise any rights of an objecting shareholder provided for under Title 3, Section 2 of the MGCL unless the REIT’s board of directors determines that such rights apply, with respect to all or any classes or series of REIT stock, to one or more transactions in connection with which holders of such shares would otherwise be entitled to exercise such rights and occurring after the date of such determination by the REIT’s board of directors.

Dividends and Other Distributions
Under the ORC, the board of directors of a corporation may declare dividends and distributions on outstanding shares of the corporation. A dividend or distribution may be paid in cash, property or authorized but unissued shares or treasury shares. Dividends may not be paid in violation of another class of shares’ rights. The ORC provides that dividends shall not exceed the combination of the surplus of the corporation and the difference between (i) the reduction in surplus that results from the immediate recognition of the transaction obligation under statement of financial accounting standards no. 106 (“SFAS no. 106”) and (ii) the aggregate amount of the transition obligation that would have been recognized as of the date of the declaration of a dividend or distribution if the corporation had elected to amortize its recognition of the transition obligation under SFAS no. 106.    Under the MGCL, no dividend or distribution may be made if, after giving effect to the dividend or other distribution: (i) the corporation would not be able to pay its debts as they become due in the usual course of business or (ii) the corporation’s total assets would be less than the sum of its total liabilities plus, unless the charter permits otherwise, any amount required to be paid to holders of preferred stock in the event of a liquidation of the corporation. Notwithstanding clause (ii) in the immediately preceding sentence, a corporation may make a dividend or other distribution from: (a) the net earnings of the corporation for the fiscal year in which the dividend or other distribution is made; (b) the net earnings of the corporation for the preceding fiscal year or (c) the sum of the net earnings of the corporation for the preceding eight fiscal quarters.

 

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The Forest City articles provide that Forest City’s Class A Common Stock and Forest City Class B Common Stock participate equally on a share-for-share basis in any and all cash and non-cash dividends paid, other than as described below. No cash dividend can be paid on a class of shares of Forest City Common Stock until provision is made for payment of a dividend of at least an equal amount on a share-for-share basis on the other class of shares of Forest City Common Stock. If Forest City’s board of directors determines to declare any stock dividend with respect to either class of shares of Forest City Common Stock, it must at the same time declare a proportionate stock dividend with respect to the other class of shares of Forest City Common Stock. If the shares of either class of Forest City Common Stock are combined or subdivided, the shares of the other class of Forest City Common Stock must be combined or subdivided in an equivalent manner. In the discretion of the Forest City board of directors, dividends payable in shares of Forest City Class A Common Stock may be paid with respect to shares of either class of Forest City Common Stock, but dividends payable in shares of Forest City Class B Common Stock may be paid only with respect to shares of Forest City Class B Common Stock.

  

 

The REIT Charter provides that if (i) the REIT board of directors authorizes and the REIT declares any stock dividend with respect to any class of REIT common stock, the REIT board of directors must at the same time declare a proportionate stock dividend with respect to each other class of REIT common stock and (ii) the shares of either class of REIT common stock are combined or subdivided, the shares of the other class of REIT common stock must be combined or subdivided in an equivalent manner. In the discretion of the REIT board of directors, dividends payable in shares of REIT Class A common stock may be paid with respect to shares of any class of REIT common stock, but dividends payable in shares of REIT Class B common stock may be paid only with respect to shares of REIT Class B common stock.

Exclusive Forum for Certain Litigation
The Forest City regulations provide that, unless the Forest City board of directors agrees otherwise, (a) any derivative action or proceeding, (b) any action asserting a claim of breach of any duty owed by any director or officer or other employee of Forest City to Forest City or to the shareholders of Forest City, (c) any action asserting a claim against Forest City or any of Forest City’s directors, officers or other employees pursuant to the ORC or the Forest City articles or regulations or (d) claims governed by the internal affairs doctrine must be brought in the Court of Common Pleas of Cuyahoga County, Ohio (or, if that court does not have jurisdiction, the United States District Court for the Northern District of Ohio, Eastern Division).    The REIT Bylaws provide that, unless the REIT board of directors agrees otherwise, (a) any derivative action or proceeding, (b) any action asserting a claim of breach of any duty owed by any of the REIT’s directors, officers or other employees to the REIT or to the REIT’s shareholders, (c) any action asserting a claim against the REIT or any of the REIT’s directors, officers or other employees pursuant to the MGCL, the REIT Charter or the REIT Bylaws and (d) claims governed by the internal affairs doctrine must be brought in the Circuit Court for Baltimore City, Maryland (or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division).

 

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CERTAIN TAKEOVER DEFENSE PROVISIONS OF MARYLAND LAW AND THE REIT CHARTER AND REIT BYLAWS

The REIT Charter and REIT Bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other transaction that might involve a premium price for shares of REIT stock or otherwise be in the best interests of the REIT’s shareholders.

 

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Removal of Directors
The ORC provides that all of the directors of a particular class, or any individual director, may be removed from office without cause by the vote of holders of a majority of the voting power entitled to elect directors in place of those to be removed, except that, unless all of the directors, or all the directors of a particular class are removed, no individual director shall be removed if the votes of a sufficient number of shares are cast against the director’s removal that, if cumulatively voted at an election of all the directors, or all the directors of a particular class, as the case may be, would be sufficient to elect at least one director.    The MGCL provides that the shareholders may remove any director of a corporation, with or without cause, by the affirmative vote of a majority of all votes entitled to be cast generally for the election of directors, unless the charter provides otherwise or the corporation elects to be subject to certain provisions of the MGCL, as discussed below. Under the MGCL, unless the charter provides otherwise, if the shareholders of any class or series are entitled separately to elect one or more directors, such a director may not be removed without cause except by the affirmative vote of a majority of all the votes of that class or series. The REIT Charter provides that, subject to the rights of holders of shares of one or more classes or series of REIT preferred stock to elect or remove one or more directors, (a) any REIT Class A director may be removed as a director at any time (i) for cause (as defined in the REIT Charter) by the affirmative vote of holders of shares of REIT Class A common stock entitled to cast a majority of all the votes entitled to be cast generally in the election of REIT Class A directors or (ii) without cause, by the affirmative vote of holders of shares of REIT Class A common stock entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of REIT Class A directors, and (b) any REIT Class B director may be removed as a director at any time by the affirmative vote of holders of shares of REIT Class B common stock entitled to cast a majority of the votes entitled to be cast generally in the election of REIT Class B directors, with or without cause. The REIT Charter further provides that notwithstanding an election by the REIT to be subject to the provisions of Subtitle 8 relating to a classified board and a two-thirds vote requirement for removing directors, a REIT director may only be removed in accordance with the standards set forth in the REIT Charter (as described above).

 

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Board Vacancies
The Forest City regulations provide that the directors elected by the holders of Forest City Class A Common Stock may fill any Class A director vacancy, and the directors elected by the holders of Forest City Class B Common Stock may fill any Class B director vacancy, that is created by an increase in the number of directors or by an inability of a sitting director to serve by reason of incapacity, death or resignation.    The REIT Bylaws provide that a majority of the directors elected by the holders of REIT Class A common stock may fill any REIT Class A director vacancy, and a majority of the directors elected by the holders of REIT Class B common stock may fill any REIT Class B director vacancy, in each instance, that is created by an increase in the number of directors or by any other cause, even if the number of REIT Class A directors or number of REIT Class B directors, as applicable, is less than a quorum of the REIT board of directors. Any individual elected to fill a vacancy as a director will serve until the next annual meeting of shareholders and until his or her successor is duly elected and qualifies.
Advance Notice of Director Nominations and Shareholder Proposals
The Forest City regulations establish an advance notice procedure for shareholders to nominate candidates for Forest City’s board of directors. Holders of Forest City Common Stock may only nominate a candidate for election as a director that will be voted on by the class of Forest City Common Stock that the nominating shareholder holds. For a shareholder to properly nominate a candidate for election as a director at a shareholder meeting, the shareholder must (i) be a shareholder of the requisite class of Forest City Common Stock of record at the time of the giving of the notice of the meeting and at the time of the meeting, (ii) be entitled to vote at the meeting in the election of directors and (iii) have given timely written notice of the nomination to Forest City’s Corporate Secretary. To be timely, a shareholder’s notice must be delivered to or mailed and received by Forest City’s Corporate Secretary at the principal executive officers of Forest City not later than the close of business on the ninetieth calendar day prior to the date Forest City’s proxy statement was released to shareholders in connection with the previous year’s annual meeting, advanced by one year. The notice must set forth the information specified in Forest City’s regulations.   

The REIT Bylaws provide that nominations of individuals for election as directors and proposals of business to be considered by shareholders at any annual meeting may be made only (1) pursuant to the REIT’s notice of the meeting, (2) by or at the direction of the REIT board of directors or (3) by any shareholder who was a shareholder of record at the record date set by the REIT board for the purpose of determining shareholders entitled to vote at the meeting, at the time of giving the notice required by the REIT Bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of each of the individuals so nominated or on such other proposed business and who has complied with the advance notice procedures of the REIT Bylaws. Shareholders generally must provide notice to the REIT’s secretary not earlier than the 150th day or later than the close of business on the 120th day before the first anniversary of the date that the REIT’s proxy statement is released to the shareholders for the preceding year’s annual meeting of shareholders.

 

Only the business specified in the notice of the meeting may be brought before a special meeting of shareholders. Nominations of individuals for election as directors at a special meeting of shareholders may be made only (1) by or at the direction of the REIT board, (2) by a shareholder that has requested that a special meeting be called for the purpose of electing directors in compliance with the REIT Bylaws and that has supplied the information required by the

 

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REIT Bylaws about each individual whom the shareholder proposes to nominate for election of directors or (3) if the special meeting has been called in accordance with the REIT Bylaws for the purpose of electing directors, by any shareholder who was a shareholder of record at the record date set by the REIT board for the purpose of determining shareholders entitled to vote at the meeting, at the time of giving the notice required by the REIT Bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice procedures of the REIT Bylaws. Shareholders generally must provide notice to the REIT’s secretary not earlier than the 120th day before such special meeting or later than the later of the close of business on the 90th day before the special meeting or the tenth day after the first public announcement of the date of the special meeting and the nominees proposed by the REIT’s board of directors to be elected at the meeting.

 

A shareholder’s notice must contain certain information specified by the REIT Bylaws about the shareholder, its affiliates and any proposed business or nominee for election as a directors, including information about the economic interest of the shareholder, its affiliates and any proposed nominee in the REIT.

Ownership and Transfer Restrictions
Forest City’s organizational documents do not contain any provisions restricting ownership of shares of any outstanding class or series thereof of Forest City’s capital stock.    Except with regard to persons exempted by the REIT board from the ownership and transfer restrictions of the REIT Charter, no person may beneficially or constructively own more than 9.8% (in value or number of shares, whichever is more restrictive) of the outstanding REIT common stock or more than 9.8% (in value) of all classes or series of REIT stock. See “Description of REIT Stock—Restrictions on Ownership and Transfer”.
Notice of Holdings
Forest City’s organizational documents do not contain any provisions requiring shareholders to provide notice of their holdings.    The REIT Charter provides that every owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of REIT stock, within 30 days after the end of each taxable year, must give the REIT written notice stating the shareholder’s name and address, the number of shares of each class and series of REIT stock that the shareholder beneficially owns and a description of the manner in which the shares are held.

 

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Change in Control

Business Combinations. If a person becomes the beneficial owner of 10% or more of an issuer’s shares without the prior approval of its board of directors, chapter 1704 of the ORC, referred to as the “merger moratorium statute”, prohibits the following transactions for at least three years if they involve both the issuer and either the acquirer or anyone affiliated or associated with the acquirer: (i) the disposition or acquisition of any interest in assets, (ii) mergers, consolidations, combinations and majority share acquisitions, (iii) voluntary dissolutions and (iv) the issuance or transfer of shares or any rights to acquire shares in excess of 5% of the outstanding shares.

 

The prohibition imposed under the merger moratorium statute continues indefinitely after the initial three-year period unless the transaction is approved by the holders of at least two-thirds of the voting power of the issuer or satisfies statutory conditions relating to the fairness of the consideration to be received by the shareholders.

 

The merger moratorium statute does not apply to a corporation if its articles of incorporation or regulations so provide. Forest City has not opted out of the application of the merger moratorium statute.

 

Control Share Acquisitions. The ORC requires shareholder approval of any “control share acquisition.” A “control share acquisition” is the acquisition, directly or indirectly, by any person of shares of an Ohio public corporation that, when added to all other shares of the corporation in respect of which the person may exercise or direct the exercise of voting power as provided in the ORC, would entitle the person, immediately after the acquisition, directly or indirectly, alone or with others, to exercise or direct the exercise of the voting power of the public corporation in the election of directors within any of the following ranges of such voting power: (i) one-fifth or more but less than one-third of such voting power, (ii) one-third or more but less than a majority of such voting power or (iii) a majority or more of such voting power.

 

An acquiring person who proposes to make a control share acquisition must deliver an acquiring person statement to the corporation containing the information required under the ORC (including a description of the terms of the proposed acquisition). Within ten days after

  

Business Combinations. Under the MGCL, certain “business combinations” (including a merger, consolidation, statutory share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested shareholder (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock or an affiliate or associate of the corporation who, at any time during the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation) or an affiliate of such an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. A person is not an interested shareholder if the board of directors approved in advance the transaction by which the person otherwise would have become an interested shareholder. In approving a transaction, however, the board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by it.

 

After such five-year period, any such business combination must generally be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding voting stock of the corporation and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested shareholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested shareholder, unless, among other conditions, the corporation’s common shareholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares.

 

These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a Maryland corporation’s board of directors prior to the time that the interested

 

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the corporation receives the statement, the corporation must call a special shareholder meeting for the purpose of voting on the proposed control share acquisition. A majority of the voting power of the corporation in the election of directors represented at the meeting in person or by proxy and a majority of the disinterested shareholders represented at the meeting in person or by proxy is needed to approve the proposed control share acquisition. If approved, the control share acquisition must be consummated, in accordance with the terms so authorized, no later than 360 days following the date of the shareholder approval.

 

As permitted by the ORC, the Forest City regulations exempt any acquisition of Forest City Common Stock and preferred stock from the control share acquisition provisions.

  

shareholder becomes an interested shareholder. Pursuant to the statute, the REIT intends to elect, by resolution of the REIT board of directors, to exempt from the Maryland Business Combination Act all business combinations between the REIT and any other person, provided that such business combination is first approved by the REIT board of directors (including a majority of directors who are not affiliates or associates of such person). As a result, any person described above may be able to enter into business combinations with the REIT that may not be in the best interests of the REIT’s shareholders, without compliance by the REIT with the supermajority vote requirements and other provisions of the statute.

 

The Maryland Business Combination Act may discourage others from trying to acquire control of the REIT and increase the difficulty of consummating any offer to acquire control of the REIT.

 

The REIT cannot assure you that the REIT board of directors will not opt to be subject to such business combination provisions in the future. However, an alteration or repeal of this resolution will not have any effect on any business combinations that have been consummated or upon any agreements existing at the time of such modification or repeal.

 

Control Share Acquisitions. The MGCL provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of at least two-thirds of the votes entitled to be cast on the matter, excluding shares of stock of the corporation in respect of which any of the following persons is entitled to exercise or direct the exercise of the voting power of such shares in the election of directors: (i) a person who has made or proposes to make the control share acquisition; (ii) an officer of the corporation or (iii) an employee of the corporation who is also a director of the corporation. “Control shares” are voting shares of stock which, if aggregated with all other such shares of stock owned by the acquirer, or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges

 

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of voting power: (A) one-tenth or more but less than one-third; (B) one-third or more but less than a majority or (C) a majority or more of all voting power. Control shares do not include shares that the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares, subject to certain exceptions.

 

A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making an “acquiring person statement” as described in the MGCL), may compel the corporation’s board of directors to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any shareholders meeting.

 

If voting rights are not approved at the meeting or if the acquiring person does not deliver an “acquiring person statement” as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem for fair value any or all of the control shares (except those for which voting rights have previously been approved). Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or, if a meeting of shareholders is held at which the voting rights of such shares are considered and not approved, as of the date of the meeting. If voting rights for control shares are approved at a shareholders meeting and the acquirer becomes entitled to exercise or direct the exercise of a majority of all voting power, all other shareholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.

 

The control share acquisition statute does not apply to (i) shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction or (ii) acquisitions approved or exempted by the charter or bylaws of the corporation.

 

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Forest City

  

The REIT

  

 

As permitted by the MGCL, the REIT Bylaws, attached hereto as Annex B-2, contain a provision opting out of the Maryland Control Share Acquisition Act. This provision may be amended or eliminated at any time in the future by the REIT board of directors.

 

Subtitle 8. Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by a provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or Bylaws, to any or all of five provisions of the MGCL which provide, respectively, for:

 

•    a classified board;

 

•    a two-thirds vote requirement for removing a director;

 

•    a requirement that the number of directors be fixed only by vote of the board of directors;

 

•    a requirement that a vacancy on the board be filled only by the remaining directors in office and for the remainder of the full term of the class of directors in which the vacancy occurred; and

 

•    a majority requirement for the calling of a shareholder-requested special meeting of shareholders.

 

The REIT has not elected to be subject to any of the provisions of Subtitle 8. Through provisions in the REIT Charter and REIT Bylaws unrelated to Subtitle 8, the REIT already will require, unless called by its chairman, chief executive officer, president or board of directors, the written request of shareholders entitled to cast a majority of all votes entitled to be cast at such a meeting on such matter to call a special meeting on any matter.

 

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LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. The REIT Charter contains such a provision that eliminates such liability to the maximum extent permitted by Maryland law.

The MGCL requires a Maryland corporation (unless the charter provides otherwise, which the REIT Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that:

 

    the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty;

 

    the director or officer actually received an improper personal benefit in money, property or services; or

 

    in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

A corporation may not indemnify a director or officer in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by or on behalf of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon receipt of:

 

    a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation; and

 

    a written undertaking by the director or officer or on the director’s or officer’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director or officer did not meet the standard of conduct.

The REIT Charter authorizes the REIT to obligate the REIT, and the REIT Bylaws obligate the REIT, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:

 

    any present or former director or officer of the REIT who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity; or

 

    any individual who, while a director or officer of the REIT and at the REIT’s request, serves or has served as a director, officer, trustee, member, manager, managing or partner of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, the proceeding by reason of his or her service in that capacity.

 

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The REIT Charter and REIT Bylaws also permit the REIT to indemnify and advance expenses to any person who served a predecessor of the REIT in any of the capacities described above and any employee or agent of the REIT or a predecessor of the REIT.

The REIT intends to enter into customary indemnification agreements with the REIT’s directors and executive officers that will require the REIT, among other things, to indemnify the REIT’s directors and executive officers against certain liabilities that may arise by reason of their status as directors or officers to the maximum extent permitted by Maryland law and provide for the advancement of expenses in connection therewith.

At the Effective Time, the REIT intends to maintain directors’ and officers’ liability insurance which will indemnify the REIT’s directors and officers against damages arising out of certain kinds of claims which might be made against them based on acts and things done (or not done) by them while acting in their capacity as directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act may be provided to directors, officers or persons controlling the REIT pursuant to the foregoing provisions, in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income tax considerations relating to the Merger, to the 2015 Special Dividend, to the REIT’s anticipated qualification as a real estate investment trust under the Code, and to the acquisition, ownership and disposition of shares of Forest City Common Stock and shares of REIT common stock, as applicable. This discussion is for your general information only. This summary is not tax advice. The tax treatment of a holder will vary depending upon the holder’s particular situation, and this summary addresses only holders that hold shares of Forest City Common Stock and shares of REIT common stock, as applicable, as capital assets and does not deal with all aspects of taxation that may be relevant to particular holders in light of their personal investment or tax circumstances. This summary also does not deal with all aspects of taxation that may be relevant to certain types of holders to which special provisions of the U.S. federal income tax laws apply, including:

 

    dealers in securities or currencies;

 

    traders in securities that elect to use a mark-to-market method of accounting for such traders’ securities holdings;

 

    banks;

 

    insurance companies;

 

    tax-exempt organizations;

 

    persons liable for the alternative minimum tax;

 

    persons that hold shares of Forest City Common Stock or shares of REIT common stock, as applicable, that are a hedge, that are hedged against interest rate or currency risks or that are part of a straddle or conversion transaction;

 

    persons that purchase or sell shares of Forest City Common Stock or REIT common stock, as applicable, as part of a wash sale for tax purposes; and

 

    U.S. shareholders whose functional currency is not the U.S. dollar.

This summary is based on the Code, its legislative history, existing and proposed regulations under the Code, published rulings and court decisions. This summary describes the provisions of these sources of law only as they are in effect as of the date of this proxy statement/prospectus. All of these sources of law may change at any time, and any change in the law may apply retroactively.

If a partnership holds shares of Forest City Common Stock or shares of REIT common stock, as applicable, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding shares of Forest City Common Stock or shares of REIT common stock, as applicable, should consult such partner’s tax advisor with regard to the U.S. federal income tax treatment of an investment in the shares of Forest City Common Stock or shares of REIT common stock, as applicable.

We urge you to consult with your own tax advisors regarding the tax consequences to you of acquiring, owning and selling the shares of Forest City Common Stock or shares of REIT common stock, as applicable, including the federal, state, local and foreign tax consequences of acquiring, owning and selling the shares of Forest City Common Stock or REIT common stock, as applicable in your particular circumstances and potential changes in applicable laws.

As used in this section, the term “U.S. shareholder” means a holder of shares of Forest City Common Stock or REIT common stock, as applicable, who, for U.S. federal income tax purposes, is:

 

    a citizen or resident of the United States;

 

    a domestic corporation;

 

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    an estate whose income is subject to U.S. federal income taxation regardless of the income’s source; or

 

    a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons have authority to control all substantial decisions of the trust.

Nonresident alien individuals, foreign corporations, foreign partnerships and estates or trusts that in either case are not subject to U.S. federal income tax on a net income basis, who own shares of Forest City Common Stock or shares of REIT common stock, as applicable, are referred to in this section as “non-U.S. shareholders.”

U.S. Federal Income Tax Consequences of the Merger and the Conversion of Forest City to a Limited Partnership

The Merger and the subsequent steps taken to convert Forest City to a limited partnership are intended to qualify as a reorganization under Section 368 of the Code, and the federal income tax consequences summarized below assume that the Merger and the subsequent steps taken to convert Forest City to a limited partnership will so qualify. It is a condition to closing that our counsel, Sullivan & Cromwell LLP, deliver an opinion that the Merger and the subsequent steps taken to convert Forest City to a limited partnership will be treated for U.S. federal income tax purposes as a reorganization under Section 368 of the Code. The opinion of our counsel is based on the U.S. federal income tax law in effect as of the date issued, relies on certain representations of our management and assumes, among other things, that the Merger and the conversion of Forest City to a limited partnership will be consummated in accordance with the applicable documents and as described herein. An opinion of counsel is not binding on the IRS or any court.

Neither the REIT nor Forest City will recognize any gain or loss as a result of the Merger and the conversion of Forest City to a limited partnership. Except as described below with respect to non-U.S. shareholders that own or have owned in excess of 5% of the shares of Forest City Common Stock, shareholders will not recognize any gain or loss upon the conversion of shares of Forest City Common Stock into shares of REIT common stock pursuant to the Merger. The initial tax basis of the shares of REIT common stock received by a shareholder pursuant to the Merger will be the same as such shareholder’s adjusted tax basis in the shares of Forest City Common Stock being converted pursuant to the Merger. The holding period of the shares of REIT common stock received by a shareholder pursuant to the Merger will include such shareholder’s holding period with respect to the shares of Forest City Common Stock being converted pursuant to the Merger.

If, after the Merger, we are a “domestically controlled qualified investment entity” within the meaning of the Code, then in the case of non-U.S. shareholders that own or have owned in excess of 5% of the shares of Forest City Common Stock, the Merger may result in gain recognition as a result of the Treasury regulations governing dispositions of investments in U.S. real property. A “domestically controlled qualified investment entity” means any qualified investment entity (including a real estate investment trust) in which at all times during an applicable testing period less than 50% in value of such entity’s stock was held directly or indirectly by foreign persons. If you are a non-U.S. shareholder that beneficially owns or has owned (within the five-year period ending on the date shares of Forest City Common Stock are converted into shares of REIT common stock, or the period during which you held shares of Forest City Common Stock, if shorter) in excess of 5% of the shares of Forest City Common Stock, we urge you to consult with your own tax advisor to determine the tax consequences to you resulting from the conversion of shares of Forest City Common Stock into REIT common stock pursuant to the Merger.

Taxation of the 2015 Special Dividend

The 2015 Special Dividend is intended to assist us in meeting the requirement that we distribute to our shareholders by December 31, 2016 our pre-real estate investment trust earnings and profits in order to qualify as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016. We expect to declare and pay the 2015 Special Dividend in a combination of cash and shares of Forest City Common Stock in advance of the Merger.

 

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On March 12, 2015, we submitted a private letter ruling request to the IRS with respect to the tax treatment of the planned 2015 Special Dividend. We expect the private letter ruling to confirm, amongst other things, that any and all of the cash and Forest City Common Stock distributed pursuant to the 2015 Special Dividend will be treated as a taxable dividend under the Code, and the amount of the distribution of Forest City Common Stock received by any shareholder electing to receive stock will be considered to equal the amount of money which could have been received in lieu thereof. Assuming the private letter ruling is granted, the 2015 Special Dividend is expected to have the tax consequences described below.

A shareholder receiving a portion of the 2015 Special Dividend in shares of Forest City Common Stock will be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of cash that would have been received if the shareholder had elected to receive, and actually did receive, all cash. A shareholder that receives any shares of Forest City Common Stock pursuant to the 2015 Special Dividend will generally have a tax basis in such stock equal to the amount such shareholder would have been received if the shareholder had elected to receive, and actually did receive, all cash, minus the amount of cash such shareholder actually received in the 2015 Special Dividend, and the holding period in such stock will begin on the day following the payment of the 2015 Special Dividend.

For noncorporate U.S. shareholders, the 2015 Special Dividend may be eligible for taxation at the preferential rates applicable to qualified dividend income. The 2015 Special Dividend may be eligible for the dividends received deduction in the case of U.S. shareholders that are corporations. Such corporate holders should also consider the possibility that the 2015 Special Dividend could be treated as an “extraordinary dividend” within the meaning of the Code, which would reduce a corporate holder’s basis in its stock (not below zero) by the “nontaxed portion” of the “extraordinary dividend,” where the holder has not held such stock for more than two years before the dividend announcement date. Each corporate U.S. shareholder is urged to consult with its tax advisor with respect to the tax treatment of the 2015 Special Dividend.

Taxation of the REIT as a Real Estate Investment Trust

In the opinion of Sullivan & Cromwell LLP, the REIT’s proposed organization and method of operation will enable the REIT to meet the requirements for qualification and taxation as a real estate investment trust under the Code commencing with the taxable year ending December 31, 2016 and for subsequent taxable years. Investors should be aware, however, that opinions of counsel are not binding upon the IRS or any court.

In providing its opinion, Sullivan & Cromwell LLP is relying, without independent investigation, as to certain factual matters upon the statements and representations contained in a certificate provided to Sullivan & Cromwell LLP with respect to the REIT.

The REIT’s qualification as a real estate investment trust under the Code will depend upon the satisfaction by the REIT of requirements of the Code relating to qualification for real estate investment trust status. Some of these requirements depend upon actual operating results, distribution levels, diversity of stock ownership, asset composition, source of income and record keeping. Accordingly, while the REIT intends to qualify to be taxed as a real estate investment trust for U.S. federal income tax purposes, the actual results of the REIT for any particular year might not satisfy these requirements. Neither Sullivan & Cromwell LLP nor any other such law firm will monitor the compliance of the REIT with the requirements for real estate investment trust qualification on an ongoing basis.

The sections of the Code applicable to REITs are highly technical and complex. The following discussion summarizes material aspects of these sections of the Code.

As a real estate investment trust, the REIT generally will not have to pay U.S. federal corporate income taxes on the REIT’s net income that the REIT currently distributes to its shareholders. This treatment substantially eliminates the “double taxation” at the corporate and shareholder levels that generally results from investment in a regular corporation. The REIT’s dividends, however, generally will not be eligible for (i) the reduced rates of tax applicable to dividends received by noncorporate holders and (ii) the corporate dividends-received deduction.

 

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However, the REIT will have to pay U.S. federal income tax as follows:

 

    First, the REIT will have to pay tax at regular corporate rates on any undistributed real estate investment trust taxable income, including undistributed net capital gains.

 

    Second, under certain circumstances, the REIT may have to pay the alternative minimum tax on the REIT’s items of tax preference.

 

    Third, if the REIT has (a) net income from the sale or other disposition of “foreclosure property,” as defined in the Code, which is held primarily for sale to customers in the ordinary course of business or (b) other non-qualifying income from foreclosure property, the REIT will have to pay tax at the highest corporate rate on that income.

 

    Fourth, if the REIT has net income from “prohibited transactions,” as defined in the Code, the REIT will have to pay a 100% tax on that income. Prohibited transactions are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business.

 

    Fifth, if the REIT should fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below under “ — Requirements for QualificationIncome Tests”, but has nonetheless maintained the REIT’s qualification as a real estate investment trust because the REIT has satisfied some other requirements, the REIT will have to pay a 100% tax on an amount equal to (a) the gross income attributable to the greater of (i) 75% of the REIT’s gross income over the amount of gross income that is qualifying income for purposes of the 75% test, and (ii) 95% of the REIT’s gross income over the amount of gross income that is qualifying income for purposes of the 95% test, multiplied by (b) a fraction intended to reflect the REIT’s profitability.

 

    Sixth, if the REIT should fail to distribute during each calendar year at least the sum of (1) 85% of the REIT’s real estate investment trust ordinary income for that year, (2) 95% of the REIT’s real estate investment trust capital gain net income for that year and (3) any undistributed taxable income from prior periods, the REIT would have to pay a 4% excise tax on the excess of that required distribution over the sum of the amounts actually distributed and retained amounts on which income tax is paid at the corporate level.

 

    Seventh, if the REIT acquires any asset from a C corporation in certain transactions in which the REIT must adopt the basis of the asset or any other property in the hands of the C corporation as the basis of the asset in the hands of the REIT, and the REIT recognizes gain on the disposition of that asset during the ten-year period beginning on the date on which the REIT acquired that asset, then the REIT will have to pay tax on the built-in gain at the highest regular corporate rate. A C corporation means generally a corporation that has to pay full corporate-level tax. Because the REIT will be acquiring all of the assets of Forest City in a carryover basis transaction, if it disposes of any so-acquired asset within 10 years of the effective time of the REIT’s election to be taxed as a real estate investment trust, it will be subject to tax on the built-in gain recognized on such disposition at the highest regular corporate rate.

 

    Eighth, if the REIT derives “excess inclusion income” from a residual interest in a real estate mortgage investment conduit, or “REMIC,” or certain interests in a taxable mortgage pool, or “TMP,” the REIT could be subject to corporate-level U.S. federal income tax at a 35% rate to the extent that such income is allocable to certain types of tax-exempt shareholders that are not subject to unrelated business income tax, such as government entities.

 

    Ninth, if the REIT receives non-arm’s-length income from a TRS (as defined under “—Requirements for QualificationAsset Tests”), or as a result of services provided by a TRS to tenants of the REIT, the REIT will be subject to a 100% tax on the amount of the REIT’s non-arm’s-length income.

 

   

Tenth, if the REIT fails to satisfy a real estate investment trust asset test, as described below, due to reasonable cause and the REIT nonetheless maintains its real estate investment trust qualification

 

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because of specified cure provisions, the REIT will generally be required to pay a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the nonqualifying assets that caused the REIT to fail such test.

 

    Eleventh, if the REIT fails to satisfy any provision of the Code that would result in the REIT’s failure to qualify as a real estate investment trust (other than a violation of the real estate investment trust gross income tests or a violation of the asset tests described below) and the violation is due to reasonable cause, the REIT may retain its real estate investment trust qualification but will be required to pay a penalty of $50,000 for each such failure.

Requirements for Qualification

The Code defines a real estate investment trust as a corporation, trust or association:

 

    that is managed by one or more trustees or directors;

 

    the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

 

    that would otherwise be taxable as a domestic corporation, but for the sections of the Code defining and providing special rules for real estate investment trusts;

 

    that is neither a financial institution nor an insurance company to which certain provisions of the Code apply;

 

    except for the first taxable year in which an election is made to treat the corporation, trust or association as a real estate investment trust, the beneficial ownership of which is held by 100 or more persons;

 

    during the last half of each taxable year (other than the first taxable year in which an election is made to treat the corporation, trust or association as a real estate investment trust), not more than 50% in value of the outstanding stock of which is owned, directly or constructively, by five or fewer individuals, as defined in the Code to include certain entities (the “not closely held requirement”); and

 

    that meets certain other tests, including tests described below regarding the nature of its income and assets.

The Code provides that the conditions described in the first through fourth bullet points above must be met during the entire taxable year and that the condition described in the fifth bullet point above must be met (other than the first taxable year in which an election is made to treat the corporation, trust or association as a REIT) during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

The REIT expects to satisfy the conditions described in the first through fourth bullet points of the second preceding paragraph for the taxable year ending December 31, 2016 and subsequent taxable years. The REIT intends to comply with the fifth and sixth bullet points of the second preceding paragraph beginning with the REITs first taxable year following the REIT’s taxable year ending December 31, 2016. In addition, the REIT Charter will provide for restrictions regarding the ownership and transfer of the shares of REIT common stock. These restrictions are intended to, among other things, assist the REIT in satisfying the share ownership requirements described in the fifth and sixth bullet points of the preceding paragraph. The ownership and transfer restrictions pertaining to the shares of REIT common stock are described in this proxy statement/prospectus under the heading “Description of REIT StockRestrictions on Ownership and Transfer”.

Disregarded Entity Subsidiaries. A corporation that is a QRS, as defined in the Code, will not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a QRS will be treated as assets, liabilities and items of these kinds of the REIT, unless the REIT makes an election to treat such

 

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corporation as a TRS. Thus, in applying the requirements described in this section, the REIT’s QRSs (if any) will be ignored, and all assets, liabilities and items of income, deduction and credit of these subsidiaries will be treated as assets, liabilities and items of these kinds of the REIT.

Investments in Partnerships. Following the Merger and the conversion of Forest City to a limited partnership, we expect that all of our investments will be held indirectly through the Operating Partnership. In addition, the Operating Partnership may hold certain of its investments indirectly through subsidiary partnerships and limited liability companies which we expect will be treated as partnerships or disregarded entities for U.S. federal income tax purposes. In general, entities that are classified as partnerships or disregarded entities for U.S. federal income tax purposes are “pass-through” entities which are not required to pay entity-level U.S. federal income tax. If a real estate investment trust is a partner in a partnership, Treasury regulations provide that the real estate investment trust will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to that proportionate share. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the real estate investment trust for purposes of the rules of the Code defining real estate investment trusts, including satisfying the gross income tests and the asset tests. Thus, the REIT’s proportionate share of the assets, liabilities and items of income of any partnership in which the REIT is a partner, including the Operating Partnership, will be treated as assets, liabilities and items of income of the REIT for purposes of applying the requirements described in this section. Thus, actions taken by partnerships in which the REIT owns an interest, either directly or through one or more tiers of partnerships or disregarded entity subsidiaries, can affect the REIT’s ability to satisfy the real estate investment trust income and asset tests and the determination of whether the REIT has net income from prohibited transactions. See the fourth bullet point under the heading “Taxation of the REIT as a Real Estate Investment Trust” above for a brief description of prohibited transactions.

Taxable Real Estate Investment Trust Subsidiaries. A TRS is any corporation in which a real estate investment trust directly or indirectly owns stock, provided that the real estate investment trust and that corporation make a joint election to treat that corporation as a TRS. The election can be revoked at any time as long as the real estate investment trust and the TRS revoke such election jointly. In addition, if a TRS holds, directly or indirectly, more than 35% of the securities of any other corporation other than a real estate investment trust (by vote or by value), then that other corporation is also treated as a TRS. A corporation can be a TRS with respect to more than one real estate investment trust.

A TRS is subject to U.S. federal income tax at regular corporate rates (currently a maximum rate of 35%), and may also be subject to state and local taxation. Any dividends paid or deemed paid by any one of the REIT’s TRSs will also be taxable, either (1) to the REIT to the extent the dividend is retained by the REIT, or (2) to the REIT’s shareholders to the extent the dividends received from the TRS are paid to the REIT’s shareholders. The REIT may hold more than 10% of the stock of a TRS without jeopardizing its qualification as a real estate investment trust under the Code notwithstanding the rule described below under “—Asset Tests” that generally precludes ownership of more than 10% of any issuer’s securities. However, as noted below, in order for the REIT to qualify as a real estate investment trust under the Code, the securities of all of the TRSs in which the REIT has invested either directly or indirectly may not represent more than 25% of the total value of the REIT’s assets. The REIT expects that the aggregate value of all of its interests in TRSs will represent at the effective time of the REIT’s election to be taxed as a real estate investment trust, and will continue to represent, less than 25% of the total value of the REIT’s assets; however, the REIT cannot assure that this will always be true. Other than certain activities related to operating or managing a lodging or health care facility, a TRS may generally engage in any business including the provision of customary or non-customary services to tenants of the parent real estate investment trust.

Income Tests. In order to maintain the REIT’s qualification as a real estate investment trust, the REIT annually must satisfy two gross income requirements.

 

   

First, the REIT must derive at least 75% of its gross income, excluding gross income from prohibited transactions, for each taxable year directly or indirectly from investments relating to real property,

 

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mortgages on real property or investments in real estate investment trust equity securities, including “rents from real property,” as defined in the Code, or from certain types of temporary investments. Rents from real property generally include expenses of the REIT that are paid or reimbursed by tenants.

 

    Second, at least 95% of the REIT’s gross income, excluding gross income from prohibited transactions, for each taxable year must be derived from real property investments as described in the preceding bullet point, dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of these types of sources.

Rents that the REIT receives will qualify as rents from real property in satisfying the gross income requirements for a REIT described above only if the rents satisfy several conditions.

 

    First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from rents from real property solely because the rent is based on a fixed percentage or percentages of receipts or sales.

 

    Second, the Code provides that rents received from a tenant will not qualify as rents from real property in satisfying the gross income tests if the REIT, directly or under the applicable attribution rules, owns a 10% or greater interest in that tenant; except that rents received from a TRS under certain circumstances qualify as rents from real property even if the REIT owns more than a 10% interest in the subsidiary. We refer to a tenant in which the REIT owns a 10% or greater interest as a “related party tenant”.

 

    Third, if rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property.

 

    Finally, for rents received to qualify as rents from real property, except as described below, the REIT generally must not operate or manage the property or furnish or render services to the tenants of the property, other than through an independent contractor from whom the REIT derives no revenue or throug