SEC Info  
   Home     Search     My Interests     Help     Sign In     Please Sign In  

Forest City Enterprises Inc · 10-K · For 1/31/09

Filed On 3/30/09, 9:09am ET   ·   Accession Number 950152-9-3231   ·   SEC File 1-04372

  in   Show  and 
Help... Wildcards:  ? (any letter),  * (many).  Logic:  for Docs:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).
 
  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 3/30/09  Forest City Enterprises Inc       10-K        1/31/09    7:2.2M                                   Bowne BCL/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.88M 
 2: EX-21       Subsidiaries of the Registrant                      HTML      7K 
 3: EX-23       Consent of Experts or Counsel                       HTML      6K 
 4: EX-24       Power of Attorney                                   HTML     41K 
 5: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 6: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 7: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML     10K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Item 1
"Business
"Item 1A
"Risk Factors
"Item 1B
"Unresolved Staff Comments
"Item 2
"Properties
"Item 3
"Legal Proceedings
"Item 4
"Submission of Matters to a Vote of Security Holders
"Executive Officers of the Registrant
"Part Iii
"Part Ii
"Item 5
"Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
"Item 6
"Selected Financial Data
"Item 7
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 7A
"Quantitative and Qualitative Disclosures About Market Risk
"Item 8
"Financial Statements and Supplementary Data
"Report of Independent Registered Public Accounting Firm
"Consolidated Balance Sheets
"Consolidated Statements of Operations
"Consolidated Statements of Comprehensive Income (Loss)
"Consolidated Statements of Shareholders' Equity
"Consolidated Statements of Cash Flows
"Notes to Consolidated Financial Statements
"Quarterly Consolidated Financial Data (Unaudited)
"Item 9
"Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 9A
"Controls and Procedures
"Item 9B
"Other Information
"Item 10
"Directors, Executive Officers and Corporate Governance
"Item 11
"Executive Compensation
"Item 12
"Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"Item 13
"Certain Relationships and Related Transactions, and Director Independence
"Item 14
"Principal Accountant Fees and Services
"Part Iv
"Item 15
"Exhibits and Financial Statements Schedules
"Schedule II -- Valuation and Qualifying Accounts
"Schedule III -- Real Estate and Accumulated Depreciation
"Signatures

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  FORM 10-K  

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
     
x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the fiscal year ended January 31, 2009
 
   
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the transition period from                      to                     
Commission file number 1-4372
FOREST CITY ENTERPRISES, INC.
 
(Exact name of registrant as specified in its charter)
     
Ohio   34-0863886
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
         
               Terminal Tower        50 Public Square    
               Suite 1100         Cleveland, Ohio   44113
     
(Address of principal executive offices)
  (Zip Code)
         
   Registrant’s telephone number, including area code   216-621-6060
 
Securities registered pursuant to Section 12(b) of the Act:
     
    Name of each exchange on
Title of each class   which registered
 
   
     Class A Common Stock ($.33 1/3 par value)
       New York Stock Exchange
     Class B Common Stock ($.33 1/3 par value)
       New York Stock Exchange
     $100,000,000 Aggregate Principal Amount of 7.375% Senior Notes Due 2034
       New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check  mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES  o     NO  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES  o     NO  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  x     NO  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
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 o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller Reporting Company o 
Indicate by check  mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  o     NO  x
The aggregate market value of the outstanding common equity held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,894,505,746.
The number of shares of registrant’s common stock outstanding on March 25, 2009 was 80,766,501 and 22,686,427 for Class A and Class B common stock, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on June 5, 2009 are incorporated by reference into Part III to the extent described herein.

 



 


Forest City Enterprises, Inc. and Subsidiaries
Annual Report on Form 10-K
For The Year Ended January 31, 2008
Table of Contents

PART I
                 
            Page
 
               
 
  Item 1.   Business     2  
 
  Item 1A.   Risk Factors     4  
 
  Item 1B.   Unresolved Staff Comments     16  
 
  Item 2.   Properties     16  
 
  Item 3.   Legal Proceedings     30  
 
  Item 4.   Submission of Matters to a Vote of Security Holders     30  
 
      Executive Officers of the Registrant     30  
 
               
PART II            
 
               
 
  Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    31  
 
  Item 6.   Selected Financial Data     33  
 
  Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
 
  Item 7A.   Quantitative and Qualitative Disclosures About Market Risk     78  
 
  Item 8.   Financial Statements and Supplementary Data     82  
 
  Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     144  
 
  Item 9A.   Controls and Procedures     144  
 
  Item 9B.   Other Information     146  
 
               
PART III            
 
               
 
  Item 10.   Directors, Executive Officers and Corporate Governance     146  
 
  Item 11.   Executive Compensation     146  
 
  Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    146  
 
  Item 13.   Certain Relationships and Related Transactions, and Director Independence     146  
 
  Item 14.   Principal Accountant Fees and Services     146  
 
               
PART IV            
 
               
 
  Item 15.   Exhibits and Financial Statements Schedules     147  
 
      Signatures     156  
 EX-21
 EX-23
 EX-24
 EX-31.1
 EX-31.2
 EX-32.1

 



Table of Contents


PART I

Item 1. Business
Founded in 1920 and publicly traded since 1960, Forest City Enterprises, Inc. (with its subsidiaries, the “Company” or “Forest City”) is principally engaged in the ownership, development, management and acquisition of commercial and residential real estate properties in 27 states and the District of Columbia. At January 31, 2009, the Company had approximately $11.4 billion in consolidated assets, of which approximately $10.6 billion was invested in real estate, at cost. The Company’s core markets include the New York City/Philadelphia metropolitan area, Denver, Boston, the Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of California. The Company has offices in Albuquerque, Boston, Chicago, Denver, London (England), Los Angeles, New York City, San Francisco, Washington, D.C. and the Company’s corporate headquarters in Cleveland, Ohio. The Company’s portfolio of real estate assets is diversified both geographically and among property types.
The Company operates through three primary strategic business units:
   
Commercial Group, the Company’s largest business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings, hotels and mixed-use projects.
 
   
Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. Additionally, it develops for-sale condominium projects and also 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. It also owns and develops land into master-planned communities and mixed-use projects.
The Company has centralized the capital management, financial reporting and certain administrative functions of its business units. In most other respects, the strategic business units operate autonomously, with the Commercial Group and Residential Group each having their own development, acquisition, leasing, property and financial management functions. The Company believes this structure enables its employees to focus their expertise and to exercise the independent leadership, creativity and entrepreneurial skills appropriate for their particular business segment.
Segments of Business
The Company currently has five segments: Commercial Group, Residential Group, Land Development Group, the New Jersey Nets (“The Nets”) and Corporate Activities. Financial information about industry segments required by this item is included in Item 8 - Financial Statements and Supplementary Data, Note L - Segment Information.
Commercial Group
The Company has developed and/or acquired retail projects for more than 50 years and office and mixed-use projects for more than 30 years. The Commercial Group owns a diverse portfolio in both urban and suburban locations in 16 states. The Commercial Group targets densely populated markets where it uses its expertise to develop complex projects, often employing public and/or private partnerships. As of January 31, 2009, the Commercial Group owned interests in 101 completed properties, including 47 retail properties (approximately 14.6 million gross leasable square feet), 48 office properties (approximately 13.3 million gross leasable square feet) and 5 hotels (1,823 rooms).
The Company 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 centers, entertainment-based centers, community centers and power centers (collectively, “specialty retail centers”). As of January 31, 2009, the Commercial Group’s retail portfolio consisted of 19 regional malls (including 2 under construction) with gross leasable area (“GLA”) of 9.9 million square feet and 31 specialty retail centers (including 1 under construction) with a total GLA of 7.0 million square feet.
Regional malls are developed in collaboration with anchor stores that typically own their facilities as an integral part of the mall structure and environment but do not generate significant direct payments to the Company. In contrast, anchor stores at specialty retail centers generally are tenants under long-term leases that contribute significant rental payments to the Company.
While the Company continues to develop regional malls in strong markets, it 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 proving to be economically advantageous for the Company, for the tenants who realize high sales per square foot and for the cities that benefit from the new jobs and taxes created in the urban locations.

2



Table of Contents

In its office development activities, the Company is primarily a build-to-suit developer that works with tenants to meet their requirements. The Company’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, the Company continues to concentrate future office and mixed-use developments largely in the New York City, Boston, Chicago, Washington, D.C., Albuquerque and Denver metropolitan areas.
Residential Group
The Company’s Residential Group owns, develops, acquires, leases and manages residential rental properties in 21 states and the District of Columbia. The Company has been engaged in apartment community development for over 50 years beginning in Northeast Ohio and gradually expanding nationally. Its residential portfolio includes middle-market apartments, upscale urban properties and adaptive re-use developments. The Residential Group develops for-sale condominium projects and also owns, develops and manages military family housing. Additionally, the Company also owns a select number of supported-living facilities.
At January 31, 2009, the Residential Group’s operating portfolio consisted of 36,257 units in 122 properties in which Forest City has an ownership interest. In addition, the Company owns a residual interest in and manages 8 properties containing 1,260 units of syndicated senior citizen subsidized housing.
Land Development Group
The Company has been in the land development business since the 1930s. The Land Development Group acquires and sells raw land and sells fully-entitled developed lots to residential, commercial and industrial customers. The Land Development Group also owns and develops raw land into master-planned communities, mixed-use projects and other residential developments. As of January 31, 2009, the Company owned approximately 10,840 acres of undeveloped land for these commercial and residential development purposes. The Company has an option to purchase 1,488 acres of developable land at its Stapleton project in Denver, Colorado, and 5,731 acres of developable land at its Mesa del Sol project in Albuquerque, New Mexico. The Company has land development projects in 12 states.
Historically, the Land Development Group’s activities focused on land development projects in Northeast Ohio. Over time, the Land Development Group’s activities expanded to larger, more complex projects. The Land Development Group has extended its activities on a national basis, first in Arizona, and more recently in Illinois, North Carolina, Florida, Colorado, Texas, New Mexico, South Carolina, New York, Missouri and Washington. Land development activities at the Company’s Stapleton project in Denver, Mesa del Sol project in Albuquerque and Central Station project in downtown Chicago are reported in the Land Development Group.
As of the end of fiscal 2008, the Company had purchased 1,447 acres at Stapleton, leaving a balance of 1,488 acres that may be acquired through an option held by the Company for additional development over the course of the next 7 years. Over and above the developable land that may be purchased through an option held by the Company, 1,116 acres of Stapleton are reserved for regional parks and open space, of which 604 acres is under development or has been completed. Aside from land sales activities, Stapleton currently has over 2,000,000 square feet of retail space, approximately 350,000 square feet of office space, over 1.3 million of other commercial space and 484 apartment units in place.
Additionally, as of the end of fiscal 2008, the Company had purchased 3,175 acres at Mesa del Sol, leaving a balance of 5,731 acres to be acquired for additional development over the course of the next 25 to 50 years. Aside from land sales activities, Mesa del Sol currently has 198,000 square feet of office space in place, which is included in the Commercial Group segment.
In addition to sales activities of the Land Development Group, the Company also sells land acquired by its Commercial Group and Residential Group adjacent to their respective projects. Proceeds and related costs from such land sales are included in the revenues and expenses of such groups.
The Nets
On August 16, 2004 the Company purchased an ownership interest in The Nets, a franchise of the National Basketball Association (“NBA”). The Company accounts for its investment on the equity method of accounting. Although the Company has a legal ownership interest of approximately 23% in The Nets, the Company recognized approximately 54%, 25% and 17% of the net loss for the years ended January 31, 2009, 2008 and 2007, respectively, because profits and losses are allocated to each member based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets.
The purchase of the interest in The Nets was the first step in the Company’s efforts to pursue development projects, which include a new entertainment arena complex and adjacent urban developments combining housing, offices, shops and public open space. The Nets segment is primarily comprised of and reports on the sports operations of the basketball team.

3



Table of Contents

Competition
The real estate industry is highly competitive in many of the markets in which the Company operates. Competition could over-saturate any market; as a result, the Company may not have sufficient cash to meet the debt service requirements on certain of its properties. Although the Company may attempt to negotiate a restructuring with the mortgagee, it may not be successful, which could cause a property to be transferred to the mortgagee.
There are numerous other developers, managers and owners of commercial and residential real estate and land that compete with us nationally, regionally and/or locally, some of whom may have greater financial resources. They compete with the Company for management and leasing revenues, land for development, properties for acquisition and disposition, anchor stores and tenants for properties. The Company may not be able to successfully compete in these areas.
Tenants at the Company’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. The Company’s competitors and those of its tenants could have a material adverse effect on the Company’s ability to lease space in its properties and on the rents it can charge or the concessions it can grant. This in turn could materially and adversely affect the Company’s results of operations and cash flows and could affect the realizable value of its assets upon sale.
In addition to real estate competition, the Company faces competition related to the operation of The Nets, a professional sports franchise.  Specifically, The Nets are in competition with other major league sports, college athletics and other sports-related and non-sports related entertainment. If The Nets are not able to successfully manage this risk, they may incur additional losses resulting in an increase of the Company’s share of the total losses, which are allocated to each member based on an analysis of the respective members’ claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets.
Number of Employees
The Company had 3,237 employees as of January 31, 2009, of which 2,845 were full-time and 392 were part-time.
Available Information
Forest City Enterprises, Inc. is an Ohio corporation and its executive offices are located at Suite 1100, 50 Public Square, Cleveland, Ohio 44113. The Company makes available, free of charge, on its website at www.forestcity.net, its annual, quarterly and current reports, including amendments to such reports, as soon as practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (“SEC”). The Company’s SEC filings can also be obtained from the SEC website at www.sec.gov. The Company’s filings can be read and copied at the SEC’s Public Reference Room office at 100 F Street N.E., Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference Room can be obtained by calling 1-800-SEC-0330.
The Company’s corporate governance guidelines including the Company’s Code of Ethical and Legal Conduct and committee charters are also available on the Company’s website at www.forestcity.net or in print to any stockholder upon written request addressed to Corporate Secretary, Forest City Enterprises, Inc., Suite 1360, 50 Public Square, ClevelandOhio 44113.
The information found on the Company’s website or the SEC website is not part of this Annual Report on Form 10-K.

Item 1A. Risk Factors
Market Conditions May Negatively Impact Our Liquidity and Our Ability to Finance or Refinance Projects or Repay Our Debt
Ongoing economic conditions have negatively impacted the lending and capital markets, particularly for real estate. The capital markets have witnessed significant adverse conditions, including a substantial reduction in the availability of and access to capital. The risk premium demanded by capital suppliers has increased markedly, as they are demanding greater compensation for credit risk. Lending spreads have widened from recent levels and originations of new loans for the commercial mortgage backed securities have essentially ceased. Underwriting standards are being tightened. In addition, recent failures and consolidations of certain financial institutions have decreased the number of potential lenders, resulting in reduced lending levels available to the market. The continuation of these market conditions, combined with the volatility in the financial markets, has made our ability to access capital increasingly challenging. It is very unlikely that we will be able to obtain financings today on terms comparable to those we have secured in the past, and our financing costs may be significantly higher. These conditions have required us to curtail our investment in new development projects, which will negatively impact the future

4



Table of Contents

growth of our business. A continuation of these conditions may require us to further curtail our development, redevelopment or expansion projects and potentially write down our investments in some projects.
The adverse market conditions also impact our ability to, and the cost at which we, refinance our debt and obtain renewals or replacement of credit enhancement devices, such as letters of credit. While some of our current financings have extension options, some of those are contingent upon pre-determined underwriting qualifications. We cannot assure you that a given project will meet the required conditions to qualify for such extensions. Our inability to extend, repay or refinance our debt when it becomes due, including upon acceleration, could result in foreclosure on the properties pledged as collateral thereof, which could result in a loss of our full investment in such properties. While we are actively working to refinance or extend our maturing debt obligations, we cannot assure you that we will be able to do so on a timely basis. Moreover, we expect refinancing to occur on less favorable terms. Lenders in these market conditions will typically require a higher rate of interest, repayment of a portion of the outstanding principal or additional equity infusions to the project.
Of our total outstanding long-term debt of approximately $8.3 billion at January 31, 2009, approximately $882.7 million becomes due in fiscal 2009, approximately $1.05 billion becomes due in fiscal 2010 and approximately $862.5 million becomes due in fiscal 2011. If these amounts cannot be refinanced, extended or repaid from other sources, such as sales of properties or new equity, our cash flow may not be sufficient to repay all maturing debt. This inability to repay is heightened with our revolving credit facility and senior debt as we have limited sources to fund such repayment.
At January 31, 2009, we have one non-recourse mortgage amounting to $12.5 million that has matured and is currently past due. If we are unable to negotiate an extension or refinancing of the mortgage, the lender could commence foreclosure proceedings and we could lose the property. Four of our joint ventures accounted for under the equity method of accounting have non-recourse mortgages that are past due or in default at January 31, 2009. If we are unable to negotiate an extension or refinancing or cure the default on those mortgages, the lender could commence foreclosure proceedings and we could lose our investment in the projects amounting to $8.0 million. Under the terms of three of the loans we have guaranteed the lender the lien free completion of the project. This guaranty is recourse to us and the lender could enforce the completion guaranty which would have an adverse affect on our cash flows. While we are actively negotiating with the lenders to resolve these past due loans, we cannot assure you that we will be successful.
Our total outstanding debt listed above is inclusive of credit enhanced mortgage debt we have obtained for a number of our properties to back the bonds that are issued by a government authority and then remarketed to the public. Generally, the credit enhancement, such as a letter of credit, expires prior to the terms of the underlying mortgage debt and must be renewed or replaced to prevent acceleration of the underlying mortgage debt. We treat credit enhanced debt as maturing in the year the credit enhancement expires. However, if the credit enhancement is called upon due to the inability to remarket the bonds, due to reasons including but not limited to market dislocation or a downgrade in the credit rating of the enhancer, the bonds would not only incur additional interest expense, but it could accelerate the debt maturity to as early as 90 days after the advancement occurs. As of January 31, 2009, no bonds were held with the credit enhancer. On March 23, 2009, the counterparty providing the credit enhancement for our Beekman residential project in Manhattan, New York was downgraded and as a result, if new investors are not identified for approximately $440,000,000 in underlying bonds, the bonds could be tendered to the credit enhancer. It that event occurs, we will have a two year window in which to remarket the underlying bonds. Any of the bonds remaining with the credit enhancer at the end of that two year period will accelerate and become due and payable beginning in March 2011.
Our bonds that are structured in a total rate of return swap arrangement (“TRS”) have maturities reflected in the year the bond matures as opposed to the TRS maturity date, which is likely to be earlier. Throughout the life of the TRS, if the property is not performing at designated levels or due to changes in market conditions, the property may be obligated to make collateral deposits with the counterparty. At expiration of the TRS arrangement, the property must pay or is entitled to the difference, if any, between the fair market value of the bond and par. If the property does not post collateral or make the counterparty whole at expiration, the counterparty could foreclose on the property.
With the turmoil in the capital markets, an increasing number of financial institutions have sought federal assistance or failed. In the event of a failure of a lender or counterparty to a financial contract, obligations under the financial contract might not be honored and many forms of assets may be at risk and may not be fully returned to us. This was the case with amounts due to us from Lehman Brothers, Inc. of $13.8 million related to a bond remarketing performance fee at our Stapleton project in Denver, Colorado. Should a financial institution, particularly a construction lender, fail to fund its committed amounts when contractually obligated to do so, our ability to meet our obligations and complete projects could be adversely impacted
Finally, while we currently have access to liquidity through our $750 million revolving credit facility, the facility matures in March 2010. In light of the very challenging market conditions, lenders under our facility may not agree to renew or extend the agreement at current commitment levels, on similar terms or at all. We are currently negotiating with our lenders to extend the revolving credit facility. While the ultimate outcome of the extension is unknown, we anticipate an extension will result in a reduced commitment from the lenders, increased borrowing costs and modification to the financial covenants. As a result, our financing costs will increase and our access to liquidity will decrease, which would adversely affect the future growth of our business and our ability to continue our development activities.

5



Table of Contents

We Are Subject to Risks Associated with Investments in Real Estate
There is a particular concern for the real estate industry as the nation is in the midst of a recession. There have been significant declines in housing markets across the United States, which originated in the sub-prime residential mortgage market and later extended to the broader real estate markets. There has been a significant tightening of the credit markets, reduced access to liquidity and rising unemployment all of which have had a negative impact on the national economy, affecting consumer confidence and spending and negatively impacting the volume of real estate transactions. If this recession were to continue, or worsen, the value of our properties, as well as the income we receive from our properties would be adversely affected.
The value of, and our income from, our properties may decline due to developments that adversely affect real estate generally and those developments that are specific to our properties. General factors that may adversely affect our real estate portfolios if they were to occur or continue include:
   
Increases in interest rates;
 
   
The availability of financing on acceptable terms, or at all, particularly given the recent and significant market deterioration, which has resulted in the tightening of lending standards and reduced access to capital;
 
   
The availability of lender financing necessary to extend or refinance our nonrecourse mortgage debt maturities;
 
   
A decline in the economic conditions at the national, regional or local levels, particularly a decline in one or more of our primary markets;
 
   
Decreases in rental rates;
 
   
An increase in competition for tenants and customers or a decrease in demand by tenants and customers;
 
   
The financial condition of tenants, including the extent of bankruptcies and defaults;
 
   
An increase in supply or decrease in demand of our property types in our primary markets;
 
   
Declines in consumer confidence and spending during an economic recession that adversely affect our revenue from our retail centers;
 
   
Further declines in housing markets that adversely affect our revenue from our land segment;
 
   
The adoption on the national, state or local level of more restrictive laws and governmental regulations, including more restrictive zoning, land use or environmental regulations and increased real estate taxes.; and
 
   
Opposition from local community or political groups with respect to the development, construction or operations at a particular site.
In addition, there are factors that may adversely affect the value of specific operating properties or result in reduced income or unexpected expenses. As a result, we may not achieve our projected returns on the properties and we could lose some or all of our investments in those properties. Those operational factors include:
   
Adverse changes in the perceptions of prospective tenants or purchasers of the attractiveness of the property;
 
   
Our inability to provide adequate management and maintenance;
 
   
The investigation, removal or remediation of hazardous materials or toxic substances at a site;
 
   
Our inability to collect rent or other receivables;
 
   
Vacancies and other changes in rental rates;
 
   
An increase in operating costs that cannot be passed through to tenants;
 
   
Introduction of a competitor’s property in or in close proximity to one of our current markets; 
 
   
Underinsured or uninsured natural disasters, such as earthquakes, floods or hurricanes; and
 
   
Our inability to obtain adequate insurance.

6



Table of Contents

We Are Subject to Real Estate Development Risks
In addition to the risks described above, which could also adversely impact our development projects, our development projects are subject to significant risks relating to our ability to complete our projects on time and on budget. Factors that may result in a development project exceeding budget, being delayed or being prevented from completion include:
   
An inability to secure sufficient financing on favorable terms, or at all, including an inability to refinance or extend construction loans;
 
   
Construction delays or cost overruns, either of which may increase project development costs;
 
   
An increase in commodity costs;
 
   
An inability to obtain zoning, occupancy and other required governmental permits and authorizations;
 
   
An inability to secure tenants or anchors necessary to support the project; 
 
   
Failure to achieve or sustain anticipated occupancy or sales levels; and
 
   
Threatened or pending litigation.
Some of these development risks have been magnified given current adverse industry and market conditions. See also “Market Conditions May Negatively Impact Our Liquidity and Our Ability to Finance or Refinance Projects or Repay Our Debt” above. If any of these events occur, we may not achieve our projected returns on properties under development and we could lose some or all of our investments in those properties. In addition, the lead time required to develop, construct and lease-up a development property has substantially increased, which could adversely impact our projected returns or result in a termination of the development project.
In the past, we have elected not to proceed, or have been prevented from proceeding, with certain development projects, and we anticipate that this may occur again from time to time in the future. In addition, development projects may be delayed or terminated because a project partner or prospective anchor withdraws or a third party challenges our entitlements or public financing.
The overall economic climate remains challenging, as a result of the ongoing stress on the capital markets, including the reduced availability of debt financings and continued interest rate volatility. We are party to financial arrangements and tenant leases with some of the companies most impacted by these events. We have slowed the pace of our development, redevelopment and expansion projects and are taking prudent steps to mitigate risk to our portfolio and maintain optimum levels of liquidity and profitability. If we are unable to or decide not to proceed with certain projects, we could incur write-offs, some of which could be substantial, which would have an adverse affect on our results of operations. If circumstances require us or we elect to delay projects, we would incur additional carrying costs, which could negatively impact our liquidity and/or profitability.
We periodically serve as either the construction manager or the general contractor for our development projects. The construction of real estate projects entails unique risks, including risks that the project will fail to conform to building plans, specifications and timetables. These failures could be caused by labor strikes, weather, government regulations and other conditions beyond our control. In addition, we may become liable for injuries and accidents occurring during the construction process that are underinsured.
In the construction of new projects, we generally guarantee the lender of the construction loan the lien-free completion of the project. This guaranty is recourse to us and places the risk of construction delays and cost overruns on us. In addition, from time to time, we guarantee our construction obligations to major tenants and public agencies. These types of guarantees are released upon completion of the project, as defined. We may have significant expenditures in the future in order to comply with our lien-free completion obligations.
Examples of projects that face these and other development risks include the following:
   
Brooklyn Atlantic Yards.  We are in the process of developing Brooklyn Atlantic Yards, a long-term $4.0 billion mixed-use project in downtown Brooklyn expected to feature a state of the art sports and entertainment arena for the Nets basketball team, a franchise of the NBA. The acquisition and development of Brooklyn Atlantic Yards has been formally approved by the required state governmental authorities but final documentation of the transactions are subject to the completion of negotiations with local and state governmental authorities, including negotiation of the applicable

7



Table of Contents

     
development documentation and public subsidies. Pre-construction activities have commenced for the potential removal, remediation or other activities to address environmental contamination at, on, under or emanating to or from the land. There is also one lawsuit pending challenging the use of eminent domain which may not be resolved in our favor resulting in Brooklyn Atlantic Yards not being developed at all or not being developed with the features we anticipate. As a result of the foregoing, this project has experienced delays and may continue to experience further delays. There is also the potential for increased costs and delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) our inability to obtain tax-exempt financing or the availability of financing or public subsidies, or our inability to retain the current land acquisition financing, (iv) our or our partners’ inability or failure to meet required equity contributions, (v) increasing rates for financings, (vi) loss of arena sponsorships and related revenues and (vii) other potential litigation seeking to enjoin or prevent the project or litigation for which there may not be insurance coverage. The development of Brooklyn Atlantic Yards is being done in connection with the proposed move of the Nets to the planned arena. The arena itself (and its plans) along with any movement of the team is subject to approval by the NBA, which we may not receive. If any of the foregoing risks were to occur, we may not be able to develop Brooklyn Atlantic Yards to the extent intended or at all. Even if we are able to continue with the development, we would likely not be able to do so as quickly as originally planned.
   
Military Family Housing.  We have formed various partnerships, primarily with the United States Department of the Navy, to engage in the ownership, redevelopment and operation of United States Navy and United States Marine Corps military family housing communities. We have also formed a joint venture partnership to redevelop and operate, under a ground lease, United States Air Force military family communities. These military family communities, comprising approximately 12,000 housing units, are located primarily on the islands of Oahu and Kauai, Hawaii; Chicago, Illinois; Seattle, Washington; and Colorado Springs, Colorado. The number of military personnel stationed in these areas could be affected by future Defense Base Closure and Realignment Commission decisions. In addition, our partnerships are at risk that future federal appropriations for Basic Allowance for Housing (“BAH”) and local market adjustments to BAH do not keep pace with increases in property taxes, utilities and other operating expenses for the partnerships. We are also subject to the risk of competition from other local housing options available to the military personnel.
 
   
For-Sale Condominiums.  We are engaged in the development of condominiums in selected markets. Current condominium projects include Mercury, a previously unfinished office building in Los Angeles, California, and Central Station in Chicago, Illinois. While we have previously developed for-sale condominium projects with partners, we are developing some of these projects during a housing downturn without the development assistance of one or more partners. We may not be able to sell the units at the projected sales prices for a number of reasons, including, without limitation, a rise in interest rates, continued deterioration of the housing market and the inability of prospective buyers to secure financing, which risk has been heightened due to the current financial crisis affecting the national economy.
Vacancies in Our Properties May Adversely Affect Our Results of Operations and Cash Flows
Our results of operations and cash flows may be adversely affected if we are unable to continue leasing a significant portion of our commercial and residential real estate portfolio. We depend on commercial and residential tenants in order to collect rents and other charges. The current economic downturn has impacted our tenants on many levels. The downturn has been particularly hard on commercial retail tenants, many of whom have announced store closings and scaled backed growth plans. If we are unable to sustain historical occupancy levels in our real estate portfolio, our cash flows and results of operations could be adversely affected. Our ability to sustain our current and historical occupancy levels also depends on many other factors that are discussed elsewhere in this section.
The Downturn in the Housing Market May Continue to Adversely Affect Our Results of Operations and Cash Flows
The United States has experienced a continuing dramatic downturn in the residential real estate markets, resulting in a decline in both the demand for, and price of, housing. We depend on homebuilders and condominium builders and buyers, which have been significantly and adversely impacted by the housing downturn, to continue buying our land held for sale. We do not know how long the downturn in the housing market will last or if we will ever see a return to previous conditions. Our ability to sustain our historical sales levels of land depends in part on the strength of the housing market and will continue to suffer until conditions improve. Our failure to successfully sell our land held for sale on favorable terms would adversely affect our results of operations and cash flows and could result in a write-down in the value of our land due to impairment.
Our Properties and Businesses Face Significant Competition
The real estate industry is highly competitive in many of the markets in which we operate. Competition could over-saturate any market, as a result of which we may not have sufficient cash to meet the nonrecourse debt service requirements on certain of our properties. Although we may attempt to negotiate a restructuring with the mortgagee, we may not be successful, particularly in light of current credit markets, which could cause a property to be transferred to the mortgagee.

8



Table of Contents

There are numerous other developers, managers and owners of commercial and residential real estate and undeveloped land that compete with us nationally, regionally and/or locally, some of whom have greater financial resources than us. They compete with us for management and leasing opportunities, land for development, properties for acquisition and disposition, and for anchor stores and tenants for properties. We may not be able to successfully compete in these areas.
Tenants at our retail properties face continual competition in attracting customers from retailers at other shopping centers, catalogue companies, online merchants, warehouse stores, large discounters, outlet malls, wholesale clubs, direct mail and telemarketers. Our competitors and those of our tenants could have a material adverse effect on our ability to lease space in our properties and on the rents we can charge or the concessions we can grant. This in turn could materially and adversely affect our results of operations and cash flows, and could affect the realizable value of our assets upon sale.
We May Be Unable to Sell Properties to Avoid Losses or to Reposition Our Portfolio
Because real estate investments are relatively illiquid, we may be unable to dispose of underperforming properties and may be unable to reposition our portfolio in response to changes in national, regional or local real estate markets. As a result, we may incur operating losses from some of our properties and may have to write-down the value of some properties due to impairment.
Our Results of Operations and Cash Flows May Be Adversely Affected by Tenant Defaults or Bankruptcy
Our results of operations and cash flows may be adversely affected if a significant number of our tenants are unable to meet their obligations or do not renew their leases, or if we are unable to lease a significant amount of space on economically favorable terms. In the event of a default by a tenant, we may experience delays in payments and incur substantial costs in recovering our losses.
Based on tenants with net base rent of greater than 2% of total net base rent as of January 31, 2009, our five largest office tenants by leased square feet are the City of New York, Millennium Pharmaceuticals, Inc., U.S. Government, Wellchoice, Inc., and Morgan Stanley & Co. Given our large concentration of office space in New York City, we may be adversely affected by the consolidation or failure of certain financial institutions. Based on tenants with net base rent of greater than 1% of total net base rent as of January 31, 2009, our five largest retail tenants by leased square feet are AMC Entertainment, Inc., Bass Pro Shops, Inc., Regal Entertainment Group, The Gap and TJX Companies.
Our ability to collect rents and other charges will be even more difficult if the tenant is bankrupt or insolvent. While our tenants have from time to time filed for bankruptcy or been involved in insolvency proceedings, there has been an increased number of bankruptcies with the current recession which could adversely affect our properties. Circuit City, a retail tenant that leased 241,032 square feet at eight properties, filed for bankruptcy in November 2008 and recently liquidated and closed all of their stores. As a result, we expensed approximately $2,935,000 of costs associated with the Circuit City leases during the three months ended January 31, 2009. Additionally, we will not receive and may not be able to replace the future rents we had anticipated for their space at those eight properties. The Circuit City bankruptcy, as well as current bankruptcies of some of our tenants, and the potential bankruptcies of other tenants in the future could make it difficult for us to enforce our rights as lessor and protect our investment.
We May Be Negatively Impacted by the Consolidation or Closing of Anchor Stores
Our retail centers are generally anchored by department stores or other “big box” tenants. We could be adversely affected if one or more of these anchor stores were to consolidate, close or enter into bankruptcy. Given the current economic environment for retailers, we are at a heightened risk that an anchor store could close or enter into bankruptcy. Although non-tenant anchors generally do not pay us rent, they typically contribute towards common area maintenance and other expenses. Even if we own the anchor space, we may be unable to re-lease this area or to re-lease it on comparable terms. The loss of these revenues could adversely affect our results of operations and cash flows. Further, the temporary or permanent loss of any anchor likely would reduce customer traffic in the retail center, which could lead to decreased sales at other retail stores. Rents obtained from other tenants may be adversely impacted as a result of co-tenancy clauses in their leases. One or more of these factors could cause the retail center to fail to meet its debt service requirements. The consolidation of anchor stores may also negatively affect current and future development and redevelopment projects.
We May Be Negatively Impacted by International Activities
While our international activities are currently limited in scope and generally focused on evaluating various international opportunities, we may expand our international efforts subjecting us to risks that could have an adverse effect on the projected returns on the international projects or our overall results of operations. We have limited experience in dealing with foreign economies or cultures, changes in political environments or changes in exchange rates for foreign currencies. In addition, international activities would subject us to a wide variety of local laws and regulations governing these foreign properties with

9



Table of Contents

which we have no prior experience. We may experience difficulties in managing international properties, including the ability to successfully integrate these properties into our business operations and the ambiguities that arise when dealing with foreign cultures. Each of these factors may adversely affect our projected returns on foreign investments, which could in turn have an adverse effect on our results of operations.
Terrorist Attacks and Other Armed Conflicts May Adversely Affect Our Business
We have significant investments in large metropolitan areas, including New York City/Philadelphia, Boston, Washington D.C./Baltimore, Denver, Chicago, Los Angeles and San Francisco, which face a heightened risk related to terrorism. Some tenants in these areas may choose to relocate their business to less populated, lower-profile areas of the United States that are not as likely to be targets of terrorist activity. This could result in a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease our properties on less favorable terms. In addition, properties in our real estate portfolio could be directly impacted by future terrorist attacks which could cause the value of our property and the level of our revenues to significantly decline.
Future terrorist activity, related armed conflicts or prolonged or increased tensions in the Middle East could cause consumer confidence and spending to decrease and adversely affect mall traffic. Additionally, future terrorist attacks could increase volatility in the United States and worldwide financial markets. Any of these occurrences could have a significant impact on our revenues, costs and operating results.
The Investment in a Professional Sports Franchise Involves Certain Risks and Future Losses Are Expected for The Nets
On August 16, 2004, we purchased a legal ownership interest in The Nets. This interest is reported on the equity method of accounting and as a separate segment. The purchase of the interest in The Nets was the first step in our efforts to pursue development projects at Brooklyn Atlantic Yards, which are expected to include a new entertainment arena complex and adjacent developments combining housing, offices, shops and public open space. The relocation of The Nets is, among other items, subject to various approvals by the NBA, and we cannot assure you we will receive these approvals on a timely basis or at all. If we are unable to or delayed in moving The Nets to Brooklyn, we may be unable to achieve our projected returns on the related development projects, which could result in a delay in the return of, termination of, or losses on our investment. The Nets are currently operating at a loss and are projected to continue to operate at a loss at least as long as they remain in New Jersey, which is expected to be until at least 2011, and possibly longer. Such operating losses will need to be funded by the contribution of equity. Even if we are able to relocate The Nets to Brooklyn, there can be no assurance that The Nets will be profitable in the future. Losses are allocated to each member of the limited liability company that owns The Nets based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of each accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets. Therefore, losses allocated to us have exceeded our legal ownership interest and may become significant.
Our investment in The Nets is subject to a number of operational risks, including risks associated with operating conditions, competitive factors, economic conditions and industry conditions. If The Nets are not able to successfully manage the following operational risks, The Nets may incur additional operating losses, which are allocated to each member based on an analysis of the respective members’ claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets:
   
Competition with other major league sports, college athletics and other sports-related and non sports-related entertainment;
 
   
Dependence on competitive success of The Nets;
 
   
Fluctuations in the amount of revenues from advertising, sponsorships, concessions, merchandise, parking and season and other ticket sales, which are tied to the popularity and success of The Nets and general economic conditions;
 
   
Uncertainties of increases in players’ salaries;
 
   
Dependence on talented players;
 
   
Risk of injuries to key players;
 
   
Uncertainties relating to labor relations in professional sports, including the expiration of the NBA’s current collective bargaining agreement, or a player or management initiated stoppage after such expiration; and
 
   
Dependence on television and cable network, radio and other media contracts.

10



Table of Contents

Our High Debt Leverage May Prevent Us from Responding to Changing Business and Economic Conditions
Our high degree of debt leverage could limit our ability to obtain additional financing or adversely affect our liquidity and financial condition. We have a high ratio of debt (consisting of nonrecourse mortgage debt, a revolving credit facility and senior and subordinated debt) to total market capitalization. This ratio was approximately 92.2% and 64.0% at January 31, 2009 and January 31, 2008, respectively, based on our long-term debt outstanding at that date and the market value of our outstanding Class A common stock and Class B common stock. Our high leverage may adversely affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes and may make us more vulnerable to a continued downturn in the economy.
Nonrecourse mortgage debt is collateralized by individual completed rental properties, projects under development and undeveloped land. We do not expect to repay a substantial amount of the principal of our outstanding debt prior to maturity or to have available funds from operations sufficient to repay this debt at maturity. As a result, it will be necessary for us to refinance our debt through new debt financings or through equity offerings. If interest rates are higher at the time of refinancing, our interest expense would increase, which would adversely affect our results of operations and cash flows. Cash flows and our liquidity would also be adversely affected if we are required to repay a portion of the outstanding principal or contribute additional equity to obtain the refinancing. In addition, in the event we were unable to secure refinancing on acceptable terms, we might be forced to sell properties on unfavorable terms, which could result in the recognition of losses and could adversely affect our financial position, results of operations and cash flows. If we were unable to make the required payments on any debt collateralized by a mortgage on one of our properties or to refinance that debt when it comes due, the mortgage lender could take that property through foreclosure and, as a result, we could lose income and asset value as well harm our Company reputation. See also “Market Conditions May Negatively Impact Our Liquidity and Our Ability to Finance or Refinance Projects or Repay Our Debt” above.
Our Corporate Debt Covenants Could Adversely Affect Our Financial Condition
We have guaranteed the obligations of our wholly-owned subsidiary, Forest City Rental Properties Corporation, or FCRPC, under the FCRPC Amended and Restated credit agreement as most recently amended on January 30, 2009, among FCRPC, the banks named therein, KeyBank National Association, as administrative agent, National City Bank, as syndication agent and Bank of America, N.A., as documentation agent. This guaranty imposes a number of restrictive covenants on Forest City, including a prohibition on certain consolidations and mergers, limitations on the amount of debt, guarantees and property liens that Forest City may incur and a prohibition on dividends through the maturity date. The guaranty also requires Forest City to maintain a specified minimum cash flow coverage ratio, consolidated shareholders’ equity and Earnings Before Depreciation and Taxes, or EBDT.
The Indentures under which our senior and subordinated debt is issued also contain certain restrictive covenants, including, among other things, limitations on our ability to incur debt, pay dividends, acquire our common stock, permit liens on our properties or dispose of assets.
While we are in compliance with all of our covenants at January 31, 2009, we cannot guarantee our future compliance with any of the covenants. The failure to comply with any of our financial or non-financial covenants could result in an event of default and accelerate some or all of our indebtedness, which could have a material adverse effect on our financial condition. Forest City’s ability and FCRPC’s ability to comply with these covenants will depend upon the future economic performance of Forest City and FCRPC. These covenants may adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that may be desirable or advantageous to us.
We Are Subject to Risks Associated With Hedging Agreements
We will often enter into interest rate swap agreements and other interest rate hedging contracts, including caps and floors to manage our exposure to interest rate volatility or to satisfy lender requirements. While these agreements may help reduce our exposure to interest rate volatility, they also expose us to additional risks, including a risk that the counterparties will not perform. Moreover, there can be no assurance that the hedging agreement will qualify for hedge accounting or that our hedging activities will have the desired beneficial impact on our results of operations. Should we desire to terminate a hedging agreement there could be significant costs and cash requirements involved to fulfill our initial obligation under the hedging agreement.
When a hedging agreement is required under the terms of a mortgage loan it is often a condition that the hedge counterparty maintains a specified credit rating. With the current volatility in the financial markets there is an increased risk that hedge counterparties could have their credit rating downgraded to a level that would not be acceptable under the loan provisions. If we were unable to renegotiate that requirement with the lender or find an alternative counterparty with acceptable credit rating for current and future hedge requirements, we could be in default under the loan and the lender could take that property through foreclosure.

11



Table of Contents

Any Rise in Interest Rates Will Increase Our Interest Costs
Including the effect of the protection provided by the interest rate swaps, caps and long-term contracts in place as of January 31, 2009, a 100 basis point increase in taxable interest rates (including properties accounted for under the equity method and corporate debt and the effect of interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our variable-rate debt by approximately $13,606,000 at January 31, 2009. Although tax-exempt rates generally move in an amount that is smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates (including properties accounted for under the equity method) would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt by approximately $9,752,000 at January 31, 2009. The analysis above includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans for which the interest expense is capitalized. For variable rate bonds, during times of market illiquidity, a premium interest rate could be charged on the bonds to successfully market them which would result in even higher interest rates.
If We Are Unable to Obtain Tax-Exempt Financings, Our Interest Costs Would Rise
We regularly utilize tax-exempt financings and tax increment financings, which generally bear interest at rates below prevailing rates available through conventional taxable financing. We cannot assure you that tax-exempt bonds or similar government subsidized financing will continue to be available to us in the future, either for new development or acquisitions, or for the refinancing of outstanding debt. Our ability to obtain these financings or to refinance outstanding debt on favorable terms could significantly affect our ability to develop or acquire properties and could have a material adverse effect on our results of operations, cash flows and financial position.
Downgrades in Our Credit Rating Could Adversely Affect Our Performance
We are periodically rated by nationally recognized rating agencies. Any further downgrades in our credit rating could impact our ability to borrow by increasing borrowing costs as well as limiting our access to capital. In addition, a further downgrade could require us to post cash collateral and/or letters of credit to cover our self-insured property and liability insurance deductibles, surety bonds, energy contracts and hedge contracts which would adversely affect our cash flow and liquidity.
Our Business Will Be Adversely Impacted Should an Uninsured Loss or a Loss in Excess of Insurance Limits Occur
We carry comprehensive insurance coverage for general liability, property, flood, earthquake and rental loss (and environmental insurance on certain locations) with respect to our properties within insured limits and policy specifications that we believe are customary for similar properties. There are, however, specific types of potential losses, including environmental loss or losses of a catastrophic nature, such as losses from wars, terrorism, hurricanes, earthquakes or other natural disasters, that in our judgment, cannot be purchased at a commercially viable cost or whereby such losses, if incurred, would exceed the insurance limits procured. In the event of an uninsured loss or a loss in excess of our insurance limits, or a failure by an insurer to meet its obligations under a policy, we could lose both our invested capital in, and anticipated profits from, the affected property and could be exposed to liabilities with respect to that which we thought we had adequate insurance to cover. Any such uninsured loss could materially and adversely affect our results of operations, cash flows and financial position. Under our current policies, which expire October 31, 2009, our properties are insured against acts of terrorism, subject to various limits, deductibles and exclusions for acts of war and terrorist acts involving biological, chemical and nuclear damage. Once these policies expire, we may not be able to obtain adequate terrorism coverage at a reasonable cost. In addition, our insurers may not be able to maintain reinsurance sufficient to cover any losses we may incur as a result of terrorist acts. As a result, our insurers’ ability to provide future insurance for any damages that we sustain as a result of a terrorist attack may be reduced.
Additionally, most of our current project mortgages require special all-risk property insurance, and we cannot assure you that we will be able to obtain policies that will satisfy lender requirements. We are self-insured as to the first $500,000 of liability coverage and on the first $250,000 of property damage per occurrence through our wholly-owned captive insurance company that is licensed, regulated and capitalized in accordance with state of Arizona statutes. While we believe that our self-insurance reserves are adequate, we cannot assure you that we will not incur losses that exceed these self-insurance reserves.
We May Be Adversely Impacted by Environmental Matters
We are subject to various foreign, federal, state and local environmental protection and health and safety laws and regulations governing, among other things: the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the ground, air or water; and the health and safety of our employees. In some instances, federal, state and local laws require abatement or removal of specific hazardous materials such as asbestos-containing materials or lead-based paint, in the event of demolition, renovations, remodeling, damage or decay. Laws and regulations also impose specific worker protection and notification requirements and govern emissions of and exposure to hazardous or toxic substances, such as asbestos fibers in the air. We incur costs to comply with such laws and regulations, but we cannot assure you that we have been or will be at all times in complete compliance with such laws and regulations.

12



Table of Contents

Under certain environmental laws, an owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances at that property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. Certain contamination is difficult to remediate fully and can lead to more costly design specifications, such as a requirement to install vapor barrier systems, or a limitation on the use of the property and could preclude development of a site at all. The presence of hazardous substances on a property could also result in personal injury, contribution or other claims by private parties. In addition, persons who arrange for the disposal or treatment of hazardous or toxic wastes may also be liable for the costs of the investigation, removal and remediation of those wastes at the disposal or treatment facility, regardless of whether that facility is owned or operated by that person.
We have invested, and will in the future, invest in properties that are or have been used for or are near properties that have had industrial purposes in the past. As a result, our properties are or may become contaminated with hazardous or toxic substances. We will incur costs to investigate and possibly to remediate those conditions and it is possible that some contamination will remain in or under the properties even after such remediation. While we investigate these sites and work with all relevant governmental authorities to meet their standards given our intended use of the property, it is possible that there will be new information identified in the future that indicates there are additional unaddressed environmental impacts, there could be technical developments that will require new or different remedies to be undertaken in the future, and the regulatory standards imposed by governmental authorities could change in the future.
As a result of the above, the value of our properties could decrease, our income from developed properties could decrease, our projects could be delayed, we could become obligated to third parties pursuant to indemnification agreements or guarantees, our expense to remediate or maintain the properties could increase, and our ability to successfully sell, rent or finance our properties could be adversely affected by environmental matters in a manner that could have a material adverse effect on our financial position, cash flows or results of operation. While we maintain insurance for certain environmental matters, we cannot assure you that we will not incur losses related to environmental matters, including losses that may materially exceed any available insurance. See “Our Business Will Be Adversely Impacted Should an Uninsured Loss or a Loss in Excess of Insurance Limits Occur.”
We Are Controlled by the Ratner, Miller and Shafran Families, Whose Interests May Differ from Those of Other Shareholders
Our authorized common stock consists of Class A common stock and Class B common stock. The economic rights of each Class of common stock are identical, but the voting rights differ. The Class A common stock, voting as a separate Class, is entitled to elect 25% of the members of our board of directors, while the Class B common stock, voting as a separate Class, is entitled to elect the remaining 75% of our board of directors. On all other matters, the Class A common stock and Class B common stock vote together as a single Class, with each share of our Class A common stock entitled to one vote per share and each share of Class B common stock entitled to ten votes per share. At February 27, 2009, members of the Ratner, Miller and Shafran families, which include members of our current board of directors and executive officers, owned 83.2% of the Class B common stock. RMS, Limited Partnership (“RMS LP”), which owned 82.7% of the Class B common stock, is a limited partnership, comprised of interests of these families, with eight individual general partners, currently consisting of:
   
Samuel H. Miller, Treasurer of Forest City and Co-Chairman of our Board of Directors;
 
   
Charles A. Ratner, President and Chief Executive Officer of Forest City and a Director;
 
   
Ronald A. Ratner, Executive Vice President of Forest City and a Director;
 
   
Brian J. Ratner, Executive Vice President of Forest City and a Director;
 
   
Deborah Ratner Salzberg, President of Forest City Washington, Inc., a subsidiary of Forest City, and a Director;
 
   
Joan K. Shafran, a Director;
 
   
Joseph Shafran; and
 
   
Abraham Miller.
Joan K. Shafran is the sister of Joseph Shafran. Charles A. Ratner, James A. Ratner, Executive Vice President of Forest City and a Director, and Ronald A. Ratner are brothers. Albert B. Ratner, Co-Chairman of our Board of Directors, is the father of Brian J. Ratner and Deborah Ratner Salzberg and is first cousin to Charles A. Ratner, James A. Ratner, Ronald A. Ratner, Joan K. Shafran, Joseph Shafran and Bruce C. Ratner, Executive Vice President of Forest City and a Director. Samuel H. Miller was married to Ruth Ratner Miller (now deceased), a sister of Albert B. Ratner, and is the father of Abraham Miller. General

13



Table of Contents

partners holding 60% of the total voting power of RMS LP determine how to vote the Class B common stock held by RMS LP. No person may transfer his or her interest in the Class B common stock held by RMS LP without complying with various rights of first refusal.
In addition, at February 27, 2009, members of these families collectively owned 14.6% of the Class A common stock. As a result of their ownership in Forest City, these family members and RMS LP have the ability to elect a majority of our board of directors and to control the management and policies of Forest City. Generally, they may also determine, without the consent of our other shareholders, the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and prevent or cause a change in control of Forest City.
Even if these families or RMS LP reduce their level of ownership of Class B common stock below the level necessary to maintain a majority of the voting power, specific provisions of Ohio law and our Amended Articles of Incorporation may have the effect of discouraging a third party from making a proposal to acquire us or delaying or preventing a change in control or management of Forest City without the approval of these families or RMS LP.
RMS Investment Corp. Provides Property Management and Leasing Services to Us and Is Controlled By Some of Our Affiliates
We paid approximately $307,000 and $237,000 as total compensation during the years ended January 31, 2009 and 2008, respectively, to RMS Investment Corp. for property management and leasing services. RMS Investment Corp. is controlled by members of the Ratner, Miller and Shafran families, some of whom are our directors and executive officers.
RMS Investment Corp. manages and provides leasing services to our Cleveland-area specialty retail center, Golden Gate, which has 361,000 square feet. The current rate of compensation for this management service is 4% of all rental income, plus a leasing fee of generally 3% to 4% of rental income of all new or renewed leases. Management believes these fees are comparable to those other management companies would charge to non-affiliated third parties.
Our Directors and Executive Officers May Have Interests in Competing Properties, and We Do Not Have Non-Compete Agreements with Certain of Our Directors and Executive Officers
Under our current policy, no director or executive officer, including any member of the Ratner, Miller and Shafran families, is allowed to invest in a competing real estate opportunity without first obtaining the approval of the audit committee of our board of directors. We do not have non-compete agreements with any director, officer or employee, other than Charles Ratner, James Ratner, Ronald Ratner and Bruce Ratner who entered into non-compete agreements on November 9, 2006. Upon leaving Forest City, any other director, officer or employee could compete with us. Notwithstanding our policy, we permit our principal shareholders who are officers and employees to develop, expand, operate or sell, independent of our business, certain commercial, industrial and residential properties that they owned prior to the implementation of our policy. As a result of their ownership of these properties, a conflict of interest may arise between them and Forest City, which may not be resolved in our favor. The conflict may involve the development or expansion of properties that may compete with our properties and the solicitation of tenants to lease these properties.
We Face Potential Liability from Properties Accounted For on the Equity Method and Other Partnership Risks
As part of our financing strategy, we have financed several real estate projects through limited partnerships with investment partners. The investment partner, typically a large, sophisticated institution or corporate investor, invests cash in exchange for a limited partnership interest and special allocations of expenses and the majority of tax losses and credits associated with the project. These partnerships typically require us to indemnify, on an after-tax or “grossed up” basis, the investment partner against the failure to receive or the loss of allocated tax credits and tax losses. Due to the economic structure and related economic substance, we have consolidated each of these properties in our consolidated financial statements.
We believe that all the necessary requirements for qualification for such tax credits have been and will be met and that our investment partners will be able to receive expense allocations associated with these properties. However, we cannot assure you that this will, in fact, be the case or that we will not be required to indemnify our investment partners on an after-tax basis for these amounts. Any indemnification payment could have a material adverse effect on our results of operations and cash flows.
In addition to partnerships, we also use limited liability companies, or LLCs, to finance some of our projects with third party lenders. Acting through our wholly-owned subsidiaries, we typically are a general partner or managing member in these partnerships or LLCs. There are, however, instances in which we do not control or even participate in management or day-to-day operations. The use of a structure where we do not control the management of the entity involves special risks associated with the possibility that:
   
Another partner or member may have interests or goals that are inconsistent with ours;

14



Table of Contents

   
A general partner or managing member may take actions contrary to our instructions, requests, policies or objectives with respect to our real estate investments; or
 
   
A partner or a member could experience financial difficulties that prevent it from fulfilling its financial or other responsibilities to the project or its lender or the other partners or members.
In the event any of our partners or members files for bankruptcy, we could be precluded from taking certain actions affecting our project without bankruptcy court approval, which could diminish our control over the project even if we were the general partner or managing member. In addition, if the bankruptcy court were to discharge the obligations of our partner or member, it could result in our ultimate liability for the project being greater than we would have otherwise been obligated for.
To the extent we are a general partner, we may be exposed to unlimited liability, which may exceed our investment or equity in the partnership. If one of our subsidiaries is a general partner of a particular partnership it may be exposed to the same kind of unlimited liability.
Failure to Continue to Maintain Effective Internal Controls in Accordance with Section 404 of the Sarbanes-Oxley Act of 2002 Could Have a Material Adverse Effect on Our Ability to Ensure Timely and Reliable Financial Reporting
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires our management to evaluate the effectiveness of, and our independent registered public accounting firm to attest to, our internal control over financial reporting. We will continue our ongoing process of testing and evaluating the effectiveness of, and remediating any issues identified related to, our internal control over financial reporting. The process of documenting, testing and evaluating our internal control over financial reporting is complex and time consuming. Due to this complexity and the time-consuming nature of the process and because currently unforeseen events or circumstances beyond our control could arise, we cannot assure you that we ultimately will be able to continue to comply fully in subsequent fiscal periods with Section 404 in our Annual Report on Form 10-K. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404, which could adversely affect public confidence in our ability to record, process, summarize and report financial data to ensure timely and reliable external financial reporting.
Compliance or Failure to Comply with the Americans with Disabilities Act and Other Similar Laws Could Result in Substantial Costs
The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. In the event that we are not in compliance with the Americans with Disabilities Act, the federal government could fine us or private parties could be awarded damages against us. If we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our results of operations and cash flows.
We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We believe that our properties are currently in material compliance with all of these regulatory requirements. However, existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that could adversely affect our cash flows and results of operations.
Changes in Market Conditions Could Continue to Hurt the Market Price of Our Publicly Traded Securities
The market price of our publicly traded securities has been volatile and will continue to fluctuate with various market conditions, which may change from time to time. The market conditions that may affect the market price of our publicly traded securities include the following:
   
Investor perception of us and the industry in which we operate;
 
   
The extent of institutional investor interest in us;
 
   
The reputation of the real estate industry generally;
 
   
The appeal of other real estate securities in comparison to securities issued by other entities (including securities issued by real estate investment trusts);
 
   
Our financial condition and performance; and
 
   
General market volatility and economic conditions.

15



Table of Contents

The stock market has experienced volatile conditions resulting in substantial price and volume fluctuations that are often unrelated or disproportionate to the financial performance of companies. Negative market volatility may continue to cause the market price of our publicly traded securities to decline. Further declines in the price of our Class A common stock could have an adverse effect on our business by reducing our ability to generate capital through sales of our Class A common stock, subjecting us to further credit rating downgrades and increasing the risk of not satisfying the New York Stock Exchange’s continued listing standards.

Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
The Corporate headquarters of Forest City Enterprises, Inc. are located in Cleveland, Ohio and are owned by the Company. The Company’s core markets include the New York City/Philadelphia metropolitan area, Denver, Boston, the Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of California.
The following table provides summary information concerning the Company’s real estate portfolio as of January 31, 2009. Consolidated properties are properties that we control and/or hold a variable interest in and are deemed to be the primary beneficiary. Unconsolidated properties are properties that we do not control and/or are not deemed to be the primary beneficiary and are accounted for under the equity method.

16



Table of Contents

     
Forest City Enterprises, Inc. Portfolio of Real Estate
COMMERCIAL GROUP
OFFICE BUILDINGS
                                                     
        Date of                                   Leasable
        Opening/                           Leasable   Square
        Acquisition/   Legal   Pro-Rata           Square   Feet at Pro-
Name       Expansion   Ownership (1)   Ownership (2)   Location   Major Tenants   Feet   Rata %
 
Consolidated Office Buildings                                
 
  2 Hanson Place     2004       100.00 %     100.00 %   Brooklyn, NY   Bank of New York, HSBC     399,000       399,000  
 
  250 Huron (formerly Chase Financial Tower)     1991       95.00 %     100.00 %   Cleveland, OH   Leasing in progress     119,000       119,000  
 
  35 Landsdowne Street     2002       100.00 %     100.00 %   Cambridge, MA   Millennium Pharmaceuticals     202,000       202,000  
 
  40 Landsdowne Street     2003       100.00 %     100.00 %   Cambridge, MA   Millennium Pharmaceuticals     215,000       215,000  
 
  45/75 Sidney Street     1999       100.00 %     100.00 %   Cambridge, MA   Millennium Pharmaceuticals; Novartis     277,000       277,000  
 
  65/80 Landsdowne Street     2001       100.00 %     100.00 %   Cambridge, MA   Partners HealthCare System     122,000       122,000  
 
  88 Sidney Street     2002       100.00 %     100.00 %   Cambridge, MA   Alkermes, Inc.     145,000       145,000  
 
  Ballston Common Office Center     2005       100.00 %     100.00 %   Arlington, VA   US Coast Guard     174,000       174,000  
 
  Colorado Studios     2007       90.00 %     90.00 %   Denver, CO   Colorado Studios     75,000       68,000  
 
  Commerce Court     2007       70.00 %     100.00 %   Pittsburg, PA   US Bank; Wesco Distributors; Cardworks Services; Marc USA     379,000       379,000  
 
  Edgeworth Building     2006       100.00 %     100.00 %   Richmond, VA   Hirschler Fleischer     137,000       137,000  
 
  Eleven MetroTech Center     1995       85.00 %     85.00 %   Brooklyn, NY   City of New York - DoITT; E-911     216,000       184,000  
 
  Fairmont Plaza     1998       85.00 %     85.00 %   San Jose, CA   Littler Mendelson; Merrill Lynch; Calpine; UBS Financial; Camera 12 Cinemas; Accenture     405,000       344,000  
 
  Fifteen MetroTech Center     2003       95.00 %     95.00 %   Brooklyn, NY   Wellchoice, Inc.; City of New York - HRA     650,000       618,000  
 
  Halle Building     1986       75.00 %     100.00 %   Cleveland, OH   Case Western Reserve University; Grant Thornton; CEOGC     406,000       406,000  
 
  Harlem Center     2003       100.00 %     100.00 %   Manhattan, NY   Office of General Services-Temporary Disability & Assistance; State Liquor Authority     147,000       147,000  
(5)
  Higbee Building     1990       100.00 %     100.00 %   Cleveland, OH   Greater Cleveland Partnership; Key Bank     815,000       815,000  
 
  Illinois Science and Technology Park                                                
 
  - Building A     2006       100.00 %     100.00 %   Skokie, IL   Northshore University Hospital     224,000       224,000  
 
  - Building P     2006       100.00 %     100.00 %   Skokie, IL   NanoInk, Inc.; Midwest Bio Research     128,000       128,000  
 
  - Building Q     2007       100.00 %     100.00 %   Skokie, IL   Astellas Pharmacy; NanoInk, Inc.; Polyera     158,000       158,000  
 
  Jackson Building     1987       100.00 %     100.00 %   Cambridge, MA   Ariad Pharmaceuticals     99,000       99,000  
+
  Johns Hopkins - 855 North Wolfe Street     2008       76.60 %     76.60 %   East Baltimore, MD   Johns Hopkins; Brain Institute; Howard Hughes Institute     279,000       214,000  
 
  New York Times     2007       100.00 %     100.00 %   Manhattan, NY   ClearBridge Advisors, LLC, a Legg Mason Company; Covington & Burling; Osler Hoskin; Seyfarth Shaw     737,000       737,000  
 
  Nine MetroTech Center North     1997       85.00 %     85.00 %   Brooklyn, NY   City of New York - Fire Department     317,000       269,000  
 
  One MetroTech Center     1991       82.50 %     82.50 %   Brooklyn, NY   JP Morgan Chase; National Grid     937,000       773,000  
 
  One Pierrepont Plaza     1988       100.00 %     100.00 %   Brooklyn, NY   Morgan Stanley; Goldman Sachs     656,000       656,000  
 
  Post Office Plaza (formerly M. K. Ferguson)     1990       100.00 %     100.00 %   Cleveland, OH   Washington Group; Chase Manhattan Mortgage Corp; Educational Loan Servicing Corp; Quicken Loans     476,000       476,000  
(5)
  Resurrection Health Care (4930 Oakton)     2006       100.00 %     100.00 %   Skokie, IL   Leasing in progress     40,000       40,000  
 
  Richards Building     1990       100.00 %     100.00 %   Cambridge, MA   Genzyme Biosurgery; Alkermes, Inc.     126,000       126,000  

17



Table of Contents

     
Forest City Enterprises, Inc. Portfolio of Real Estate
COMMERCIAL GROUP
OFFICE BUILDINGS (continued)
                                                          
        Date of                                   Leasable
        Opening/                           Leasable   Square
        Acquisition/   Legal   Pro-Rata           Square   Feet at Pro-
Name       Expansion   Ownership (1)   Ownership (2)   Location   Major Tenants   Feet   Rata %
 
Consolidated Office Buildings (continued)                                
 
  Richmond Office Park     2007       100.00 %     100.00 %   Richmond, VA   Anthem Blue Cross Blue Shield; The Brinks Co.; Wachovia Bank     570,000       570,000  
 
  Skylight Office Tower     1991       92.50 %     100.00 %   Cleveland, OH   Cap Gemini; Ulmer & Berne, LLP     321,000       321,000  
 
  Stapleton Medical Office Building     2006       90.00 %     90.00 %   Denver, CO   University of Colorado Hospital     45,000       41,000  
 
  Ten MetroTech Center     1992       100.00 %     100.00 %   Brooklyn, NY   Internal Revenue Service     365,000       365,000  
 
  Terminal Tower     1983       100.00 %     100.00 %   Cleveland, OH   Forest City Enterprises, Inc.; Cuyahoga Community College     584,000       584,000  
 
  Twelve MetroTech Center     2004       100.00 %     100.00 %   Brooklyn, NY   National Union Fire Insurance Co.     177,000       177,000  
 
  Two MetroTech Center     1990       82.50 %     82.50 %   Brooklyn, NY   Securities Industry Automation Corp.; City of New York - Board of Education     521,000       430,000  
 
  University of Pennsylvania     2004       100.00 %     100.00 %   Philadelphia, PA   University of Pennsylvania     122,000       122,000  
(3)     *
  Waterfront Station - East 4th & West 4th Bldgs     2010       45.00 %     45.00 %   Washington, D.C.   Washington, D.C. Government     628,000       283,000  
                                         
 
 
Consolidated Office Buildings Subtotal
                                    12,393,000       11,544,000  
                                         
 
                                                   
Unconsolidated Office Buildings                                
 
  350 Massachusetts Ave     1998       50.00 %     50.00 %   Cambridge, MA   Star Market; Tofias     169,000       85,000  
(5)     +
  818 Mission Street     2008       50.00 %     50.00 %   San Francisco, CA   Denny’s     28,000       14,000  
 
  Advent Solar     2006       47.50 %     47.50 %   Albuquerque, NM   Advent Solar     87,000       41,000  
(5)
  Bulletin Building     2006       50.00 %     50.00 %   San Francisco, CA   Great West Life and Annuity; Corinthian School     78,000       39,000  
 
  Chagrin Plaza I & II     1969       66.67 %     66.67 %   Beachwood, OH   National City Bank; Benihana; H&R Block     113,000       75,000  
 
  Clark Building     1989       50.00 %     50.00 %   Cambridge, MA   Santa Fe Acambis     122,000       61,000  
 
  Enterprise Place     1998       50.00 %     50.00 %   Beachwood, OH   University of Phoenix; Advance Payroll; PS Executive Centers     132,000       66,000  
 
  Liberty Center     1986       50.00 %     50.00 %   Pittsburgh, PA   Federated Investors     526,000       263,000  
+
  Mesa Del Sol Town Center     2008       47.50 %     47.50 %   Albuquerque, NM   Leasing in progress     74,000       35,000  
^*
  Mesa Del Sol - Fidelity     2008/2009       47.50 %     47.50 %   Albuquerque, NM   Fidelity Investments     210,000       100,000  
 
  Signature Square I     1986       50.00 %     50.00 %   Beachwood, OH   Ciuni & Panichi     79,000       40,000  
 
  Signature Square II     1989       50.00 %     50.00 %   Beachwood, OH   Cleveland Clinic Ophthalmology; Allen Telecom, Inc.     82,000       41,000  
                                         
 
 
Unconsolidated Office Buildings Subtotal
                                    1,700,000       860,000  
                                         
 
                                                   
 
  Total Office Buildings at January 31, 2009                                     14,093,000       12,404,000  
                                         
 
  Total Office Buildings at January 31, 2008                                     13,451,000       12,050,000  
                                         

18



Table of Contents

     
Forest City Enterprises, Inc. Portfolio of Real Estate
COMMERCIAL GROUP
RETAIL CENTERS
                                                                              
        Date of                                   Total           Gross
        Opening/                           Total   Square   Gross   Leasable
        Acquisition/   Legal   Pro-Rata           Square   Feet at Pro-   Leasable   Area at Pro-
Name       Expansion   Ownership (1)   Ownership (2)   Location   Major Tenants   Feet   Rata %   Area   Rata %
 
Consolidated Regional Malls                                                        
 
  Antelope Valley Mall     1990/1999       78.00 %     78.00 %   Palmdale, CA   Sears; JCPenney; Harris Gottschalks; Dillard’s; Forever 21; Cinemark Theatre     995,000       776,000       363,000       283,000  
 
  Ballston Common Mall     1986/1999       100.00 %     100.00 %   Arlington, VA   Macy’s; Sport & Health; Regal Cinemas     579,000       579,000       310,000       310,000  
 
  Galleria at Sunset     1996/2002       100.00 %     100.00 %   Henderson, NV   Dillard’s; Macy’s; JCPenney; Dick’s Sporting Goods; Kohl’s     1,048,000       1,048,000       412,000       412,000  
 
  Mall at Robinson     2001       56.67 %     100.00 %   Pittsburgh, PA   Macy’s; Sears; JCPenney; Dick’s Sporting Goods     880,000       880,000       383,000       383,000  
 
  Mall at Stonecrest     2001       66.67 %     100.00 %   Atlanta, GA   Kohl’s; Sears; JCPenney; Dillard’s; AMC Theatre; Macy’s     1,171,000       1,171,000       397,000       397,000  
 
  Northfield at Stapleton     2005/2006       95.00 %     100.00 %   Denver, CO   Bass Pro; Target; Harkins Theatre; JCPenney; Macy’s     1,106,000       1,106,000       664,000       664,000  
+
  Orchard Town Center     2008       100.00 %     100.00 %   Westminster, CO   JCPenney; Macy’s; Target; AMC Theatre     980,000       980,000       565,000       565,000  
 
  Promenade Bolingbrook     2007       100.00 %     100.00 %   Bolingbrook, IL   Bass Pro; Macy’s; Village Roadshow     750,000       750,000       575,000       575,000  
**
  Promenade in Temecula     1999/2002/2009       75.00 %     100.00 %   Temecula, CA   JCPenney; Sears; Macy’s; Edwards Cinema     1,140,000       1,140,000       540,000       540,000  
^*
  Ridge Hill     2010/2011       70.00 %     100.00 %   Yonkers, NY   National Amusements; Whole Foods; LL Bean; Cheesecake Factory     1,200,000       1,200,000       1,200,000       1,200,000  
(3)   +
  Shops at Wiregrass     2008       50.00 %     100.00 %   Tampa, FL   JCPenney; Dillard’s; Macy’s     642,000       642,000       356,000       356,000  
 
  Short Pump Town Center     2003/2005       50.00 %     100.00 %   Richmond, VA   Nordstrom; Macy’s; Dillard’s; Dick’s Sporting Goods     1,193,000       1,193,000       582,000       582,000  
 
  Simi Valley Town Center     2005       85.00 %     100.00 %   Simi Valley, CA   Macy’s     612,000       612,000       351,000       351,000  
(5)     
  South Bay Galleria     1985/2001       100.00 %     100.00 %   Redondo Beach, CA   Macy’s; Nordstrom; Kohl’s; AMC Theatre     955,000       955,000       389,000       389,000  
 
  Victoria Gardens     2004/2007       80.00 %     80.00 %   Rancho Cucamonga, CA   Bass Pro; Macy’s; JCPenney; AMC Theatre     1,342,000       1,074,000       829,000       663,000  
(3)    *
  Village of Gulfstream     2010       50.00 %     50.00 %   Hallendale, FL   Crate & Barrel; Pottery Barn; The Container Store; Texas de Brazil; III Forks     500,000       250,000       500,000       250,000  
                                         
 
 
Consolidated Regional Malls Subtotal
                                    15,093,000       14,356,000       8,416,000       7,920,000  
                                         

19



Table of Contents

     
Forest City Enterprises, Inc. Portfolio of Real Estate
COMMERCIAL GROUP
RETAIL CENTERS (continued)
                                                                 
        Date of                                   Total             Gross  
        Opening/                           Total     Square     Gross     Leasable  
        Acquisition/   Legal   Pro-Rata           Square     Feet at Pro-     Leasable     Area at Pro-  
Name     Expansion   Ownership (1)   Ownership (2)   Location   Major Tenants   Feet     Rata %     Area     Rata %  
 
Consolidated Specialty Retail Centers                                                        
   
42nd Street
  1999     100.00 %     100.00 %   Manhattan, NY   AMC Theatre; Madame Tussaud’s Wax Museum; Modell’s; Dave & Buster’s     309,000       309,000       309,000       309,000  
   
Atlantic Center
  1996     100.00 %     100.00 %   Brooklyn, NY   Pathmark; OfficeMax; Old Navy; Marshall's; Sterns; NYC - Dept. of Motor Vehicles     399,000       399,000       392,000       392,000  
   
Atlantic Center Site V
  1998     100.00 %     100.00 %   Brooklyn, NY   Modell’s     17,000       17,000       17,000       17,000  
   
Atlantic Terminal
  2004     100.00 %     100.00 %   Brooklyn, NY   Target; Designer Shoe Warehouse; Chuck E. Cheese’s; Daffy’s     373,000       373,000       371,000       371,000  
   
Avenue at Tower City Center
  1990     100.00 %     100.00 %   Cleveland, OH   Hard Rock Café; Morton’s of Chicago; Cleveland Cinemas     365,000       365,000       365,000       365,000  
   
Brooklyn Commons
  2004     100.00 %     100.00 %   Brooklyn, NY   Lowe’s     151,000       151,000       151,000       151,000  
   
Bruckner Boulevard
  1996     100.00 %     100.00 %   Bronx, NY   Conway; Old Navy     113,000       113,000       113,000       113,000  
   
Columbia Park Center
  1999     75.00 %     75.00 %   North Bergen, NJ   Shop Rite; Old Navy; Staples; Bally’s; Shopper’s World     347,000       260,000       347,000       260,000  
   
Court Street
  2000     100.00 %     100.00 %   Brooklyn, NY   United Artists; Barnes & Noble     103,000       103,000       102,000       102,000  
   
Eastchester
  2000     100.00 %     100.00 %   Bronx, NY   Pathmark     63,000       63,000       63,000       63,000  
   
Forest Avenue
  2000     100.00 %     100.00 %   Staten Island, NY   United Artists     70,000       70,000       70,000       70,000  
   
Grand Avenue
  1997     100.00 %     100.00 %   Queens, NY   Stop & Shop     119,000       119,000       119,000       119,000  
   
Gun Hill Road
  1997     100.00 %     100.00 %   Bronx, NY   Home Depot; Chuck E. Cheese’s     147,000       147,000       147,000       147,000  
   
Harlem Center
  2002     100.00 %     100.00 %   Manhattan, NY   Marshall’s; CVS/Pharmacy; Staples; H&M     126,000       126,000       126,000       126,000  
   
Kaufman Studios
  1999     100.00 %     100.00 %   Queens, NY   United Artists     84,000       84,000       84,000       84,000  
   
Market at Tobacco Row
  2002     100.00 %     100.00 %   Richmond, VA   Rich Foods; CVS/Pharmacy     43,000       43,000       43,000       43,000  
   
Northern Boulevard
  1997     100.00 %     100.00 %   Queens, NY   Stop & Shop; Marshall’s; Old Navy; AJ Wright     218,000       218,000       218,000       218,000  
   
Quartermaster Plaza
  2004     100.00 %     100.00 %   Philadelphia, PA   Home Depot; BJ’s Wholesale; Staples; PetSmart; Walgreen’s     459,000       459,000       456,000       456,000  
   
Quebec Square
  2002     90.00 %     90.00 %   Denver, CO   Wal-Mart; Home Depot; Sam’s Club; Ross Dress for Less; Office Depot; PetSmart     739,000       665,000       216,000       194,000  
   
Queens Place
  2001     100.00 %     100.00 %   Queens, NY   Target; Best Buy; Macy’s Furniture;
Designer Shoe Warehouse
    455,000       455,000       221,000       221,000  
   
Richmond Avenue
  1998     100.00 %     100.00 %   Staten Island, NY   Staples     76,000       76,000       76,000       76,000  
   
Saddle Rock Village
  2005     80.00 %     100.00 %   Aurora, CO   Target; JoAnn Fabrics; PetSmart; OfficeMax     279,000       279,000       97,000       97,000  
(5)  
South Bay Southern Center
  1978     100.00 %     100.00 %   Redondo Beach, CA   Bank of America     78,000       78,000       78,000       78,000  

20



Table of Contents

     
Forest City Enterprises, Inc. Portfolio of Real Estate
COMMERCIAL GROUP
RETAIL CENTERS (continued)
                                                                 
        Date of                                   Total             Gross  
        Opening/                           Total     Square     Gross     Leasable  
        Acquisition/   Legal   Pro-Rata           Square     Feet at Pro-     Leasable     Area at Pro-  
Name     Expansion   Ownership (1)   Ownership (2)   Location   Major Tenants   Feet     Rata %     Area     Rata %  
 
Consolidated Specialty Retail Centers (continued)                                                        
   
Station Square
  1994/2002     100.00 %     100.00 %   Pittsburgh, PA   Hard Rock Café; Grand Concourse Restaurant; Buca Di Beppo     291,000       291,000       291,000       291,000  
+  
White Oak Village
  2008     50.00 %     100.00 %   Richmond, VA   Target; Lowes; Sam’s Club; JCPenney; OfficeMax; PetSmart; Ukrop’s     800,000       800,000       294,000       294,000  
   
Woodbridge Crossing
  2002     100.00 %     100.00 %   Woodbridge, NJ   Modell’s; Thomasville Furniture; Party City     284,000       284,000       284,000       284,000  
                                     
   
Consolidated Specialty Retail Centers Subtotal
                      6,508,000       6,347,000       5,050,000       4,941,000  
                                     
   
 
                                                           
   
Consolidated Retail Centers Total
                      21,601,000       20,703,000       13,466,000       12,861,000  
                                     
   
 
                                                           
Unconsolidated Regional Malls                                                        
   
Boulevard Mall
  1996/2000     50.00 %     50.00 %   Amherst, NY   JCPenney; Macy’s; Sears; Michael’s     912,000       456,000       336,000       168,000  
   
Charleston Town Center
  1983     50.00 %     50.00 %   Charleston, WV   Macy’s; JCPenney; Sears     897,000       449,000       363,000       182,000  
   
San Francisco Centre
  2006     50.00 %     50.00 %   San Francisco, CA   Nordstrom; Bloomingdale’s; Century Theaters     1,462,000       731,000       788,000       394,000  
                                     
   
Unconsolidated Regional Malls Subtotal
                      3,271,000       1,636,000       1,487,000       744,000  
                                     
   
 
                                                           
Unconsolidated Specialty Retail Centers                                                        
(4)^*  
East River Plaza
  2009/2010     35.00 %     50.00 %   Manhattan, NY   Home Depot; Target; Best Buy     517,000       259,000       517,000       259,000  
   
Golden Gate
  1958     50.00 %     50.00 %   Mayfield Hts., OH   OfficeMax; Old Navy; Marshall’s; Cost Plus; HHGregg     361,000       181,000       361,000       181,000  
   
Marketplace at Riverpark
  1996     50.00 %     50.00 %   Fresno, CA   JCPenney; Best Buy; Marshall’s; OfficeMax; Old Navy;
Target; Sports Authority
    471,000       236,000       296,000       148,000  
(5)  
Metreon
  2006     50.00 %     50.00 %   San Francisco, CA   AMC Loews     279,000       140,000       279,000       140,000  
   
Plaza at Robinson Town Center
  1989     50.00 %     50.00 %   Pittsburgh, PA   T.J. Maxx; Marshall’s; IKEA; Value City; JoAnn Fabrics; OfficeMax     507,000       254,000       507,000       254,000  
                                     
   
Unconsolidated Specialty Retail Centers Subtotal
                      2,135,000       1,070,000       1,960,000       982,000  
                                     
   
 
                                                           
   
Unconsolidated Retail Centers Total
                      5,406,000       2,706,000       3,447,000       1,726,000  
                                     
   
 
                                                           
   
Total Retail Centers at January 31, 2009
                        27,007,000       23,409,000       16,913,000       14,587,000  
                                     
   
Total Retail Centers at January 31, 2008
                          26,930,000       23,034,000       16,303,000       13,829,000  
                                     

21



Table of Contents

     
Forest City Enterprises, Inc. Portfolio of Real Estate
COMMERCIAL GROUP
HOTELS
                                         
    Date of                              
    Opening/                              
    Acquisition/   Legal     Pro-Rata                 Hotel Rooms at  
Name     Expansion   Ownership (1)     Ownership (2)     Location   Rooms     Pro-Rata %  
 
Consolidated Hotels
                                       
Charleston Marriott
  1983     95.00 %     100.00 %   Charleston, WV     352       352  
Ritz-Carlton, Cleveland
  1990     100.00 %     100.00 %   Cleveland, OH     206       206  
Sheraton Station Square
  1998/2001     100.00 %     100.00 %   Pittsburgh, PA     399       399  
                             
Consolidated Hotels Subtotal
                            957       957  
                             
 
                                       
Unconsolidated Hotels
                                       
Courtyard by Marriott
  1985     3.97 %     3.97 %   Detroit, MI     250       10  
Westin Convention Center
  1986     50.00 %     50.00 %   Pittsburgh, PA     616       308  
                             
Unconsolidated Hotels Subtotal
                            866       318  
                             
 
                                       
Total Hotel Rooms at January 31, 2009
                            1,823       1,275  
                             
Total Hotel Rooms at January 31, 2008
                            1,823       1,275  
                             

22



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS
                                                 
            Date of                            
            Opening/                            
            Acquisition/   Legal   Pro-Rata       Leasable     Leasable Units  
Name         Expansion   Ownership (1)   Ownership (2)   Location   Units     at Pro-Rata %  
 
Consolidated Apartment Communities                            
       
100 Landsdowne Street
  2005     100.00 %     100.00 %   Cambridge, MA     203       203  
       
101 San Fernando
  2000     95.00 %     95.00 %   San Jose, CA     323       307  
       
1251 S. Michigan
  2006     0.01 %     100.00 %   Chicago, IL     91       91  
  ^*    
80 DeKalb
  2009/2010     70.00 %     100.00 %   Brooklyn, NY     365       365  
       
American Cigar Company
  2000     100.00 %     100.00 %   Richmond, VA     171       171  
       
Ashton Mill
  2005     90.00 %     100.00 %   Cumberland, RI     193       193  
       
Autumn Ridge
  2002     100.00 %     100.00 %   Sterling Heights, MI     251       251  
  ^*    
Beekman
  2010/2011     49.00 %     70.00 %   Manhattan, NY     904       633  
       
Botanica on the Green (East 29th Avenue Town Center)
  2004     90.00 %     90.00 %   Denver, CO     78       70  
       
Botanica II
  2007     90.00 %     90.00 %   Denver, CO     154       139  
       
Bowin
  1998     95.05 %     95.05 %   Detroit, MI     193       183  
       
Cambridge Towers
  2002     100.00 %     100.00 %   Detroit, MI     250       250  
       
Cameron Kinney
  2007     100.00 %     100.00 %   Richmond, VA     259       259  
       
Consolidated-Carolina
  2003     89.99 %     100.00 %   Richmond, VA     158       158  
       
Coraopolis Towers
  2002     80.00 %     80.00 %   Coraopolis, PA     200       160  
       
Crescent Flats (East 29th Avenue Town Center)
  2004     90.00 %     90.00 %   Denver, CO     66       59  
       
Cutter’s Ridge at Tobacco Row
  2006     100.00 %     100.00 %   Richmond, VA     12       12  
       
Donora Towers
  2002     100.00 %     100.00 %   Donora, PA     103       103  
       
Drake
  1998     95.05 %     95.05 %   Philadelphia, PA     284       270  
       
Easthaven at the Village
  1994-1995     100.00 %     100.00 %   Beachwood, OH     360       360  
       
Emerald Palms
  1996/2004     100.00 %     100.00 %   Miami, FL     505       505  
       
Grand
  1999     85.50 %     85.50 %   North Bethesda, MD     549       469  
       
Grand Lowry Lofts
  2000     100.00 %     100.00 %   Denver, CO     261       261  
       
Grove
  2003     100.00 %     100.00 %   Ontario, CA     101       101  
  ^+    
Hamel Mill Lofts
  2008/2009     100.00 %     100.00 %   Haverhill, MA     305       305  
       
Heritage
  2002     100.00 %     100.00 %   San Diego, CA     230       230  
(3)      
Independence Place I
  1973     50.00 %     50.00 %   Parma Hts., OH     202       101  
       
Independence Place II
  2003     100.00 %     100.00 %   Parma Hts., OH     201       201  
       
Kennedy Biscuit Lofts
  1990     98.90 %     100.00 %   Cambridge, MA     142       142  

23



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS (continued)
                                                 
            Date of                            
            Opening/                            
            Acquisition/   Legal   Pro-Rata           Leasable     Leasable Units  
Name         Expansion   Ownership (1)   Ownership (2)   Location       Units     at Pro-Rata %  
 
Consolidated Apartment Communities (continued)                            
       
Knolls
  1995     1.00 %     100.00 %   Orange, CA     260       260  
       
Lakeland
  1998     95.10 %     95.10 %   Waterford, MI     200       190  
       
Lenox Club
  1991     95.00 %     95.00 %   Arlington, VA     385       366  
       
Lenox Park
  1992     95.00 %     95.00 %   Silver Spring, MD     406       386  
       
Lofts 23
  2005     100.00 %     100.00 %   Cambridge, MA     51       51  
       
Lofts at 1835 Arch
  2001     95.05 %     95.05 %   Philadelphia, PA     191       182  
  +    
Lucky Strike
  2008     100.00 %     100.00 %   Richmond, VA     131       131  
  ^+    
Mercantile Place on Main (formerly Dallas Mercantile)
  2008     100.00 %     100.00 %   Dallas, TX     366       366  
       
Metro 417
  2005     75.00 %     100.00 %   Los Angeles, CA     277       277  
       
Metropolitan
  1989     100.00 %     100.00 %   Los Angeles, CA     270       270  
       
Midtown Towers
  1969     100.00 %     100.00 %   Parma, OH     635       635  
       
Museum Towers
  1997     100.00 %     100.00 %   Philadelphia, PA     286       286  
(3)      
Oceanpointe Towers
  1980     5.80 %     100.00 %   Long Branch, NJ     151       151  
       
One Franklintown
  1988     100.00 %     100.00 %   Philadelphia, PA     335       335  
       
Parmatown Towers and Gardens
  1972-1973     100.00 %     100.00 %   Parma, OH     412       412  
       
Pavilion
  1992     95.00 %     95.00 %   Chicago, IL     1,114       1,058  
       
Plymouth Square
  2003     100.00 %     100.00 %   Detroit, MI     280       280  
  *    
Presidio
  2010     100.00 %     100.00 %   San Francisco, CA     161       161  
       
Queenswood
  1990     93.36 %     100.00 %   Corona, NY     296       296  
       
Sky55
  2006     100.00 %     100.00 %   Chicago, IL     411       411  
       
Southfield
  2002     100.00 %     100.00 %   Whitemarsh, MD     212       212  
(3)      
Village Center
  1983     100.00 %     100.00 %   Detroit, MI     254       254  
       
Wilson Building
  2007     100.00 %     100.00 %   Dallas, TX     143       143  
                                     
       
Consolidated Apartment Communities Subtotal
                            14,341       13,665  
                                     

24



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS (continued)
                                                 
            Date of                            
            Opening/                            
            Acquisition/   Legal   Pro-Rata           Leasable     Leasable Units  
Name         Expansion   Ownership (1)   Ownership (2)   Location       Units     at Pro-Rata %  
 
Consolidated Supported-Living Apartments                            
       
Forest Trace
  2000     100.00 %     100.00 %   Lauderhill, FL     322       322  
       
Sterling Glen of Glen Cove
  2000     100.00 %     100.00 %   Glen Cove, NY     80       80  
       
Sterling Glen of Great Neck
  2000     100.00 %     100.00 %   Great Neck, NY     142       142  
                                     
       
Consolidated Supported-Living Apartments Subtotal
                            544       544  
                                     
       
 
                                       
       
Consolidated Apartments Total
                            14,885       14,209  
                                     
       
 
                                       
Unconsolidated Apartment Communities                            
       
Arbor Glen
  2001-2007     50.00 %     50.00 %   Twinsburg, OH     288       144  
  +    
Barrington Place
  2008     49.00 %     49.00 %   Raleigh, NC     274       134  
       
Bayside Village
  1988-1989     50.00 %     50.00 %   San Francisco, CA     862       431  
       
Big Creek
  1996-2001     50.00 %     50.00 %   Parma Hts., OH     516       258  
       
Boulevard Towers
  1969     50.00 %     50.00 %   Amherst, NY     402       201  
       
Brookpark Place
  1976     100.00 %     100.00 %   Wheeling, WV     152       152  
       
Brookview Place
  1979     3.00 %     3.00 %   Dayton, OH     232       7  
       
Burton Place
  2000     90.00 %     90.00 %   Burton, MI     200       180  
       
Camelot
  1967     50.00 %     50.00 %   Parma Hts., OH     151       76  
       
Carl D. Perkins
  2002     100.00 %     100.00 %   Pikeville, KY     150       150  
       
Cedar Place
  1974     2.98 %     100.00 %   Lansing, MI     220       220  
       
Cherry Tree
  1996-2000     50.00 %     50.00 %   Strongsville, OH     442       221  
       
Chestnut Lake
  1969     50.00 %     50.00 %   Strongsville, OH     789       395  
       
Clarkwood
  1963     50.00 %     50.00 %   Warrensville Hts., OH     568       284  
  +    
Cobblestone Court Apartments
  2006-2008     50.00 %     50.00 %   Painesville, OH     304       152  
       
Colonial Grand
  2003     50.00 %     50.00 %   Tampa, FL     176       88  
       
Connellsville Towers
  1981     7.96 %     7.96 %   Connellsville, PA     111       9  
       
Coppertree
  1998     50.00 %     50.00 %   Mayfield Hts., OH     342       171  
       
Deer Run
  1987-1990     43.03 %     43.03 %   Twinsburg, OH     562       242  
       
Eaton Ridge
  2002-2004     50.00 %     50.00 %   Sagamore Hills, OH     260       130  

25



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS (continued)
                                                 
            Date of                            
            Opening/                            
            Acquisition/   Legal   Pro-Rata           Leasable     Leasable Units  
Name         Expansion   Ownership (1)   Ownership (2)   Location       Units     at Pro-Rata %  
 
Unconsolidated Apartment Communities (continued)                            
       
Farmington Place
  1980     100.00 %     100.00 %   Farmington, MI     153       153  
       
Fenimore Court
  1982     7.06 %     50.00 %   Detroit, MI     144       72  
       
Fort Lincoln II
  1979     45.00 %     45.00 %   Washington, D.C.     176       79  
       
Fort Lincoln III & IV
  1981     24.90 %     24.90 %   Washington, D.C.     306       76  
       
Frenchtown Place
  1975     8.24 %     100.00 %   Monroe, MI     151       151  
       
Glendora Gardens
  1983     1.99 %     99.00 %   Glendora, CA     105       104  
       
Granada Gardens
  1966     50.00 %     50.00 %   Warrensville Hts., OH     940       470  
       
Hamptons
  1969     50.00 %     50.00 %   Beachwood, OH     651       326  
       
Hunter’s Hollow
  1990     50.00 %     50.00 %   Strongsville, OH     208       104  
  +    
Legacy Arboretum
  2008     49.00 %     49.00 %   Charlotte, NC     266       130  
  ^+    
Legacy Crossroads
  2008-2009     50.00 %     50.00 %   Cary, NC     344       172  
       
Liberty Hills
  1979-1986     50.00 %     50.00 %   Solon, OH     396       198  
       
Metropolitan Lofts
  2005     50.00 %     50.00 %   Los Angeles, CA     264       132  
       
Millender Center
  1985     3.97 %     100.00 %   Detroit, MI     339       339  
       
Miramar Towers
  1980     5.80 %     100.00 %   Los Angeles, CA     157       157  
       
Newport Landing
  2002-2005     50.00 %     50.00 %   Coventry Township, OH     336       168  
       
Noble Towers
  1979     50.00 %     50.00 %   Pittsburgh, PA     133       67  
       
North Port Village
  1981     27.00 %     27.00 %   Port Huron, MI     251       68  
       
Nu Ken Tower (Citizen’s Plaza)
  1981     8.84 %     50.00 %   New Kensington, PA     101       51  
       
Panorama Towers
  1978     99.00 %     99.00 %   Panorama City, CA     154       152  
       
Park Place Towers
  1975     12.68 %     100.00 %   Mt. Clemens, MI     187       187  
       
Parkwood Village
  2001-2002     50.00 %     50.00 %   Brunswick, OH     204       102  
       
Pebble Creek
  1995-1996     50.00 %     50.00 %   Twinsburg, OH     148       74  
       
Perrytown
  1973     8.24 %     100.00 %   Pittsburgh, PA     231       231  
       
Pine Grove Manor
  1973     7.83 %     100.00 %   Muskegon Township, MI     172       172  
       
Pine Ridge Valley
  1967-1974,
2005-2007
    50.00 %     50.00 %   Willoughby Hills, OH     1,309       655  
       
Potomac Heights Village
  1981     5.80 %     100.00 %   Keyser, WV     141       141  
       
Residences at University Park
  2002     40.00 %     40.00 %   Cambridge, MA     135       54  
       
Riverside Towers
  1977     8.30 %     100.00 %   Coshocton, OH     100       100  

26



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS (continued)
                                                 
            Date of                            
            Opening/                            
            Acquisition/   Legal   Pro-Rata           Leasable     Leasable Units  
Name         Expansion   Ownership (1)   Ownership (2)   Location       Units     at Pro-Rata %  
 
Unconsolidated Apartment Communities (continued)                            
       
Settler’s Landing at Greentree
  2000-2004     50.00 %     50.00 %   Streetsboro, OH     408       204  
       
Shippan Avenue
  1980     100.00 %     100.00 %   Stamford, CT     148       148  
       
St. Mary’s Villa
  2002     40.07 %     40.07 %   Newark, NJ     360       144  
  ^*    
Stratford Crossing
  2007-2010     50.00 %     50.00 %   Wadsworth, OH     348       174  
       
Surfside Towers
  1970     50.00 %     50.00 %   Eastlake, OH     246       123  
  ^*    
Sutton Landing
  2007-2009     50.00 %     50.00 %   Brimfield, OH     216       108  
       
Tamarac
  1990-2001     50.00 %     50.00 %   Willoughby, OH     642       321  
       
The Springs
  1981     5.80 %     100.00 %   La Mesa, CA     129       129  
       
Tower 43
  2002     100.00 %     100.00 %   Kent, OH     101       101  
       
Towne Centre Place
  1975     4.92 %     100.00 %   Ypsilanti, MI     170       170  
       
Twin Lake Towers
  1966     50.00 %     50.00 %   Denver, CO     254       127  
  +    
Uptown Apartments
  2008     50.00 %     50.00 %   Oakland, CA     665       333  
       
Village Square
  1978     100.00 %     100.00 %   Williamsville, NY     100       100  
       
Westwood Reserve
  2002     50.00 %     50.00 %   Tampa, FL     340       170  
       
Woodgate / Evergreen Farms
  2004-2006     33.00 %     33.00 %   Olmsted Township, OH     348       115  
       
Worth Street
  2003     50.00 %     50.00 %   Manhattan, NY     330       165  
       
Ziegler Place
  1978     100.00 %     100.00 %   Livonia, MI     141       141  
                                     
       
Unconsolidated Apartment Communities Subtotal
                            20,149       11,303  
                                     
 
Unconsolidated Supported-Living Apartments                            
       
Classic Residence by Hyatt
  1989     50.00 %     50.00 %   Teaneck, NJ     220       110  
       
Classic Residence by Hyatt
  1990     50.00 %     50.00 %   Chevy Chase, MD     339       170  
       
Classic Residence by Hyatt
  2000     50.00 %     50.00 %   Yonkers, NY     310       155  
                                     
       
Unconsolidated Supported-Living Apartments Subtotal
                            869       435  
                                     

27



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS (continued)
                                                 
            Date of                            
            Opening/                            
            Acquisition/   Legal   Pro-Rata           Leasable     Leasable Units  
Name         Expansion   Ownership (1)   Ownership (2)   Location       Units     at Pro-Rata %  
 
Unconsolidated Military Housing                          
  ^*    
Air Force Academy
  2007-2009     50.00 %     50.00 %   Colorado Springs, CO     427       214  
  ^*    
Midwest Millington
  2008-2009     1.00 %       ^^   Memphis, TN     318       ^^  
  ^*    
Navy Midwest
  2006-2009     1.00 %       ^^   Chicago, IL     1,658       ^^  
  ^+    
Ohana Military Communities, Hawaii Increment I
  2005-2008     1.00 %       ^^   Honolulu, HI     1,952       ^^  
  ^*    
Ohana Military Communities, Hawaii Increment II
  2007-2010     1.00 %       ^^   Honolulu, HI     1,175       ^^  
  ^*    
Ohana Military Communities, Hawaii Increment III
  2007-2010     1.00 %       ^^   Honolulu, HI     2,520       ^^  
  ^*    
Ohana Military Communities, Hawaii Increment IV
  2007-2014     1.00 %       ^^   Kaneohe, HI     917       ^^  
  ^*    
Pacific Northwest Communities
  2007-2010     20.00 %       ^^   Seattle, WA     2,986       ^^  
                                     
       
Unconsolidated Military Housing Subtotal
                            11,953       214  
                                     
       
 
                                       
       
Unconsolidated Apartments Total
                            32,971       11,952  
                                     
       
 
                                       
       
Combined Apartments Total
                            47,856       26,161  
                                     
       
 
                                       
       
Federally Subsidized Housing (Total of 8 Buildings)
                            1,260          
       
 
                                   
       
 
                                       
       
Total Apartment Units at January 31, 2009
                            49,116          
       
 
                                   
       
Total Apartment Units at January 31, 2008
                            47,098          
       
 
                                   

28



Table of Contents

Forest City Enterprises, Inc. Portfolio of Real Estate
RESIDENTIAL GROUP
CONDOMINIUMS
                                                                 
            Date of                                            
            Opening/                                   Units Sold     Units Sold as  
            Acquisition/   Legal     Pro-Rata         Total     Total Units at     as of     of 1/31/09 at  
Name         Expansion   Ownership (1)     Ownership (2)     Location   Units     Pro-Rata %     1/31/09     Pro-Rata %  
 
Unconsolidated For Sale Condominiums                
       
Mercury
  2007-2008     50.00 %     50.00 %   Los Angeles, CA     238       119       89       45  
  ^*    
Central Station
  1995-2012     25.00 %     25.00 %   Chicago, IL     4,520       1,130       3,440       860  
                                     
       
Unconsolidated For Sale Condominiums Total
    4,758       1,249       3,529       905  
                                     
       
 
                                                       
        Total For Sale Condominiums at January 31, 2009     4,758                          
       
 
                                                   
        Total For Sale Condominiums at January 31, 2008     5,017                          
       
 
                                                   
 
*   Property under construction as of January 31, 2009.
 
**   Expansion of property under construction as of January 31, 2009.
 
+   Property opened or acquired in 2008.
 
++   Expansion of property.
 
^   Property to open in phases.
 
^^   The Company’s share of residual cash flow ranges from 0-20% during the life cycle of the project.
 
(1)   Represents the Company’s share of a property’s profits and losses upon settlement of any preferred returns to which the Company or its partner(s) may be entitled.
 
(2)   Represents the Company’s share of a property’s profits and losses adjusted for any preferred returns to which the Company or its partner(s) may be entitled.
 
(3)   Due to triggering events under FIN (46), these properties are now fully consolidated.
 
(4)   At East River Plaza, Home Depot may be replaced with Costco under an executed tri-party lease assignment between Landlord, Home Depot and Costco. Costco will assume Home Depot space and rent. It is subject to a modification in the project’s special permit.
 
(5)   Operating properties identified for redevelopment.

29



Table of Contents


Item 3. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its business, and management and legal counsel believe that these claims and lawsuits will not have a material adverse effect on the Company’s consolidated financial statements.

Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter.

Executive Officers of the Registrant
The following list is included in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on June 5, 2009. The names and ages of and positions held by the executive officers of the Company are presented in the following list. Each individual has been appointed to serve for the period which ends with the Annual Meeting of Shareholders to be held on June 5, 2009.
             
       Name   Age   Current Position
 
           
Albert B. Ratner (1)
    81     Co-Chairman of the Board of Directors
Samuel H. Miller
    87     Co-Chairman of the Board of Directors and Treasurer
    67     Chief Executive Officer, President and Director
Bruce C. Ratner (1)
    64     Executive Vice President and Director
James A. Ratner (1)
    64     Executive Vice President and Director
Ronald A. Ratner (1)
    61     Executive Vice President and Director
Brian J. Ratner (1)
    51     Executive Vice President and Director
    51     Executive Vice President and Chief Financial Officer
    51     Senior Vice President, Chief Accounting and Administrative Officer
Geralyn M. Presti
    53     Senior Vice President, General Counsel and Secretary
   
Albert B. Ratner has been Co-Chairman of the Board of Directors since June 1995. He previously served as Chief Executive Officer and Vice Chairman of the Board from June 1993 to June 1995 and President prior to July 1993.
 
   
Samuel H. Miller has been Co-Chairman of the Board of Directors since June 1995 and Treasurer of the Company since December 1992. He previously served as Chairman of the Board from June 1993 to June 1995, and Vice Chairman of the Board and Chief Operating Officer prior to June 1993.
 
   
Charles A. Ratner has been Chief Executive Officer since June 1995 and President since June 1993. He previously served as Chief Operating Officer from June 1993 to June 1995, and Executive Vice President prior to June 1993.
 
   
Bruce C. Ratner has been Executive Vice President since November 2006. He has been Chief Executive Officer of Forest City Ratner Companies, a subsidiary of the Company, since 1987.
 
   
James A. Ratner has been Executive Vice President since March 1988.
 
   
Ronald A. Ratner has been Executive Vice President since March 1988.
 
   
Brian J. Ratner has been Executive Vice President since June 2001.
 
   
Robert G. O’Brien has been Executive Vice President and Chief Financial Officer since April 2008. He previously served as Vice President, Finance and Investment from February 2008 to April 2008 and Executive Vice President, Strategy and Investment, of Forest City Rental Properties Corporation, a subsidiary of the Company, from October 2000 to January 2008.
 
   
Linda M. Kane has been Chief Accounting and Administrative Officer since December 2007 and Senior Vice President since June 2002. She previously served as Corporate Controller from March 1995 to December 2007 and Vice President from March 1995 to June 2002.
 
   
Geralyn M. Presti has been Senior Vice President and General Counsel since July 2002 and Secretary since April 2008. She previously served as Assistant Secretary from July 2002 to April 2008, Deputy General Counsel from January 2000 to June 2002, and Associate General Counsel from December 1996 to January 2000.
 
  (1)   Charles A. Ratner, James A. Ratner and Ronald A. Ratner are brothers. Albert B. Ratner and Bruce C. Ratner are first cousins to each other as well as first cousins to Charles A. Ratner, James A. Ratner and Ronald A. Ratner. Brian J. Ratner is the son of Albert B. Ratner.

30



Table of Contents


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Class A and Class B common stock are traded on the New York Stock Exchange (“NYSE”) under the symbols FCEA and FCEB, respectively. At January 31, 2009 and 2008, the market price of the Company’s Class A common stock was $6.76 and $39.85, respectively, and the market price of the Company’s Class B common stock was $6.92 and $39.80, respectively. As of February 27, 2009, the number of registered holders of Class A and Class B common stock were 813 and 487, respectively. The following tables summarize the quarterly high and low sales prices per share of the Company’s Class A and Class B common stock as reported by the NYSE and the dividends declared per common share:
                                           
    Quarter Ended  
    January 31,     October 31,     July 31,     April 30,  
    2009     2008     2008     2008  
 
 
                               
Market price range of common stock
                               
Class A
                               
High
  $ 12.15     $ 34.62     $ 41.60     $ 40.90  
Low
  $ 3.42     $ 10.91     $ 25.59     $ 34.47  
Class B
                               
High
  $ 12.25     $ 35.17     $ 41.45     $ 40.33  
Low
  $ 3.50     $ 11.16     $ 25.66     $ 34.56  
Quarterly dividends declared per common share Class A and Class B (1)
  $ -        $ 0.08     $ 0.08     $ 0.08  
 
    Quarter Ended  
    January 31,     October 31,     July 31,     April 30,  
    2008     2007     2007     2007  
 
 
                               
Market price range of common stock
                               
Class A
                               
High
  $ 55.46     $ 63.46     $ 72.23     $ 70.08  
Low
  $ 35.38     $ 52.94     $ 54.41     $ 60.10  
Class B
                               
High
  $ 55.49     $ 63.29     $ 71.88     $ 70.08  
Low
  $ 35.62     $ 52.91     $ 54.01     $ 60.00  
Quarterly dividends declared per common share Class A and Class B (1)
  $ 0.08     $ 0.08     $ 0.08     $ 0.07  
 
(1)  
On December 5, 2008, our Board of Directors suspended the cash dividends on shares of Class A and Class B common stock following the payment of dividends on December 15, 2008, until such dividends are reinstated. The Company’s bank revolving credit facility, as amended January 30, 2009, prohibits the Company from paying any dividends on its capital stock through March 2010.
For the three months ended January 31, 2009 there were no unregistered issuances of stock. In November 2008 and January 2009, the Company repurchased into treasury 810 shares and 592 shares, respectively, of Class A common stock to satisfy the minimum statutory tax withholding requirements relating to restricted stock vesting. These shares were not reacquired as part of a publicly announced repurchase plan or program. The following table reflects repurchases of Class A common stock for the three months ended January 31, 2009:
                                 
Issuer Purchases of Equity Securities  
                    Total Number of        
    Total             Shares     Maximum Number of  
    Number of     Average     Purchased as Part of     Shares that May Yet  
    Shares     Price Paid     Publicly Announced     Be Purchased Under  
      Purchased         Per Share         Plans or Programs         the Plans or Programs    
 
                               
November 1 through November 30, 2008
    810       $ 9.76         -     $ -    
December 1 through December 31, 2008
    -           -           -       -    
January 1 through January 31, 2009
    592         6.81         -       -    
 
                       
Total
    1,402       $ 8.51         -     $ -    
 
                       

31



Table of Contents

The following graph shows a comparison of cumulative total return for the period from January 31, 2004 through January 31, 2009 among the Company’s Class A Common Stock (FCEA) and Class B Common Stock (FCEB), Standard & Poor’s 500 Stock Index (“S&P 500”) and the Dow Jones U.S. Real Estate Index. The cumulative total return is based on a $100 investment on January 31, 2004 and the subsequent change in market prices of the securities at each respective fiscal year end. It also assumes that dividends were reinvested quarterly.
(LINE GRAPH)
                                                 
    Jan-04     Jan-05     Jan-06     Jan-07     Jan-08     Jan-09  
Forest City Enterprises Inc. Class A
  $ 100     $ 113     $ 148     $ 238     $ 158     $ 27  
Forest City Enterprises Inc. Class B
  $ 100     $ 114     $ 148     $ 238     $ 158     $ 28  
S&P 500®
  $ 100     $ 106     $ 117     $ 134     $ 131     $ 81  
Dow Jones US Real Estate Index
  $ 100     $ 116     $ 148     $ 203     $ 152     $ 76  

32



Table of Contents


Item 6. Selected Financial Data
The Operating Results and per share amounts presented below have been reclassified pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) for properties disposed of and/or classified as held for sale during the years ended January 31, 2009, 2008, 2007, 2006 and 2005. The following data should be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. Our historical operating results may not be comparable to our future operating results.
                                         
    Years Ended January 31,  
    2009     2008     2007     2006     2005  
    (in thousands, except share and per share data)  
 
                                       
Operating Results:
                                       
Total revenues from real estate operations (1)
    $  1,290,390       $  1,286,470       $  1,116,639       $  1,085,857       $  887,362  
       
 
                                       
Earnings (loss) from continuing operations (1)
    $  (122,012 )     $  (13,293 )     $  31,697       $  69,229       $  45,880  
Discontinued operations, net of tax and minority interest (1)
    9,812       65,718       145,554       14,290       50,587  
Cumulative effect of change in accounting principal, net of tax (3)
    -       -       -       -       (11,261 )
       
 
                                       
Net earnings (loss)
    $  (112,200 )     $  52,425       $  177,251       $  83,519       $  85,206  
       
 
                                       
Diluted Earnings per Common Share:
                                       
Earnings (loss) from continuing operations (1)
    $  (1.19 )     $  (0.13 )     $  0.31       $  0.67       $  0.45  
Discontinued operations, net of tax and minority interest (1)
    0.10       0.64       1.39       0.14       0.50  
Cumulative effect of change in accounting principal, net of tax
    -       -       -       -       (0.11 )
       
 
                                       
Net earnings (loss)
    $  (1.09 )     $  0.51       $  1.70       $  0.81       $  0.84  
       
 
                                       
Weighted Average Diluted Shares Outstanding
    102,755,315       102,261,740       104,454,898       102,603,932       101,846,056  
       
 
                                       
Cash Dividend Declared - Class A and B
    $  0.2400       $  0.3100       $  0.2700       $  0.2300       $  0.2950  (2)
       
 
    Years Ended January 31,  
    2009     2008     2007     2006     2005  
Financial Position:   (in thousands)  
 
                                       
Consolidated assets
    $  11,422,917       $  10,251,597       $  8,981,604       $  7,990,341       $  7,322,085  
 
                                       
Real estate portfolio, at cost
    $  10,631,884       $  9,216,704       $  8,229,273       $  7,155,126       $  6,437,906  
 
                                       
Long-term debt, primarily nonrecourse mortgages
    $  8,314,300       $  7,264,510       $  6,225,272       $  5,841,332       $  5,386,591  
 
(1)  
This category is adjusted for discontinued operations in accordance with SFAS No. 144. See the “Discontinued Operations” section of the Management Discussion and Analysis (“MD&A”) of Item 7.
 
(2)  
On December 9, 2004, the Board of Directors approved a special one-time dividend of $.10 per share (post-split) in recognition of the sale of an entire strategic business unit, Forest City Trading Group, Inc., a lumber wholesaler.
 
(3)  
Amount is related to implementation on February 1, 2004 of Financial Accounting Standards Board Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”).

33



Table of Contents


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Corporate Description
We principally engage in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. We operate through three strategic business units and five reportable segments. The Commercial Group, our largest business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings, hotels and mixed-use projects. The Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. Additionally, the Residential Group develops for-sale condominium projects and also owns interests in entities that develop and manage military family housing. New York City operations are part of the Commercial Group or Residential Group depending on the nature of the operations. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers. It also owns and develops land into master-planned communities and mixed-use projects.
Corporate Activities and The Nets, a franchise of the National Basketball Association (“NBA”) in which we account for our investment on the equity method of accounting, are reportable segments of the Company.
We have approximately $11.4 billion of assets in 27 states and the District of Columbia at January 31, 2009. Our core markets include the New York City/Philadelphia metropolitan area, Denver, Boston, Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of California. We have offices in Albuquerque, Boston, Chicago, Denver, London (England), Los Angeles, New York City, San Francisco and Washington, D.C., and our corporate headquarters is in Cleveland, Ohio.
Overview
Significant milestones occurring during 2008 included:
   
The opening of three retail centers including the 800,000 square foot White Oak Village power center, located in Richmond, Virginia, Shops at Wiregrass, a 642,000 square foot open-air lifestyle center, located in Wesley Chapel, Florida, near Tampa and the 980,000 square foot Orchard Town Center outdoor lifestyle village located in Westminster, Colorado;
 
   
The opening or acquisition of four office projects including Johns Hopkins — 855 North Wolfe Street, the first office building at The Science + Technology Park at Johns Hopkins in Baltimore, Maryland and two at Mesa del Sol in Albuquerque, New Mexico;
 
   
The opening or acquisition of seven apartment communities including the 131-unit Lucky Strike, located in Richmond, Virginia, the 665-unit Uptown Apartments, located in Oakland, California, the 366-unit Mercantile Place on Main located in Dallas, Texas and the first building at Hamel Mill Lofts, a collection of high-end, historically renovated rental apartment buildings in Haverhill, Massachusetts;
 
   
The sales of the Sterling Glen of Rye Brook, located in Rye Brook, New York and Sterling Glen of Lynbrook, located in Lynbrook, New York supported-living apartment properties to Atria Senior Living Group (“Atria”). The sales are part of a larger transaction originally announced in July, 2007, under which Atria would acquire the majority of our supported-living apartment portfolio;
 
   
The election of Deborah L. Harmon, president of Harmon & Co. and principal of Caravel Management LLC, to our board of directors by shareholders;
 
   
Redemption of Bruce C. Ratner’s minority interest in New York Times, an office building located in Manhattan, New York and Twelve MetroTech Center, an office building located in Brooklyn, New York (see the “Class A Common Units” section of the MD&A);
 
   
The closings on major financings including a $250,000,000 financing for the first two buildings of the Waterfront Station mixed-use redevelopment project in Washington, D.C., a $147,000,000 financing for 80 DeKalb, a 335,000 square foot residential building in Brooklyn, New York where construction began during 2008 and a $680,000,000 nonrecourse mortgage financing for the mixed-use Beekman residential project in lower Manhattan, the largest construction financing in our history; and
 
   
Closing $1,490,000,000 in other nonrecourse mortgage financing transactions.
In addition, subsequent to the year ended January 31, 2009, we announced that we have secured a $161,900,000 refinancing of a nonrecourse mortgage associated with our Atlantic Yards project in Brooklyn, New York.

34



Table of Contents

Critical Accounting Policies
Our consolidated financial statements include all majority-owned subsidiaries where we have financial or operational control and variable interest entities (“VIEs”) where we are deemed to be the primary beneficiary. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, we have identified certain critical accounting policies which are subject to judgment and uncertainties. We have used our best judgment to determine estimates of certain amounts included in the financial statements as a result of these policies, giving due consideration to materiality. As a result of uncertainties surrounding these events at the time the estimates are made, actual results could differ from these estimates causing adjustments to be made in subsequent periods to reflect more current information. The accounting policies that we believe contain uncertainties that are considered critical to understanding the consolidated financial statements are discussed below. Our management reviews and discusses the policies below on a regular basis. These policies have also been discussed with our audit committee of the Board of Directors.
Recognition of Revenue
Real Estate Sales – We recognize gains on sales of real estate pursuant to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66 “Accounting for Sales of Real Estate” (“SFAS No. 66”). The specific timing of a sale is measured against various criteria in SFAS No. 66 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the deposit, finance, installment or cost recovery methods, as appropriate.
We follow the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) for reporting dispositions of operating properties. Pursuant to the definition of a component of an entity in SFAS No. 144, assuming no significant continuing involvement, all earnings of properties which have been sold or determined by management to be held for sale are reported as discontinued operations. We consider assets held for sale when the transaction has been approved by the appropriate level of management and there are no significant contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing and, accordingly, the property is not identified as held for sale until the closing actually occurs. However, each potential sale is evaluated based on its separate facts and circumstances.
Leasing Operations – We enter into leases with tenants in our rental properties. The lease terms of tenants occupying space in the retail centers and office buildings generally range from 1 to 30 years, excluding leases with certain anchor tenants which typically run longer. Minimum rents are recognized on a straight-line basis over the non-cancelable term of the related leases, which includes the effects of rent steps and rent abatements under the leases. Overage rents are recognized in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition,” which states that this income is to be recognized only after the contingency has been removed (i.e., sales thresholds have been achieved). Recoveries from tenants for taxes, insurance and other commercial property operating expenses are recognized as revenues in the period the applicable costs are incurred.
Construction – Revenue and profit on long-term fixed-price contracts are recorded using the percentage-of-completion method. On reimbursable cost-plus fee contracts, revenues are recorded in the amount of the accrued reimbursable costs plus proportionate fees at the time the costs are incurred.
Military Housing Fee Revenues – Revenues for development fees related to our military housing projects are earned based on a contractual percentage of the actual development costs incurred by the military housing projects and are recognized on a monthly basis as the costs are incurred. We also recognize additional development incentive fees upon successful completion of certain criteria, such as incentives to realize development cost savings, encourage small and local business participation, comply with specified safety standards and other project management incentives as specified in the development agreements. Revenues of $62,180,000, $56,045,000 and $7,981,000 were recognized during the years ended January 31, 2009, 2008 and 2007, respectively, related to base development and development incentive fees, which were recorded in revenues from real estate operations in the Consolidated Statements of Operations.
Revenues related to construction management fees are earned based on the cost of each construction contract. We also recognized certain construction incentive fees based upon successful completion of certain criteria as set forth in the construction contracts. Revenues of $13,505,000, $10,012,000 and $4,327,000 were recognized during the years ended January 31, 2009, 2008 and 2007, respectively, related to the base construction and incentive fees, which were recorded in revenues from real estate operations in the Consolidated Statements of Operations.
Property management and asset management fee revenues are earned based on a contractual percentage of the annual net rental income and annual operating income, respectively, that is generated by the military housing privatization projects as defined in the agreements. We also recognized certain property management incentive fees based upon successful completion of certain

35



Table of Contents

criteria as set forth in the property management agreements. Property management and asset management fees of $14,318,000, $9,357,000 and $5,366,000 were recognized during the years ended January 31, 2009, 2008 and 2007, respectively, which were recorded in revenues from real estate operations in the Consolidated Statements of Operations.
Recognition of Costs and Expenses
Operating expenses primarily represent the recognition of operating costs, which are charged to operations as incurred, administrative expenses and taxes other than income taxes. Interest expense and real estate taxes during active development and construction are capitalized as a part of the project cost.
Depreciation and amortization is generally computed on a straight-line method over the estimated useful life of the asset. The estimated useful lives of buildings and certain first generation tenant allowances that are considered by management as a component of the building are primarily 50 years. Subsequent tenant improvements and those first generation tenant allowances not considered a component of the building are amortized over the life of the tenant’s lease. This estimate is based on the length of time the asset is expected to generate positive operating cash flows. Actual events and circumstances can cause the life of the building and tenant improvement to be different than the estimates made. Additionally, lease terminations can affect the economic life of the tenant improvements. We believe the estimated useful lives and classification of the depreciation and amortization of fixed assets and tenant improvements are reasonable and follow industry standards.
Major improvements and tenant improvements that are considered our assets are capitalized in real estate costs and expensed through depreciation charges. Tenant improvements that are considered lease inducements are capitalized into other assets and amortized as a reduction of rental revenue over the life of the tenant’s lease. Repairs, maintenance and minor improvements are expensed as incurred.
A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by SFAS No. 34, “Capitalization of Interest Cost,” and SFAS No. 67, “Accounting for Costs and the Initial Rental Operations of Real Estate Properties.” The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portion under construction. Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the respective accounts and any resulting gains or losses are reported in the Consolidated Statements of Operations.
Allowance for Projects Under Development – We record an allowance for estimated development project write-offs for our projects under development. A specific project is written off when it is determined by management that it is probable the project will not be developed. The allowance, which is consistently applied, is adjusted on a quarterly basis based on our actual development project write-off history. The allowance balance was $17,786,000 and $11,786,000 at January 31, 2009 and 2008, respectively, and is included in accounts payable and accrued expenses in our Consolidated Balance Sheets. The allowance increased by $6,000,000 for the year ended January 31, 2009 and decreased by $3,900,000 and $800,000 for the years ended January 31, 2008 and 2007, respectively. Any change in the allowance is reported in operating expenses in our Consolidated Statements of Operations.
Acquisition of Rental Properties - Upon acquisition of rental property, we allocate the purchase price of properties to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. Capitalized above-market lease values are amortized as a reduction of rental income (or rental expense for ground leases in which we are the lessee) over the remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income (or rental expense for ground leases in which we are the lessee) over the remaining non-cancelable terms of the respective leases, including any fixed-rate renewal periods.
Intangible assets also include amounts representing the value of tenant relationships and in-place leases based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the respective tenant. We estimate the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective leases. Our estimates of value are made using methods similar to those used by independent appraisers or by using independent appraisals. Factors considered by us in this analysis include an estimate of the carrying costs during the expected lease-up periods

36



Table of Contents

considering current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. We also use the information obtained as a result of our pre-acquisition due diligence as part of our consideration of the Financial Accounting Standards Board Interpretation (“FIN”) No. 47 “Accounting for Conditional Asset Retirement Obligations,” and when necessary, will record a conditional asset retirement obligation as part of our purchase price.
Characteristics considered by us in allocating value to our tenant relationships include the nature and extent of our business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. The value of tenant relationship intangibles is amortized over the remaining initial lease term and expected renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is amortized over the remaining non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible, including market rate adjustments, in-place lease values and tenant relationship values, would be charged to expense.
Allowance for Doubtful Accounts and Reserves on Notes Receivable – We record allowances against our rent receivables from commercial and residential tenants that we deem to be uncollectible. These allowances are based on management’s estimate of receivables that will not be realized from cash receipts in subsequent periods. We also maintain an allowance for receivables arising from the straight-lining of rents. This receivable arises from earnings recognized in excess of amounts currently due under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. The allowance against our straight-line rent receivable is based on our historical experience with early lease terminations as well as specific review of our significant tenants and tenants that are having known financial difficulties. There is a risk that our estimate of the expected activity of current tenants may not accurately reflect future events. If the estimate does not accurately reflect future tenant vacancies, the reserve for straight-line rent receivable may be over or understated by the actual tenant vacancies that occur. We estimate the allowance for notes receivable based on our assessment of expected future cash flows estimated to be paid to us. If our estimate of expected future cash flows does not accurately reflect actual events, our reserve on notes receivable may be over or understated by the actual cash flows that occur. Our allowance for doubtful accounts, which includes our straight-line allowance, was $27,213,000 and $13,084,000, at January 31, 2009 and 2008, respectively. Management believes the increase in the reserve is indicative of the general economic environment and its impact on the ability of certain retail and office tenants to pay all of their commitments recorded on the Consolidated Balance Sheet as of January 31, 2009.
Historic and New Market Tax Credit Entities – We have certain investments in properties that have received, or we believe are entitled to receive, historic rehabilitation tax credits on qualifying expenditures under Internal Revenue Code (“IRC”) section 47 and new market tax credits on qualifying investments in designated community development entities (“CDEs”) under IRC section 45D, as well as various state credit programs. We typically enter into these investments with sophisticated financial investors. In exchange for the financial investors’ initial contribution into these investments, they are entitled to substantially all of the benefits derived from the tax credit, but generally have no material interest in the underlying economics of the properties. Typically, these arrangements have put/call provisions (which range up to 7 years) whereby we may be obligated or entitled to repurchase the financial investors’ interest. We have consolidated each of these properties in our consolidated financial statements, and have reflected the investors’ contribution as accounts payable and accrued expenses in our Consolidated Balance Sheets.
We guarantee the financial investor that in the event of a subsequent recapture by a taxing authority due to our noncompliance with applicable tax credit guidelines that we will indemnify the financial investor for any recaptured tax credits. Within our consolidated financial statements, we initially record a liability for the cash received from the financial investor. We generally record income upon completion and certification of the qualifying development expenditures for historic tax credits and upon certification of the qualifying investments in designated CDEs for new market tax credits resulting in an adjustment of the liability at each balance sheet date to the amount that would be paid to the financial investor based upon the tax credit compliance regulations, which range from 0 to 7 years. During the years ended January 31, 2009, 2008 and 2007, we recognized income related to tax credits of $11,168,000, $10,788,000 and $25,873,000, respectively, which were recorded in interest and other income in our Consolidated Statements of Operations.
Impairment of Real Estate – We follow the provisions of SFAS No. 144 when reviewing our long-lived assets to determine if an impairment of their carrying value exists. We review our real estate portfolio, including land held for development or sale, to determine if the carrying costs will be recovered from future undiscounted cash flows whenever events or changes indicate that recoverability of long-lived assets may not be supported by current assumptions. Impairment indicators include, but are not limited to significant decreases to property net operating income, significant decreases in occupancy rates, physical condition of property and general economic conditions. In cases where we do not expect to recover our carrying costs, an impairment loss is recorded as an impairment of real estate to the extent the carrying value exceeds fair value. Significant estimates are made in the determination of future undiscounted cash flows. Changes to management’s estimates may affect the amount of impairment charges recognized.

37



Table of Contents

Impairment of Unconsolidated Entities — We apply the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”), to determine if there has been an other-than-temporary decline loss in value of our investments in unconsolidated entities. We review our investments in unconsolidated entities for impairment whenever events or changes indicate that the fair value may be less than the carrying value of our investment. For our equity method real estate investments, a loss in value of an investment which is other than a temporary decline is recognized as a component of equity in earnings (loss) of unconsolidated entities. This determination is based upon the length of time elapsed, severity of decline and all other relevant facts and circumstances.
Variable Interest Entities — In accordance with FIN No. 46 (R) (Revised December 2003) “Consolidation of Variable Interest Entities” (“FIN No. 46 (R)”), we consolidate a variable interest entity (“VIE”) in which we have a variable interest (or a combination of variable interests) that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, based on an assessment performed at the time the we become involved with the entity. VIEs are entities in which the equity investors do not have a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We reconsider this assessment only if the entity’s governing documents or the contractual arrangements among the parties involved change in a manner that changes the characteristics or adequacy of the entity’s equity investment at risk, some or all of the equity investment is returned to the investors and other parties become exposed to expected losses of the entity, the entity undertakes additional activities or acquires additional assets beyond those that were anticipated at inception or at the last reconsideration date that increase its expected losses, or the entity receives an additional equity investment that is at risk, or curtails or modifies its activities in a way that decreases its expected losses. We may be subject to additional losses to the extent of any financial support that we voluntarily provide in the future. Additionally, if different estimates are applied in determining future cash flows, and how the cash flows are funded, we may have otherwise concluded on the consolidation method of an entity.
The determination of the consolidation method for each entity can change as reconsideration events occur. Expected results after the formation of an entity can vary, which could cause a change in the allocation to the partners. During the year ended January 31, 2009, the deterioration of the economy as it relates to the real estate market has resulted in changes in the economic design in the operation of certain joint ventures. Our reevaluation of the economic design of various joint ventures has caused a change in consolidation methods of certain VIEs during the year ended January 31, 2009. In addition, if we sell a property, sell our interest in a joint venture or enter into a new joint venture, the number of VIEs we are involved with could vary between quarters.
As of January 31, 2009, we determined that we were the primary beneficiary under FIN No. 46 (R) of 34 VIEs representing 24 properties (20 VIEs representing 11 properties in Residential Group, 12 VIEs representing 11 properties in Commercial Group and 2 VIEs/properties in Land Development Group). The creditors of the consolidated VIEs do not have recourse to our general credit. As of January 31, 2009, we held variable interests in 42 VIEs for which we are not the primary beneficiary. The maximum exposure to loss as a result of our involvement with these unconsolidated VIEs is limited to our recorded investments in those VIEs totaling approximately $88,000,000 at January 31, 2009. Our VIEs consist of joint ventures that are engaged, directly or indirectly, in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing, supported-living communities, land development and The Nets.
The carrying value of real estate, nonrecourse mortgage debt and minority interest of VIEs for which we are the primary beneficiary are as follows:
                 
  January 31,
  2009     2008
    (in thousands)  
 
Real estate, net
  $     1,602,000     $   789,000  
Nonrecourse mortgage debt
  $     1,237,000     $     790,000  
Minority interest
  $     78,000     $     5,000  
In addition to the VIEs described above, we have also determined that we are the primary beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (see the “Senior and Subordinated Debt” section of MD&A) as of January 31, 2009.
Fiscal Year – The years 2008, 2007 and 2006 refer to the fiscal years ended January 31, 2009, 2008 and 2007, respectively.

38



Table of Contents

Results of Operations
We report our results of operations by each of our three strategic business units as we believe this provides the most meaningful understanding of our financial performance. In addition to our three strategic business units, we have two additional segments: The Nets and Corporate Activities.
Net Earnings (Loss) – Net loss for the year ended January 31, 2009 was ($112,200,000) versus net earnings of $52,425,000 for the year ended January 31, 2008. Although we have substantial recurring revenue sources from our properties, we also enter into significant one-time transactions, which could create substantial variances in net earnings (loss) between periods. This variance to the prior year is primarily attributable to the following decreases, which are net of tax and minority interest:
   
$64,604,000 ($105,287,000, pre-tax) related to the 2007 gains on disposition of Landings of Brentwood, a consolidated apartment community in Nashville, Tennessee and the following six consolidated supported-living apartment communities: Sterling Glen of Bayshore in Bayshore, New York, Sterling Glen of Center City in Philadelphia, Pennsylvania, Sterling Glen of Darien in Darien, Connecticut, Sterling Glen of Forest Hills in Forest Hills, New York, Sterling Glen of Plainview in Plainview, New York and Sterling Glen of Stamford in Stamford, Connecticut;
 
   
$18,758,000 ($30,879,000, pre-tax) related to increased write-offs of abandoned development projects in 2008 compared to 2007. The increase primarily relates to the write-off at Summit at Lehigh Valley, a Commercial development project with a housing component in Allentown, Pennsylvania, of $13,069,000, ($21,513,000 pre-tax) in 2008;
 
   
$17,920,000 ($20,111,000, pre-tax) related to the increased share of losses from our equity investment in the New Jersey Nets basketball team (see “The Nets” section of the MD&A);
 
   
$10,940,000 ($17,830,000, pre-tax) related to the 2007 net gain recognized in other income on the sale of Sterling Glen of Roslyn a consolidated supported-living apartment community under construction in Roslyn, New York;
 
   
$8,168,000 ($13,311,000, pre-tax) related to the 2007 gains on disposition of two equity method properties, University Park at MIT Hotel in Cambridge, Massachusetts and White Acres, an apartment community in Richmond Heights, Ohio offset by the 2008 gains on disposition of two equity method properties, One International Place and Emery-Richmond, office buildings in Cleveland, Ohio and Warrensville Heights, Ohio, respectively;
 
   
$7,930,000 related to a cumulative effect of change in our effective tax rate during 2008;
 
   
$7,554,000 ($12,434,000, pre-tax) related to the 2008 reduction in fair value of the Denver Urban Renewal Authority (“DURA”) purchase obligation and fee (see the “Other Structured Financing Arrangements” section of the MD&A);
 
   
$6,707,000 ($10,986,000, pre-tax) related to the 2008 increase in impairment charges of consolidated and unconsolidated entities;
 
   
$5,611,000 ($9,237,000, pre-tax) in 2008 related to the change in fair market value between the comparable periods of one of our 10-year forward swaps and a related interest rate floor which was marked to market through interest expense as a result of the derivatives not qualifying for hedge accounting (see the “Interest Rate Exposure” section of the MD&A); and
 
   
$5,255,000 ($8,651,000, pre-tax) related to the 2008 increase in outplacement and severance costs related to involuntary employee separations.
These decreases were partially offset by the following increases, net of tax and minority interest:
   
$13,924,000 ($18,197,000, pre-tax) primarily related to military housing fee income from the management and development of units located primarily in Hawaii, Illinois, Washington and Colorado;
 
   
$8,159,000 ($13,297,000, pre-tax) related to the 2008 gains on disposition of two supported-living apartment communities, Sterling Glen of Lynbrook in Lynbrook, New York and Sterling Glen of Rye Brook in Rye Brook, New York;
 
   
$4,734,000 ($7,793,000, pre-tax) primarily related to the gain on early extinguishment of a portion of our puttable equity-linked senior notes due October 15, 2011 (see the “Puttable Equity-Linked Senior Notes” section of the MD&A) in 2008 as compared to the loss on early extinguishment of nonrecourse mortgage debt primarily at Eleven MetroTech Center, an office building in Brooklyn, New York, in order to secure more favorable financing terms and at New York Times, an office building in Manhattan, New York, in order to obtain permanent financing, both in 2007;
 
   
$2,417,000 ($3,978,000, pre-tax) related to lease termination fee income in 2008 at an office building in Cleveland, Ohio; and

39



Table of Contents

    $2,035,000 ($3,350,000, pre-tax) related to the 2008 gain on the sale of an ownership interest in a parking management company.
Net earnings for the year ended January 31, 2008 was $52,425,000 versus $177,251,000 for the year ended January 31, 2007. This variance to the prior year is primarily attributable to the following decreases, which are net of tax and minority interest:
   
$143,026,000 ($233,092,000, pre-tax) related to the 2006 gains on disposition of six consolidated properties, Mount Vernon Square, an apartment community in Alexandria, Virginia, Providence at Palm Harbor, an apartment community in Tampa, Florida, Hilton Times Square, a 444-room hotel in Manhattan, New York, G Street, a specialty retail center in Philadelphia, Pennsylvania, Embassy Suites Hotel, a 463-room hotel in Manhattan, New York, and Battery Park City, a retail center in Manhattan, New York;
 
   
$4,700,000 ($7,662,000, pre-tax) related to the 2006 gain on disposition of one equity method Commercial property, Midtown Plaza, a specialty retail center in Parma, Ohio;
 
   
$34,458,000 ($51,756,000, pre-tax) related to decreased earnings in 2007 reported in the Land Development Group primarily due to a decrease in land sales at Sweetwater Ranch in Austin, Texas, Stapleton in Denver, Colorado and Bal Gra in Edenton, North Carolina;
 
   
$9,256,000 ($15,085,000, pre-tax) related to income recognition on the sale of state and federal Historic Preservation Tax Credits and New Market Tax Credits (collectively, “the Tax Credits”) in 2006 that did not recur at the same level;
 
   
$8,109,000 ($13,215,000, pre-tax) related to decreases in earnings from the Commercial Group outlot land sales in 2007 primarily at Simi Valley in Simi Valley, California partially offset by the 2007 land sale and related site work construction at Ridge Hill in Yonkers, New York, which is accounted for under the percentage of completion method;
 
   
$6,081,000 ($9,910,000, pre-tax) related to increased write-offs of abandoned development projects in 2007 compared to 2006;
 
   
$5,074,000 ($8,269,000, pre-tax) related to an impairment charge on one of our unconsolidated entities. Due to the continued deterioration of the condominium market in Los Angeles, California during the fourth quarter of 2007, Mercury lowered certain estimates regarding future cash flows on condominium sales; and
 
   
$4,809,000 ($7,837,000, pre-tax) related to management’s approved plan to demolish two buildings owned by us adjacent to Ten MetroTech Center, an office building located in Brooklyn, New York, to clear the land for a residential project named 80 DeKalb Avenue. Due to this new development plan, the estimated useful lives of the two adjacent buildings were adjusted to expire at the scheduled demolition date in April 2007 resulting in accelerated depreciation expense.
These decreases were partially offset by the following increases, net of tax and minority interest:
   
$64,604,000 ($105,287,000, pre-tax) related to the 2007 gains on disposition of Landings of Brentwood and the following six consolidated supported-living apartment properties: Sterling Glen of Bayshore, Sterling Glen of Center City, Sterling Glen of Darien, Sterling Glen of Forest Hills, Sterling Glen of Plainview, and Sterling Glen of Stamford in Stamford, Connecticut;
 
   
$10,940,000 ($17,830,000, pre-tax) related to the 2007 net gain recognized in other income on the sale of Sterling Glen of Roslyn;
 
   
$8,831,000 ($14,392,000, pre-tax) related to the 2007 gains on disposition of two equity method properties, University Park at MIT Hotel and White Acres; and
 
   
$6,685,000 ($10,858,000, pre-tax) primarily related to military housing fee income from the management and development of units.

40



Table of Contents

Summary of Segment Operating Results – The following tables present a summary of revenues from real estate operations, operating expenses, interest expense, equity in earnings (loss) of unconsolidated entities and impairment of unconsolidated entities by segment for the years ended January 31, 2009, 2008 and 2007, respectively. See discussion of these amounts by segment in the narratives following the tables.
                         
    Years Ended January 31,
    2009     2008     2007  
    (in thousands)
     
 
                       
Revenues from Real Estate Operations
                       
Commercial Group
    $ 933,876     $ 851,496     $ 753,148  
Commercial Group Land Sales
    36,777       76,940       58,167  
Residential Group
    285,889       265,777       188,094  
Land Development Group
    33,848       92,257       117,230  
The Nets
    -       -       -  
Corporate Activities
    -       -       -  
     
Total Revenues from Real Estate Operations
    $ 1,290,390     $ 1,286,470     $ 1,116,639  
     
 
                       
Operating Expenses
                       
Commercial Group
    $ 490,833     $ 436,432     $ 401,027  
Cost of Commercial Group Land Sales
    17,062       54,888       27,106  
Residential Group
    177,396       183,078       127,364  
Land Development Group
    52,878       67,687       75,107  
The Nets
    -       -       -  
Corporate Activities
    44,097       41,635       41,607  
     
Total Operating Expenses
    $ 782,266     $ 783,720     $ 672,211  
     
 
                       
Interest Expense
                       
Commercial Group
    $ 261,989     $ 214,785     $ 178,200  
Residential Group
    41,103       46,525       45,669  
Land Development Group
    234       413       8,875  
The Nets
    -       -       -  
Corporate Activities
    64,556       63,782       48,086  
     
Total Interest Expense
    $ 367,882     $ 325,505     $ 280,830  
     
 
                       
Equity in Earnings (Loss) of Unconsolidated Entities
                       
Commercial Group
    $ 6,896     $ 11,487     $ 16,674  
Gain on sale of Emery-Richmond
    200       -       -  
Gain on sale of One International Place
    881       -       -  
Gain on sale of University Park at MIT Hotel
    -       12,286       -  
Gain on sale of Midtown
    -       -       7,662  
Residential Group
    9,193       10,296       118  
Gain on sale of White Acres
    -       2,106       -  
Land Development Group
    9,519       5,245       39,190  
The Nets
    (40,989 )     (20,878 )     (14,703 )
Corporate Activities
    -       -       1  
     
Total Equity in Earnings (Loss) of Unconsolidated Entities
    $ (14,300 )   $ 20,542     $ 48,942  
     
 
                       
Impairment of Unconsolidated Entities
                       
Commercial Group
    $ 9,193     $ -     $ 400  
Residential Group
    9,443       8,269       -  
Land Development Group
    2,649       3,200       -  
The Nets
    -       -       -  
Corporate Activities
    -       -       -  
     
Total Impairment of Unconsolidated Entities
    $ 21,285     $ 11,469     $ 400  
     

41



Table of Contents

Commercial Group
Revenues from real estate operations – Revenues from real estate operations for the Commercial Group, including the segment’s land sales, increased by $42,217,000, or 4.55%, for the year ended January 31, 2009 compared to the same period in the prior year. The variance to the prior year is primarily attributable to the following increases:
   
$66,676,000 related to new property openings, as noted in the table below;
 
   
$5,288,000 related to revenues earned on a construction contract with the New York City School Construction Authority for the construction of a school at Beekman, a development project in Manhattan, New York. This represents a reimbursement of costs which is included in operating expenses discussed below; and
 
   
$3,978,000 related to lease termination fee income in 2008 at an office building in Cleveland, Ohio.
These increases were partially offset by the following decrease:
   
$40,163,000 related to a decrease in commercial outlot land sales primarily related to Promenade Bolingbrook located in Bolingbrook, Illinois, White Oak Village in Richmond, Virginia and Ridge Hill in Yonkers, New York, which were partially offset by increases in land sales at Short Pump Town Center in Richmond, Virginia and South Bay Southern Center, in Redondo Beach, California.
The balance of the remaining increase of $6,438,000 was generally due to fluctuations in mature properties.
Revenues from real estate operations for the Commercial Group, including the segment’s land sales, increased by $117,121,000, or 14.44%, for the year ended January 31, 2008 compared to the same period in the prior year. The variance to the prior year was primarily attributable to the following increases:
   
$59,854,000 related to new property openings, as noted in the table below;
 
   
$15,045,000 related to the 2007 land sale at Ridge Hill;
 
   
$13,931,000 related to the buyout of our partner in the third quarter of 2006 in Galleria at Sunset, a regional mall in Henderson, Nevada, which was previously accounted for on the equity method of accounting;
 
   
$5,466,000 related to the amortization to straight-line rent of above and below market leases, which were recorded as a component of the purchase price allocation for the New York portfolio transaction;
 
   
$5,297,000 related to an increase in rents primarily at the following regional malls: Antelope Valley, Victoria Gardens, Promenade in Temecula, South Bay Galleria and Simi Valley Town Center, which are all located in California;
 
   
$4,108,000 primarily related to reduced vacancies at 42nd Street Retail and Short Pump Town Center; and
 
   
$3,728,000 related to an increase in commercial outlot land sales primarily at Promenade Bolingbrook and White Oak Village, which was partially offset by decreases at Simi Valley and Victoria Gardens.
These increases were partially offset by the following decrease:
   
$11,714,000 related to revenues earned on a construction contract with the New York City School Construction Authority for the construction of a school at Beekman. This represents a reimbursement of costs, which is included in operating expenses discussed below.
The balance of the remaining increase of $21,406,000 was generally due to fluctuations in mature properties.
Operating and Interest Expenses – Operating expenses increased $16,575,000, or 3.37%, for year ended January 31, 2009 compared to the same period in the prior year. The variance to the prior year is primarily attributable to the following increases:
   
$26,978,000 related to write-offs of abandoned development projects, primarily at Summit at Lehigh Valley;
 
   
$18,335,000 related to new property openings, as noted in the below;

42



Table of Contents

   
$5,288,000 related to construction of a school at Beekman. These costs are reimbursed by the New York City School Construction Authority, which are included in revenues from real estate operations discussed above; and
 
   
$1,759,000 related to a participation payment on the refinancing at Jackson Building, an office building in Cambridge, Massachusetts.
These increases were partially offset by the following decrease:
   
$37,826,000 related to a decrease in commercial outlot land sales primarily related to Promenade Bolingbrook, White Oak Village and Ridge Hill, which was partially offset by increases at Short Pump Town Center and Saddle Rock Village in Aurora, Colorado.
The balance of the remaining increase of $2,041,000 was generally due to fluctuations in mature properties and general operating activities.
Operating expenses increased $63,187,000, or 14.76%, for the year ended January 31, 2008 compared to the same period in the prior year. The variance to the prior year is primarily attributable to the following increases:
   
$25,588,000 related to new property openings, as noted in the table below;
 
   
$15,563,000 related to an increase in commercial outlot sales primarily at Promenade Bolingbrook, and White Oak Village, which was partially offset by decreases at Orchard Town Center, Simi Valley and Salt Lake City;
 
   
$12,219,000 related to the 2007 costs associated with the land sale at Ridge Hill; and
 
   
$3,493,000 related to the buyout of our partner in Galleria at Sunset, which was previously accounted for on the equity method of accounting.
These increases were partially offset by the following decreases:
   
$11,714,000 related to construction of a school at Beekman. These costs are reimbursed by the New York City School Construction Authority, which is included in revenues from real estate operations discussed above; and
 
   
$2,973,000 primarily related to Issue 3 - Ohio Earn and Learn initiatives in the prior year, in order to secure a gaming license in Ohio, which was not approved by the voters.
The balance of the remaining increase of $21,011,000 was generally due to fluctuations in mature properties and general operating activities.
Interest expense for the Commercial Group increased by $47,204,000, or 21.98%, for the year ended January 31, 2009 compared to the same period in the prior year. Interest expense for the Commercial Group increased by $36,585,000, or 20.53%, during the year ended January 31, 2008 compared to the prior year. Approximately $7,380,000 and $3,675,000 of the increase for the years ended January 31, 2009 and 2008, respectively, represents the change in fair value of a forward swap related to an unconsolidated property that is marked to market through interest expense. The remaining increases are primarily attributable to the openings of the properties listed in the table below.

43



Table of Contents

The following table presents the increases in revenue and operating expenses incurred by the Commercial Group for newly-opened/acquired properties for the year ended January 31, 2009 compared to the same periods in the prior year:
                                          
                            Year Ended January 31,  
                            2009 vs. 2008
                            Revenues        
                            from Real        
              Quarter/Year   Square     Estate     Operating  
Property
  Location       Opened   Feet     Operations     Expenses  
 
                          (in thousands)  
 
                                       
Retail Centers:
                             
White Oak Village
  Richmond, Virginia     Q3-2008       800,000       $ 2,227     $ 927  
Shops at Wiregrass
  Tampa, Florida     Q3-2008       642,000       2,187       1,654  
Orchard Town Center
  Westminster, Colorado     Q1-2008       980,000       5,570       3,935  
Victoria Gardens-Bass Pro
  Rancho Cucamonga, California     Q2-2007       180,000       1,038       422  
Promenade Bolingbrook
  Bolingbrook, Illinois     Q1-2007       750,000       5,149       1,238  
 
                                       
Office Buildings:
                                       
Johns Hopkins – 855 North Wolfe Street
  East Baltimore, Maryland     Q1-2008       279,000       5,729       2,592  
New York Times
  Manhattan, New York     Q3-2007       737,000       38,548       4,568  
Richmond Office Park
  Richmond, Virginia     Q2-2007 (1)     570,000       5,492       1,669  
Illinois Science and Technology Park-Building Q
  Skokie, Illinois     Q1-2007       158,000       736       1,330  
                             
 
Total
                            $ 66,676     $ 18,335  
                             
(1)  
Acquired property.
The following table presents the increases in revenue and operating expenses incurred by the Commercial Group for newly-opened properties for the year ended January 31, 2008 compared to the prior year:
                                          
                            Year Ended January 31,  
                            2008 vs. 2007
                            Revenues        
                            from Real        
              Quarter/Year   Square     Estate     Operating  
Property
  Location       Opened   Feet     Operations     Expenses  
 
                          (in thousands)  
 
                                       
Retail Centers:
                             
Victoria Gardens-Bass Pro
  Rancho Cucamonga, California     Q2-2007       180,000     $ 2,710     $ 351  
Promenade Bolingbrook
  Bolingbrook, Illinois     Q1-2007       750,000       8,993       5,597  
Northfield at Stapleton
  Denver, Colorado     Q3-2006       1,106,000       6,239       3,005  
 
                                       
Office Buildings:
                                       
New York Times
  Manhattan, New York     Q3-2007       737,000       23,134       5,028  
Richmond Office Park
  Richmond, Virginia     Q2-2007  (1)     570,000       6,201       2,020  
Illinois Science and Technology Park-Building Q
  Skokie, Illinois     Q1-2007       158,000       1,091       1,589  
Colorado Studios
  Denver, Colorado     Q1-2007  (1)     75,000       332       116  
Commerce Court
  Pittsburgh, Pennsylvania     Q1-2007  (1)     379,000       5,386       3,440  
Illinois Science and Technology Park – Building A
  Skokie, Illinois     Q4-2006       224,000       2,758       1,792  
Illinois Science and Technology Park – Building P
  Skokie, Illinois     Q4-2006       128,000       1,103       1,228  
Edgeworth Building
  Richmond, Virginia     Q4-2006       137,000       1,368       1,124  
Stapleton Medical Office Building
  Denver, Colorado     Q3-2006       45,000       539       298  
                             
 
Total
                            $ 59,854     $ 25,588  
                             
(1)  
Acquired property.
Total occupancy for the Commercial Group is 88.5% and 89.6% for retail and office, respectively, as of January 31, 2009 compared to 92.5% and 89.7%, respectively, as of January 31, 2008. Retail occupancy was negatively impacted by the Circuit City bankruptcy and subsequent vacating of its retail space, as well as three recently opened retail centers which have not yet achieved stabilization. Retail and office occupancy as of January 31, 2009 and 2008 is based on square feet leased at the end of the fiscal quarter. Average occupancy for hotels for the year ended January 31, 2009 is 68.8% compared to 70% for the year ended January 31, 2008.
As of January 31, 2009, the average base rent per square feet expiring for retail and office leases is $26.60 and $30.82, respectively, compared to $26.56 and $29.86, respectively, as of January 31, 2008. Square feet of expiring leases and average base rent per square feet are operating statistics that represent 100% of the square footage and base rental income per square foot from expiring leases. The average daily rate (“ADR”) for our hotel portfolio is $146.26 and $141.60 for the year ended January 31, 2009 and 2008, respectively. ADR is an operating statistic and is calculated by dividing revenue by the number of rooms sold for all hotels that were open and operating for both the years ended January 31, 2009 and 2008.

44



Table of Contents

Residential Group
Revenues from real estate operations – Included in revenues from real estate operations is fee income related to the development and construction management related to our military housing projects. Military housing fee income and related operating expenses may vary significantly from period to period based on the timing of development and construction activity at each applicable project. Revenues from real estate operations for the Residential Group increased by $20,112,000, or 7.6%, during the year ended January 31, 2009 compared to the prior year. The variance is primarily attributable to the following increases:
   
$14,589,000 related to military housing fee income from the management and development of military housing units located primarily on the islands of Oahu and Kauai, Hawaii, Chicago, Illinois, Seattle, Washington, and Colorado Springs, Colorado;
   
$4,777,000 primarily related to new property openings and acquired properties as noted in the table below;
   
$4,750,000 primarily related to increases in rents and occupancy at the following properties: Sky55 in Chicago, Illinois, 100 Landsdowne Street in Cambridge, Massachusetts, Ashton Mill in Cumberland, Rhode Island, Oceanpointe Towers in Long Branch, New Jersey, Midtown Towers in Parma, Ohio, Lenox Park in Silver Spring, Maryland, Pavilion in Chicago, Illinois, and 101 San Fernando in San Jose, California; and
   
$2,449,000 related to the change to the full consolidation method of accounting from equity method at Village Center in Detroit, Michigan and Independence Place I in Parma Heights, Ohio.
These increases were partially offset by the following decreases:
   
$5,260,000 related to the net leasing arrangements whereby we receive fixed rental income in exchange for the operations of certain supported-living apartment properties which were retained by the lessee (see the “Discontinued Operations” section of the MD&A); and
   
$1,920,000 primarily related to decreases in occupancy at the following properties: Emerald Palms in Miami, Florida, Heritage in San Diego, California, and Museum Towers and One Franklintown, both of which are in Philadelphia, Pennsylvania.
The balance of the remaining increase of $727,000 was generally due to fluctuations in other mature properties.
Revenues from real estate operations for the Residential Group increased by $77,683,000, or 41.3%, during the year ended January 31, 2008 compared to the prior year. This variance is primarily attributable to the following increases:
   
$57,740,000 related to military housing fee revenues from the management and development of military housing units;
   
$13,847,000 related to the buyout of our partners at Sterling Glen of Glen Cove in Glen Cove, New York, Sterling Glen of Great Neck in Great Neck, New York, Midtown Towers and Easthaven at the Village in Beachwood, Ohio, all of which were previously accounted for on the equity method of accounting; and
   
$7,868,000 related to new property openings and acquired properties as noted in the table below.
These increases were partially offset by the following decreases:
   
$4,183,000 related to the leasing of a certain supported-living apartment property (see the “Discontinued Operations” section of the MD&A); and
   
$2,100,000 related to the 2006 land sale at Bridgewater in Hampton, Virginia.
The balance of the remaining increase of $4,511,000 was generally due to fluctuations in other mature properties.
Operating and Interest Expenses – Operating expenses for the Residential Group decreased by $5,682,000, or 3.1%, during the year ended January 31, 2009 compared to the prior year. This variance is primarily attributable to the following decreases:
   
$7,512,000 related to the net lease arrangements whereby we receive fixed rental income in exchange for the operations of certain supported-living apartment properties which were retained by the lessee (see the “Discontinued Operations” section of the MD&A);

45



Table of Contents

   
$5,292,000 related to reduced payroll costs and specific cost reduction activities; and
 
   
$4,892,000 related to management expenditures associated with military housing fee revenues.
These decreases were partially offset by the following increases:
   
$6,608,000 related to new property openings and acquired properties as noted in the table below;
 
   
$6,146,000 related to write-offs of abandoned development projects; and
 
   
$1,593,000 related to the change to the full consolidation method of accounting from the equity method at Village Center and Independence Place I.
The balance of the remaining decrease of $2,333,000 was generally due to fluctuations in mature properties and general operating activities.
Operating expenses for the Residential Group increased by $55,714,000, or 43.7%, during the year ended January 31, 2008 compared to the same period in the prior year. This variance is primarily attributable to the following increases:
   
$48,018,000 related to management expenditures associated with military housing fee income;
   
$7,137,000 related to the buyout of our partners at Sterling Glen of Glen Cove, Sterling Glen of Great Neck, Midtown Towers and Easthaven at the Village;
   
$3,583,000 related to write-offs of abandoned development projects; and
   
$1,230,000 related to new property openings and acquired properties as noted in the table below.
These increases were partially offset by the following decreases:
   
$4,041,000 due to the leasing of a certain supported-living apartment property (see the “Discontinued Operations” section of the MD&A); and
   
$2,000,000 related to the 2006 land sale at Bridgewater.
The balance of the remaining increase of $1,787,000 was generally due to fluctuations in mature properties and general operating activities.
Interest expense for the Residential Group decreased by $5,422,000, or 11.7%, during the year ended January 31, 2009 compared to the prior year primarily as a result of decreased variable interest rates. Interest expense for the Residential Group increased by $856,000, or 1.9%, during the year ended January 31, 2008 compared to the prior year.
The following table presents the increases in revenues and operating expenses incurred by the Residential Group for newly-opened/acquired properties for the year ended January 31, 2009 compared to the same period in the prior year:
                                          
                            Year Ended January 31,  
                            2009 vs. 2008  
                            Revenues        
                            from        
              Quarter/Year              Real Estate     Operating  
Property
  Location     Opened     Units     Operations     Expenses  
                            (in thousands)  
 
Hamel Mill Lofts
  Haverhill, Massachusetts       Q4-2008 (1)       305       $ 23     $ 559  
Lucky Strike
  Richmond, Virginia       Q1-2008       131       592       426  
Mercantile Place on Main
  Dallas, Texas       Q1-2008/Q4-2008       366       558       3,195  
Wilson Building
  Dallas, Texas       Q4-2007 (2)       143       1,859       1,426  
Cameron Kinney
  Richmond, Virginia       Q2-2007 (2)       259       509       344  
Botanica II
  Denver, Colorado       Q2-2007       154       1,236       658  
                             
 
Total
                            $ 4,777     $ 6,608  
                             
(1)  
Property to open in phases.
 
(2)  
Acquired property.

46



Table of Contents

The following table presents the increases (decreases) in revenues and operating expenses incurred by the Residential Group for newly-opened/acquired properties for the year ended January 31, 2008 compared to the same period in the prior year:
                                          
                            Year Ended January 31,  
                            2008 vs. 2007  
                            Revenues        
                            from        
              Quarter/Year           Real Estate     Operating  
Property     Location     Opened     Units     Operations     Expenses  
                            (in thousands)  
 
Wilson Building
  Dallas, Texas     Q4-2007  (1)     143       $ 56     $ 86  
Cameron Kinney
  Richmond, Virginia     Q2-2007  (1)     259       2,153       937  
Botanica II
  Denver, Colorado     Q2-2007       154       548       255  
1251 S. Michigan
  Chicago, Illinois     Q1-2006       91       598       (174 )
Sky55
  Chicago, Illinois     Q1-2006       411       4,513       126  
                             
 
Total
                            $ 7,868     $ 1,230  
                             
(1)  
Acquired property.
Total average occupancy for the Residential Group is 88.8% and 91.9% for the years ended January 31, 2009 and 2008, respectively. Average residential occupancy for the years ended January 31, 2009 and 2008 is calculated by dividing gross potential rent less vacancy by gross potential rent.
Total net rental income (“NRI”) for our Residential Group was 85.7% and 93.4% for the years ended January 31, 2009 and 2008, respectively. NRI is an operating statistic that represents the percentage of potential rent received after deducting vacancy and rent concessions from gross potential rent.
Land Development Group
Revenues from real estate operations – Land sales and the related gross margins vary from period to period depending on the timing of sales and general market conditions relating to the disposition of significant land holdings. We have an inventory of land that we believe is in good markets throughout the country. Our land sales have been impacted by slowing demand from home buyers in certain core markets for the land business, reflecting conditions throughout the housing industry. Revenues from real estate operations for the Land Development Group decreased by $58,409,000 for the year ended January 31, 2009 compared to the prior year. This variance is primarily attributable to the following decreases:
   
$34,899,000 in land sales at Stapleton in Denver, Colorado;
 
   
$7,596,000 in land sales at Mill Creek in York County, South Carolina;
 
   
$5,792,000 in land sales at Tangerine Crossing, in Tucson, Arizona;
 
   
$5,222,000 in land sales at Prosper in Prosper, Texas;
 
   
$1,972,000 in land sales at Sugar Chestnut in North Ridgeville, Ohio;
 
   
$1,560,000 in land sales at Bratenahl Subdivision in Bratenahl, Ohio;
 
   
$4,546,000 in unit/land sales primarily at three land development projects: Wheatfield Lakes in Wheatfield, New York, Rockport Square in Lakewood, Ohio and Creekstone in Copley, Ohio combined with several smaller decreases at other land development projects.
These decreases were partially offset by the following increases:
   
$2,458,000 in land sales at Summers Walk in Davidson, North Carolina; and
   
$720,000 in land sales primarily at Legacy Lakes in Aberdeen, North Carolina combined with several smaller increases at other land development projects.
Revenues from real estate operations for the Land Development Group decreased by $24,973,000 for the year ended January 31, 2008 compared to the prior year. This variance is primarily attributable to the following decreases:
   
$18,922,000 in land sales at Bal Gra in Edenton, North Carolina;

47



Table of Contents

   
$15,150,000 in land sales at Stapleton;
 
   
$6,326,000 in land sales at Tangerine Crossing;
 
   
$2,334,000 in land sales at Waterbury in North Ridgeville, Ohio; and
 
   
$3,457,000 in land sales primarily at four major land development projects: Suncoast Lakes in Pasco County, Florida; Wheatfield Lakes; Creekstone; and Chestnut Plaza in Elyria, Ohio; combined with several smaller sales decreases at other land development projects.
These decreases were partially offset by the following increases:
   
$7,528,000 in land sales at Prosper;
 
   
$5,100,000 in land sales at Mill Creek;
 
   
$4,176,000 in land sales at Summers Walk;
 
   
$1,560,000 primarily in land sales at Bratenahl Subdivision;
 
   
$1,527,000 in unit sales at Rockport Square; and
 
   
$1,325,000 in land sales primarily at two land development projects: Legacy Lakes and Mallard Point in Lorain, Ohio; combined with several smaller sales increases at other land development projects.
Operating and Interest Expenses – Operating expenses decreased by $14,809,000 for the year ended January 31, 2009 compared to the same period in the prior year. This variance is primarily attributable to the following decreases:
   
$17,824,000 at Stapleton primarily related to decreased land sales;
 
   
$4,719,000 at Mill Creek primarily related to decreased land sales;
 
   
$3,533,000 at Tangerine Crossing primarily related to decreased land sales;
 
   
$1,168,000 at Rockport Square primarily related to decreased unit sales; and
 
   
$4,573,000 primarily related to decreased land sales at three land development projects: Wheatfield Lakes, Monarch Grove in Lorain, Ohio and Sugar Chestnut combined with several smaller decreases at other land development projects.
These decreases were partially offset by the following increases:
   
$13,816,000 ($12,434,000, net of minority interest) at Stapleton related to the reduction in fair value of the DURA purchase obligation and fee (see the “Other Structured Financing Arrangements” section of the MD&A);
   
$1,348,000 at Summers Walk primarily related to increased land sales; and
   
$1,844,000 primarily related to increases land sales at Legacy Lakes combined with several smaller increases at other land development projects.
Operating expenses decreased by $7,420,000 for the year ended January 31, 2008 compared to the same period in the prior year. This variance is primarily attributable to the following decreases:
   
$10,830,000 at Bal Gra primarily related to decreased land sales;
   
$3,411,000 at Stapleton primarily related to decreased land sales;
   
$1,844,000 at Tangerine Crossing primarily related to decreased land sales; and
   
$3,712,000 primarily related to decreased land sales at Wheatfield Lake, Creekstone and Suncoast Lakes, combined with several smaller expense decreases at other land development projects.
These decreases were partially offset by the following increases:
   
$3,065,000 at Summers Walk primarily related to increased land sales;

48



Table of Contents

   
$2,968,000 at Mill Creek primarily related to increased land sales;
 
   
$2,029,000 at Rockport Square primarily related to increased unit sales;
 
   
$1,355,000 at Prosper primarily related to increased land sales; and
 
   
$2,960,000 primarily related to increased land sales and expenditures at Mallard Point, combined with several smaller expense increases at other land development projects.
Interest expense decreased by $179,000 for the year ended January 31, 2009 compared to the prior year. Interest expense decreased by $8,462,000 for the year ended January 31, 2008 compared to the prior year. Interest expense varies from year to year depending on the level of interest-bearing debt within the Land Development Group.
The Nets
Our equity investment in The Nets incurred a pre-tax loss of $40,989,000, $20,878,000 and $14,703,000 for the years ended January 31, 2009, 2008 and 2007, respectively, representing an increase in allocated losses of $20,111,000 and $6,175,000 compared to the same periods in the prior year. For the years ended January 31, 2009, 2008 and 2007, we recognized approximately 54%, 25% and 17% of the net loss, respectively, because profits and losses are allocated to each member based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets. For the year ended January 31, 2009, we recognized a higher share of the loss than prior years because of the distribution priorities among members and because we advanced capital to fund anticipated future operating losses on behalf of both us and certain non-funding partners. While these capital advances receive certain preferential capital treatment, generally accepted accounting principles require us to report losses, including significant non-cash losses resulting from amortization, in excess of our legal ownership of approximately 23%. Under certain facts and circumstances, generally accepted accounting principles may require losses to be recognized in excess of the basis in the equity investment. At January 31, 2009, we recognized $3,302,000 of losses in excess of our investment basis.
Included in the losses for the years ended January 31, 2009, 2008 and 2007 are approximately $20,862,000, $10,556,000 and $7,683,000, respectively, of amortization, at our share, of certain assets related to the purchase of the team. The remainder of the losses substantially relate to the operations of the team. The team is expected to operate at a loss in 2009 and will require additional capital from its members to fund the operating losses.
Corporate Activities
Operating and Interest Expenses – Operating expenses for Corporate Activities increased $2,462,000 for the year ended January 31, 2009 compared to the prior year. The increase was primarily related to company-wide severance and outplacement expenses of $8,651,000 offset by decreases in payroll and related benefits of $5,412,000 and stock-based compensation of $818,000, with the remaining difference attributable to general corporate expenses.
Operating expenses increased by $28,000 for the year ended January 31, 2008 compared to the prior year, which was primarily related to general corporate expenses.
Interest expense for Corporate Activities consists primarily of interest expense on the senior notes and the bank revolving credit facility, excluding the portion allocated to the Land Development Group (see “Financial Condition and Liquidity” section). Interest expense increased by $774,000 for the year ended January 31, 2009 compared to the year ended January 31, 2008, primarily related to unfavorable mark to market adjustments on Corporate derivative instruments, offset by a decrease in bank revolving credit interest expense due to lower variable interest rates.
Interest expense increased by $15,696,000 for the year ended January 31, 2008 compared to the prior year, primarily associated with increased borrowings during the year on the bank revolving credit facility and a full year of interest on the $287,500,000 puttable equity linked senior notes issued in a private placement in October 2006.

49



Table of Contents

Other Activity
The following items are discussed on a consolidated basis.
Interest and Other Income
For the years ended January 31, 2009, 2008 and 2007, we recorded interest and other income of $42,481,000, $73,282,000 and $61,389,000, respectively. Interest and other income decreased $30,801,000 for the year ended January 31, 2009 compared to the same period in the prior year primarily due to the following: the 2007 gain of $17,830,000 on the disposition of Sterling Glen of Roslyn, a decrease of $3,472,000 related to the income earned on the DURA purchase obligation and fee (see the “Other Structured Financing Arrangements” section of the MD&A) and a decrease of $1,846,000 related to interest income earned by Stapleton Land, LLC on an interest rate swap related to the $75,000,000 tax increment financing bonds which matured in 2007. These decreases were partially offset by an increase of $3,350,000 related to the 2008 gain on the sale of an ownership interest in a parking management company. Interest and other income increased $11,893,000 for the year ended January 31, 2008 compared to the same period in the prior year primarily due to the gain of $17,830,000 on sale of Sterling Glen of Roslyn offset by a decrease of $15,085,000 related to the income recognition on the sale of the historic preservation and new market tax credits that did not recur at the same level for the year ended January 31, 2008.
Equity in Earnings (Loss) of Unconsolidated Entities (also see the “Impairment of Unconsolidated Entities” section of the MD&A)
Equity in loss of unconsolidated entities was $(14,300,000) for the year ended January 31, 2009 and equity in earnings of unconsolidated entities was $20,542,000 for the year ended January 31, 2008, representing a decrease of $34,842,000. The variance is primarily attributable to the following decreases that occurred within our equity method investments:
-  
The Nets
   
$20,111,000 related to an increase in our share of the loss in The Nets (see “The Nets” section of the MD&A).
-  
Commercial Group
   
$12,286,000 related to the 2007 gain on disposition of our partnership interest in University Park at MIT Hotel, located in Cambridge, Massachusetts; and
 
   
$1,272,000 related to a participation payment on the refinancing during 2008 at 350 Massachusetts Avenue, an office building located in Cambridge, Massachusetts.
-  
Residential Group
   
$2,106,000 related to the 2007 gain on disposition of our partnership interest in White Acres, an apartment community located in Richmond Heights, Ohio.
-  
Land Development Group
   
$2,925,000 related to decreased land sales at Gladden Farms II in Marana, Arizona.
These decreases were partially offset by the following increases:
-  
Land Development Group
   
$3,010,000 related to increased sales at Central Station, located in Chicago, Illinois; and
   
$1,649,000 related to increased land sales at various land development projects in San Antonio, Texas.
-  
Commercial Group
   
$1,081,000 related to the 2008 gains on disposition of our partnership interests in One International Place and Emery-Richmond, office buildings located in Cleveland, Ohio and Warrensville Heights, Ohio, respectively.
The balance of the remaining decrease of $1,882,000 was due to fluctuations in the operations of our equity method investments.

50



Table of Contents

Equity in earnings of unconsolidated entities was $20,542,000 for the year ended January 31, 2008 compared to $48,942,000 for the year ended January 31, 2007, representing a decrease of $28,400,000. The variance is primarily attributable to the following decreases that occurred within our equity method investments:
 
Land Development Group
   
$14,366,000 related to decreased sales at Central Station;
   
$11,977,000 primarily related to decreased land sales at Smith Family Homes in Tampa, Florida, Gladden Forest, in Marana, Arizona, Chestnut Commons in Elyria, Ohio and Canterbury Crossing in Parker, Colorado;
   
$8,907,000 related to decreased sales at Sweetwater Ranch, located in Austin, Texas, which have been completely sold out; and
   
$4,163,000 related to decreased land sales in Mayfield Village, Ohio, which have been completely sold out.
 
Commercial Group
   
$7,662,000 related to the 2006 gain on disposition of our partnership interest in Midtown Plaza, a specialty retail center located in Parma, Ohio;
   
$2,620,000 primarily related to decreased land sales at Victor Village in Victorville, California, and other sales of land development projects; and
   
$2,236,000 due to the consolidation of Galleria at Sunset, a regional mall located in Henderson, Nevada, in the third quarter of 2006 due to the buy-out of our partner.
 
The Nets
   
$6,175,000 due to an increase in our share of the loss in The Nets (see “The Nets” section of the MD&A).
These decreases were partially offset by the following increases:
 
Commercial Group
   
$12,286,000 related to the 2007 gain on disposition of our partnership interest in University Park at MIT Hotel; and
   
$3,144,000 related to our share of earnings for San Francisco Centre in San Francisco, California, which opened during the third quarter of 2006.
 
Land Development Group
   
$2,605,000 related to increased land sales at Gladden Farms II.
 
Residential Group
   
$2,106,000 related to the 2007 gain on disposition of our partnership interest in White Acres.
The balance of the remaining increase of $9,565,000 was due to fluctuations in the operations of our equity method investments.

51



Table of Contents

Amortization of Mortgage Procurement Costs
Mortgage procurement costs are amortized on a straight-line basis over the life of the related nonrecourse mortgage debt, which approximates the effective interest method. For the years ended January 31, 2009, 2008 and 2007, we recorded amortization of mortgage procurement costs of $12,145,000, $11,296,000 and $10,684,000, respectively. Amortization of mortgage procurement costs increased $849,000 and $612,000 for the years ended January 31, 2009 and 2008, respectively, compared to the same periods in the prior years.
Loss on Early Extinguishment of Debt
For the years ended January 31, 2009, 2008 and 2007, we recorded $1,670,000, $8,955,000 and $2,175,000, respectively, as loss on early extinguishment of debt. For the year ended January 31, 2009, the loss represents the impact of early extinguishment of nonrecourse mortgage debt at Galleria at Sunset, a regional mall located in Henderson, Nevada, 1251 S. Michigan and Sky 55, apartment communities located in Chicago, Illinois, and Grand Lowry Lofts, an apartment community located in Denver, Colorado, in order to secure more favorable financing terms. There charges were offset by gains on the early extinguishment of a portion of our puttable equity-linked senior notes due October 15, 2011 (see the “Puttable Equity-Linked Senior Notes” section of the MD&A) and on the early extinguishment of the Urban Development Action Grant loan at Post Office Plaza, an office building located in Cleveland, Ohio.
For the year ended January 31, 2008, the loss primarily represents the impact of early extinguishment of nonrecourse mortgage debt at Sterling Glen of Great Neck, a 142-unit supported living residential community located in Great Neck, New York, Northern Boulevard and Columbia Park Center, specialty retail centers located in Queens, New York and North Bergen, New Jersey, respectively, and Eleven MetroTech Center, an office building located in Brooklyn, New York and the early extinguishment of borrowings at 101 San Fernando, an apartment community located in San Jose, California, in order to secure more favorable financing terms. The loss for the year ended January 31, 2008 also includes the impact of early extinguishment of the construction loan at New York Times, an office building located in Manhattan, New York, in order to obtain permanent financing, as well as the costs associated with the disposition of Landings of Brentwood, a consolidated apartment community in Nashville, Tennessee, which was sold during the year ended January 31, 2008 (see the “Discontinued Operations” section of the MD&A). For the year ended January 31, 2007, the loss primarily represents the early extinguishment of a construction loan at Simi Valley, California, in order to obtain permanent financing and the early extinguishment of other borrowings at 101 San Fernando.
Impairment of Real Estate
We review our real estate portfolio, including land held for development or sale, for impairment whenever events or changes indicate that our carrying value of the long-lived asset may not be recoverable. Due to the deterioration of general economic conditions, adverse changes in the capital markets, the recent and continuing decline in our market capitalization and in the fair value of our debt securities, we determined that a triggering event as defined in SFAS No. 144 occurred for our entire portfolio during the three months ended January 31, 2009. As a result, we reviewed the estimated undiscounted cash flows of all of our consolidated real estate assets over an estimated holding period to determine whether the total expected cash flows exceed the carrying value of the asset. As a result of the analysis, we determined that one consolidated property was impaired at January 31, 2009 in accordance with the provision of SFAS No. 144.
We recorded an impairment of real estate of $1,262,000, $102,000 and $1,923,000 for the years ended January 31, 2009, 2008 and 2007, respectively. For the year ended January 31, 2009, we recorded an impairment of real estate of $1,262,000 related to a residential development property in Mamaroneck, New York. For the year ended January 31, 2008, we recorded an impairment of real estate of $102,000 in a residential property located in Denver, Colorado. For the year ended January 31, 2007, we recorded an impairment of real estate of $1,923,000 related to Saddle Rock Village, a 345,000 square-foot Commercial specialty retail center and its adjacent outlots located in Aurora, Colorado. These impairments represent a write down to the estimated fair value, less cost to sell, due to a change in events, such as an offer to purchase and/or consideration of current market conditions, related to the estimated future cash flows.
Our estimate of future discounted cash flows, asset terminal value and asset holding period were based on the most current information available at January 31, 2009. If the conditions mentioned above continue to deteriorate, or if our plans regarding our assets change, it could result in additional impairment charges in the future.
Impairment of Unconsolidated Entities
We also reviewed our portfolio of unconsolidated entities to determine if an other-than-temporary impairment existed. During the years ended January 31, 2009, 2008 and 2007, we recorded impairment charges related to other-than-temporary declines in value of certain of our equity method investments. In accordance with APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”), other-than-temporary declines in fair value of our investment in unconsolidated entities result in reductions in the carrying value of these investments. We consider a decline in value in our equity method investments that is not estimated to recover within 12 months to be other-than-temporary.

52



Table of Contents

The following table summarizes our impairment of unconsolidated entities during the years ended January 31, 2009, 2008 and 2007, which are included in the Consolidated Statements of Operations.
                                                     
            Years Ended January 31,
            2009     2008     2007  
            (in thousands)
 
Mercury (Condominium)
  (Los Angeles, California)     $ 8,036     $ 8,269     $ -  
Pittsburgh Peripheral (Land Project)
  (Pittsburgh, Pennsylvania)     3,937       -       300  
Classic Residence by Hyatt (Supported-Living Apartments)
  (Yonkers, New York)     1,107       -       -  
Specialty Retail Centers
                               
El Centro Mall
  (El Centro, California)     2,030       -       -  
Coachella Plaza
  (Coachella, California)     1,870       -       -  
Southgate Mall
  (Yuma, Arizona)     1,356       -       -  
Mixed-Use Land Development Palmer
  (Manatee County, Florida)     1,214       -       -  
Cargor VI
  (Manatee County, Florida)     892       -       -  
Old Stone Crossing at Caldwell Creek
  (Charlotte, North Carolina)     365       300       -  
Smith Family Homes
  (Tampa, Florida)     -       2,050       -  
Gladden Forest
  (Marana, Arizona)     -       850       -  
Other
            478       -       100  
             
 
            $ 21,285     $ 11,469     $ 400  
             
In order to arrive at our estimates of fair value of our unconsolidated entities, we use varying assumptions that may include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type. If market conditions continue to worsen, the assumptions used in our estimates could change and result in additional other-than-temporary impairments in the future.
Write-Off of Abandoned Development Projects
We review, on a quarterly basis, each project under development to determine whether it is probable the project will be developed. If it is determined by management that the project will not be developed, project costs are written off to operating expenses as an abandoned development project cost. We may abandon certain projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or due to third party challenges related to entitlements or public financing. As a result, we may fail to recover expenses already incurred in exploring development opportunities. We recorded write-offs of abandoned development projects of $52,211,000, $19,087,000 and $9,318,000 for the years ended January 31, 2009, 2008 and 2007, respectively, which were recorded in operating expenses in the Consolidated Statements of Operations.
Depreciation and Amortization
We recorded depreciation and amortization expense of $269,560,000, $230,637,000 and $174,686,000 for the years ended January 31, 2009, 2008 and 2007, respectively. Depreciation and amortization increased $38,923,000 and $55,951,000 for the years ended January 31, 2009 and 2008, respectively, compared to the same periods in the prior years. Included in the increase in 2008 compared to the prior year is $44,240,000 of depreciation and amortization primarily related to new property openings and acquisitions and $2,520,000 of amortization related to capitalized software costs. These increases were partially offset by accelerated depreciation of $7,837,000 recorded during 2007 due to management’s approval to demolish two buildings adjacent to Ten MetroTech Center, an office building located in Brooklyn, New York, to clear the land for a residential project named 80 DeKalb Avenue. Due to the new development plan, the estimated useful lives of the two adjacent buildings were adjusted to expire at the scheduled demolition date in April 2007.
Included in the increase for 2007 compared to the prior year is $31,710,000 of depreciation and amortization primarily related to new property openings and acquisitions. Also included in this increase is $8,793,000 of amortization expense related to capitalized software costs and $7,611,000 related to depreciation and amortization of tangible and intangible assets resulting from the New York portfolio transaction that closed in November of 2006. The remainder of the increase in 2007 is due to the accelerated depreciation of $7,837,000 recorded during 2007 due to management’s approval to demolish two buildings adjacent to Ten MetroTech Center to clear land for 80 DeKalb Avenue.
Income Taxes
Income tax expense/(benefit) for the three years ended January 31, 2009, 2008 and 2007 was $(29,154,000), $3,002,000 and $35,330,000, respectively. The difference in the income tax expense/(benefit) reflected in the Consolidated Statements of Operations versus the income tax expense/(benefit) computed at the statutory federal income tax rate is primarily attributable to state income taxes, cumulative effect of changing our effective tax rate, additional state NOL’s and general business credits, changes to our charitable contribution carryover, changes to the valuation allowances related to charitable contributions, state NOL’s, and general business credits, and various permanent differences between pre-tax GAAP income and taxable income.

53



Table of Contents

At January 31, 2009, we had a federal net operating loss carryforward of $113,458,000 (generated primarily from the impact on our net earnings of tax depreciation expense from real estate properties and excess deductions from stock based compensation) that will expire in the years ending January 31, 2024 through January 31, 2029, a charitable contribution deduction carryforward of $42,705,000 that will expire in the years ending January 31, 2010 through January 31, 2014, General Business Credit carryovers of $15,099,000 that will expire in the years ending January 31, 2010 through January 31, 2029, and an alternative minimum tax (“AMT”) credit carryforward of $28,501,000 that is available until used to reduce Federal tax to the AMT amount.
Our policy is to consider a variety of tax-deferral strategies, including tax deferred exchanges, when evaluating our future tax position. We have a full valuation allowance against the deferred tax assets associated with our charitable contributions. We have increased our valuation allowance against our general business credits, other than those general business credits which are eligible to be utilized to reduce future AMT liabilities, because we believe at this time it is more likely than not that we will not realize these benefits.
We applied the “with-and-without” methodology for recognizing excess tax benefits from the deduction of stock-based compensation. The net operating loss available for the tax return, as is noted in the paragraph above, is significantly greater than the net operating loss available for the tax provision due to excess deductions from stock-based compensation reported on the return, as well as the impact of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”) adjustments to the net operating loss. The January 31, 2009 tax return will include a stock-based compensation deduction of $200,000, none of which will decrease taxable income on the current year tax provision since we are in a net taxable loss position before the stock option deduction. As a result, we did not record an adjustment to additional paid-in-capital, nor did we record a reduction in our current taxes payable due to stock-based compensation deductions. We have not recorded a net deferred tax asset of approximately $17,096,000 from excess stock-based compensation deductions for which a benefit has not yet been recognized.
FIN No. 48
We adopted the provisions of FIN No. 48 effective February 1, 2007. Unrecognized tax benefits represent those tax benefits related to tax positions that have been taken or are expected to be taken in tax returns that are not recognized in the financial statements because management has either concluded that it is not more likely than not that the tax position will be sustained if audited by the appropriate taxing authority or the amount of the benefit will be less than the amount taken or expected to be taken in our income tax returns. The effect of this adoption on February 1, 2007 resulted in a cumulative effect adjustment of $245,000 as an increase to beginning retained earnings.
We recognize estimated interest payable on underpayments of income taxes and estimated penalties that may result from the settlement of some uncertain tax positions as components of income tax expense. At January 31, 2009, we had approximately $463,000 of accrued interest recorded related to uncertain income tax positions, as compared to $840,000 of accrued interest and penalties recorded as of January 31, 2008. During the year ended January 31, 2009, $377,000 of tax benefit was booked relating to interest and penalties. During the year ended January 31, 2009, we settled an Internal Revenue Service audit of one of our partnership investments, which resulted in a decrease in our unrecognized tax benefits in the amount of $845,000, and the associated accrued interest and penalties in the amount of $447,000.
We file a consolidated United States federal income tax return. Where applicable, we file combined income tax returns in various states and we file individual separate income tax returns in other states. Our federal consolidated income tax returns for the year ended January 31, 2005 and subsequent years are subject to examination by the Internal Revenue Service. Certain of our state returns for the years ended January 31, 2003 and January 31, 2004 and all state returns for the year ended January 31, 2005 and subsequent years are subject to examination by various taxing authorities.

54



Table of Contents

A reconciliation of the total amounts of our unrecognized tax benefits, exclusive of interest and penalties, as of January 31, 2009 and 2008, is depicted in the following table:
                  
    Unrecognized Tax Benefits  
    January 31,
    2009     2008  
    (in thousands)  
 
Balance, beginning of year
    $ 2,556     $ 4,892  
 
Gross increases for tax positions of prior years
    224       946  
Gross decreases for tax positions of prior years
    (71 )     (1,685 )
Gross increases for tax positions of current year
    -       79  
Settlements
    (845 )     (411 )
Lapse of statutes of limitation
    (383 )     (1,265 )
     
 
Balance, end of year
    $ 1,481     $ 2,556  
     
The total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, is $145,000 as of January 31, 2009 and $336,000 as of January 31, 2008. Based upon our assessment of the outcome of examinations that are in progress, the settlement of liabilities, or as a result of the expiration of the statutes of limitation for certain jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns will materially change from those recorded at January 31, 2009. Included in the $1,481,000 of unrecognized benefits noted above, is $1,461,000 which, due to the reasons above, could significantly decrease during the next twelve months.
Discontinued Operations
Pursuant to the definition of a component of an entity in SFAS No. 144, all earnings of discontinued operations sold or held for sale, assuming no significant continuing involvement, have been reclassified in the Consolidated Statements of Operations for the years ended January 31, 2009, 2008 and 2007. We consider assets held for sale when the transaction has been approved and there are no significant contingencies related to the sale that may prevent the transaction from closing.
During the year ended January 31, 2008, we consummated an agreement to sell eight (seven operating properties and one property that was under construction at the time of the agreement) and lease four supported-living apartment properties to a third party. Pursuant to the agreement, during the second quarter of 2007, six operating properties listed in the table below and the property under construction, Sterling Glen of Roslyn located in Roslyn, New York, were sold. The seventh operating property, Sterling Glen of Lynbrook, was operated by the purchaser under a short-term lease through the date of sale, which occurred on May 20, 2008 and generated a gain on disposition of rental property of $8,627,000 ($5,294,000, net of tax). The gain along with the operating results of the property through the date of sale is classified as discontinued operations
The four remaining properties entered into long-term operating leases with the purchaser. On January 30, 2009, terms of the purchase agreement for the sale of Sterling Glen of Rye Brook, whose operating lease had a stated term of ten years, were amended and the property was sold. The sale generated a gain on disposition of rental property of $4,670,000 ($2,865,000, net of tax) which, along with the operating results of the property, is classified as discontinued operations for all periods presented. On January 31, 2009, another long-term operating lease that had a stated term of ten years was terminated with the purchaser and the operations of the property were transferred back to us.
The two remaining properties have long-term operating leases with stated terms of five years with various put and call provisions at a pre-determined purchase price that can be exercised beginning in the second year of each lease at an amount that is in excess of the current carrying amount of the properties. We are generally entitled to a fixed lease payment from the lessee over the term of the lease in exchange for the operations of the properties, which will be retained by the lessee. We have continued to consolidate the leased properties in our Consolidated Balance Sheets as the criteria for sales accounting pursuant to the provisions of SFAS No. 66 have not been achieved. Further, we have concluded that the leased properties have met the criteria as VIEs pursuant to FIN No. 46(R), and due to our obligation to absorb a majority of expected losses, the leased properties are consolidated by us at January 31, 2009. Additionally, these properties do not meet the qualifications of assets held for sale under SFAS No. 144 as of January 31, 2009; therefore, these properties have not been included in discontinued operations.

55



Table of Contents

There were no properties classified as held for sale as of January 31, 2009. Sterling Glen of Lynbrook was classified as held for sale at January 31, 2008 through the date of disposition. Sterling Glen of Lynbrook’s assets and liabilities as of January 31, 2008 are presented in the table below.
         
    January 31, 2008  
    (in thousands)  
 
       
Assets
       
Real estate
  $ 29,858  
Notes and accounts receivable, net
    179  
Other assets
    1,635  
 
     
Total Assets
  $ 31,672  
 
     
 
       
Liabilities
       
Mortgage debt, nonrecourse
  $ 27,700  
Accounts payable and accrued expenses
    798  
 
     
Total Liabilities
  $ 28,498  
 
     
The following table lists the consolidated rental properties included in discontinued operations:
                         
        Square Feet/       Year   Year   Year
        Number of   Period   Ended   Ended   Ended
Property
  Location   Units/Rooms   Disposed   1/31/2009   1/31/2008     1/31/2007  
 
 
                       
Commercial Group:
                       
Battery Park City Retail
  Manhattan, New York   166,000 square feet   Q3-2006   -   -   Yes
Embassy Suites Hotel
  Manhattan, New York   463 rooms   Q3-2006   -   -   Yes
Hilton Times Square
  Manhattan, New York   444 rooms   Q1-2006   -   -   Yes
G Street Retail
  Philadelphia, Pennsylvania   13,000 square feet   Q1-2006   -   -   Yes
 
                       
Residential Group:
                       
Sterling Glen of Rye Brook
  Rye Brook, New York   168 units   Q4-2008   Yes   Yes   Yes
Sterling Glen of Lynbrook
  Lynbrook, New York   130 units   Q2-2008   Yes   Yes   Yes
Sterling Glen of Bayshore
  Bayshore, New York   85 units   Q2-2007   -   Yes   Yes
Sterling Glen of Center City
  Philadelphia, Pennsylvania   135 units   Q2-2007   -   Yes   Yes
Sterling Glen of Darien
  Darien, Connecticut   80 units   Q2-2007   -   Yes   Yes
Sterling Glen of Forest Hills
  Forest Hills, New York   83 units   Q2-2007   -   Yes   Yes
Sterling Glen of Plainview
  Plainview, New York   79 units   Q2-2007   -   Yes   Yes
Sterling Glen of Stamford
  Stamford, Connecticut   166 units   Q2-2007   -   Yes   Yes
Landings of Brentwood
  Nashville, Tennessee   724 units   Q2-2007   -   Yes   -
Mount Vernon Square
  Alexandria, Virginia   1,387 units   Q4-2006   -   -   Yes
Providence at Palm Harbor
  Tampa, Florida   236 units   Q2-2006   -   -   Yes
In addition, our Lumber Group strategic business unit was sold during the year ended January 31, 2005 for $39,085,902, $35,000,000 of which was paid in cash at closing. Pursuant to the terms of a note receivable with a 6% interest rate from the buyer, the remaining purchase price was to be paid in four annual installments commencing November 12, 2006. We deferred a gain of $4,085,902 (approximately $2,400,000, net of tax) relating to the note receivable due, in part, to the subordination to the buyer’s senior financing. The gain is recognized in discontinued operations and interest income is recognized in continuing operations as the note receivable principal and interest are collected. During the years ended January 31, 2009, 2008 and 2007, we received the first three annual installments of $1,250,000 each, which included $1,108,000 ($680,000, net of tax), $1,046,000 ($642,000, net of tax) and $760,000 ($466,000, net of tax) of the deferred gain, respectively, and $142,000, $204,000 and $490,000 of interest income recorded in continuing operations, respectively.

56



Table of Contents

The operating results related to discontinued operations were as follows:
                         
    Years Ended January 31,  
    2009     2008     2007  
    (in thousands)  
 
                       
Revenues from real estate operations
  $ 7,356     $ 35,454     $ 117,012  
 
                       
Expenses
                       
Operating expenses
    931       23,989       81,541  
Depreciation and amortization
    1,986       3,894       12,023  
     
 
    2,917       27,883       93,564  
     
 
                       
Interest expense
    (2,612 )     (7,561 )     (23,431 )
Amortization of mortgage procurement costs
    (302 )     (418 )     (503 )
Loss on early extinguishment of debt
    -       (363 )     -  
 
                       
Interest income
    61       1,028       2,355  
Gain on disposition of rental properties and Lumber Group
    14,405       106,333       351,861  
     
 
                       
Earnings before income taxes
    15,991       106,590       353,730  
     
 
                       
Income tax expense (benefit)
                       
Current
    19,991       25,294       12,277  
Deferred
    (13,812 )     16,091       79,386  
     
 
    6,179       41,385       91,663  
     
 
                       
Earnings before minority interest
    9,812       65,205       262,067  
 
                       
Minority interest, net of tax
                       
Gain on disposition of rental properties
    -       -       118,009  
Operating loss from rental properties
    -       (513 )     (1,496 )
     
 
    -       (513 )     116,513  
     
 
                       
Net earnings from discontinued operations
  $ 9,812     $ 65,718     $ 145,554  
     

57



Table of Contents

Gain on Disposition of Rental Properties and Lumber Group
The following table summarizes the gain on disposition of rental properties and Lumber Group, before tax and minority interest, for the years ended January 31, 2009, 2008 and 2007:
                         
    Years Ended January 31,  
    2009     2008     2007  
    (in thousands)  
 
                       
Discontinued Operations:
                       
Sterling Glen Properties (Supported-Living Apartments) (1)
  $ 13,297     $ 80,208     $ -  
Landings of Brentwood (Apartments) (2)
    -       25,079       -  
Hilton Times Square Hotel (2)
    -       -       135,945  
Embassy Suites Hotel (2)
    -       -       117,606  
Mount Vernon Square (Apartments) (2)
    -       -       63,881  
Battery Park City (Retail) (2)
    -       -       25,888  
Providence at Palm Harbor (Apartments) (2)
    -       -       7,342  
G Street Retail (Specialty Retail Center)
    -       -       439  
Lumber Group
    1,108       1,046       760  
     
Total
  $ 14,405     $ 106,333     $ 351,861  
     
  (1)  
The properties included in the gain on disposition are Sterling Glen of Rye Brook and Sterling Glen of Lynbrook for the year ended January 31, 2009 and Sterling Glen of Bayshore, Sterling Glen of Center City, Sterling Glen of Darien, Sterling Glen of Forest Hills, Sterling Glen of Plainview and Sterling Glen of Stamford for the year ended January 31, 2008. We elected to deposit the sales proceeds with a qualified intermediary for the purposes of identifying replacement assets under Section 1031 of the Internal Revenue Code for Sterling Glen of Plainview and Sterling Glen of Stamford.
  (2)  
We elected to deposit the sales proceeds with a qualified intermediary for purposes of acquiring replacement assets under Section 1031 of the Internal Revenue Code.
Upon disposal, investments accounted for on the equity method are not classified as discontinued operations under the provisions of SFAS No. 144; therefore, the gains or losses on the sales of equity method properties are reported in continuing operations when sold. The following table summarizes our proportionate share of gains on the disposition of equity method investments during the years ended January 31, 2009, 2008 and 2007, which are included in equity in earnings (loss) of unconsolidated entities in the Consolidated Statements of Operations.
                                 
            Years Ended January 31,  
            2009     2008     2007  
            (in thousands)  
 
                               
One International Place (Office Building)
  Cleveland, Ohio   $ 881     $ -     $ -  
Emery-Richmond (Office Building)
  Warrensville Heights, Ohio     200       -       -  
University Park at MIT Hotel
  Cambridge, Massachusetts     -       12,286       -  
White Acres (Apartments)
  Richmond Heights, Ohio     -       2,106       -  
Midtown Plaza (Specialty Retail Center)
  Parma, Ohio     -       -       7,662  
             
Total
          $ 1,081     $ 14,392     $ 7,662  
             

58



Table of Contents

FINANCIAL CONDITION AND LIQUIDITY
Ongoing economic conditions have negatively impacted the lending and capital markets, particularly for real estate. The risk premium demanded by capital suppliers has increased significantly. Lending spreads have widened from recent levels and originations of new loans for the Commercial Mortgage Backed Securities market have virtually ceased. Underwriting standards are being tightened with lenders requiring lower loan-to-values and increased debt service coverage levels. While the long-term impact is unknown, borrowing costs for us will likely rise and financing levels will decrease over the foreseeable future.
Our principal sources of funds are cash provided by operations, the bank revolving credit facility, nonrecourse mortgage debt, dispositions of land held for sale as well as operating properties, proceeds from the issuance of senior notes and from equity joint ventures and other financing arrangements. Our principal uses of funds are the financing of development projects and acquisitions of real estate, capital expenditures for our existing portfolio, and principal and interest payments on our nonrecourse mortgage debt, interest payments on our bank revolving credit facility and previously issued senior notes and repayment of borrowings under our bank revolving credit facility.
Our primary capital strategy seeks to isolate the operating and financial risk at the property level to maximize returns and reduce risk on and of our equity capital. Our mortgage debt is nonrecourse, including our construction loans, with each property separately financed. We do not cross-collateralize our mortgage debt outside of a single identifiable project. We operate as a C-corporation and retain substantially all of our internally generated cash flows. This cash flow, together with refinancing and property sale proceeds, has historically provided us with the necessary liquidity to take advantage of investment opportunities. Recent changes in the lending and capital markets have impaired our ability to refinance and/or sell property and has also increased the rates of return to make new investment opportunities appealing. As a result of these market changes, we have dramatically cut back on new development and acquisition activities.
Despite the dramatic decrease in development activities, we still intend to complete all projects that are under construction. We continue to make progress on certain other pre-development projects primarily located in core markets. The cash we believe is required to fund our equity in projects under development plus any cash necessary to extend or paydown the remaining 2009 debt maturities is anticipated to exceed our cash from operations. As a result, we intend to extend maturing debt or repay it with net proceeds from property sales or future debt or equity financing.
Subsequent to January 31, 2009, we have already addressed $251,902,000 or 28.5% of the $882,716,000 of total debt maturing in 2009 through closed loans and committed financings. We have extension options on $416,128,000 or 47.1% of our total 2009 debt maturities all of which require some hurdle or milestone as defined in the specific agreement in order to qualify for the extension. We cannot assure you that we will achieve the defined hurdles or milestones to qualify for these extensions. We are in current negotiations on the remaining 2009 debt maturities but we cannot assure you we will be able to obtain all of these financings on favorable terms or at all.
We have proactively taken necessary steps to preserve liquidity by properly aligning our overhead costs with the reduced level of development and acquisition activities and suspension of cash dividends on Class A and Class B common stock. We are currently exploring various other options to enhance our liquidity such as admitting other joint venture partners into some of our properties, potential asset sales and/or raising funds in a public or private equity offering. There can be no assurance, however, that any of these scenarios can be accomplished.
Effective December 1, 2005, the SEC adopted new rules that substantially modified the registration, communications and offering procedures under the Securities Act of 1933, as amended (“Securities Act”). These rules streamline the shelf registration process for “well-known seasoned issuers” (“WKSI”) by allowing them to file shelf registration statements that automatically become effective. While we previously met the criteria to be a WKSI, we will not meet that criteria when we file our Annual Report on Form 10-K for the year ended January 31, 2009. We are in the process of amending our existing automatic shelf registration statement to convert it to a non-automatic shelf registration statement under the Securities Act so that we will have continued access to capital through the public equity and debt markets.
Bank Revolving Credit Facility
At January 31, 2009 and 2008, our bank revolving credit facility, as amended on January 30, 2009 (the “Amended Facility”), provides for maximum borrowings of $750,000,000 and matures in March 2010. The Amended Facility increased the spread on the LIBOR-based rate option to 2.50% and on the prime-based rate option to 1.50%. We have historically elected the LIBOR-based rate option. In addition, the Amended Facility further restricts our ability to purchase, acquire, redeem or retire any of our capital stock, and prohibits us from paying any dividends on our capital stock through the maturity date. The Amended Facility allows certain actions by us or our subsidiaries, such as default in paying debt service or allowing foreclosure on an encumbered real estate asset only to the extent such actions do not have a material adverse effect, as defined in the agreement, on us. Of the available borrowings, up to $100,000,000 may be used for letters of credit or surety bonds. The credit facility also contains certain financial covenants, including maintenance of certain debt service and cash flow coverage ratios, and specified levels of net worth (as defined in the credit facility). At January 31, 2009, we were in compliance with all of these financial covenants.

59



Table of Contents

We are currently in negotiations with our lenders to extend the revolving credit facility. While the ultimate outcome of the extension is unknown, we anticipate an extension will result in a reduced commitment from the lenders, increased borrowing costs and modifications to the financial covenants. In the event an extension is not to a level to support our operating cash flows, we would institute a plan to raise capital through the sale of assets, admitting other joint venture equity partners into some of our properties, curtailing all capital expenditures and/or raising funds in a public or private equity offering.
The available credit on the bank revolving credit facility and its related terms at January 31, 2009 and 2008 were as follows:
                 
    January 31,  
    2009     2008  
    (in thousands)  
 
               
Maximum borrowings
  $ 750,000     $ 750,000  
Less outstanding balances:
               
Borrowings
    365,500       39,000  
Letters of credit
    65,949       71,802  
Surety bonds
    -       -  
 
           
Available credit
  $ 318,551     $ 639,198  
 
           
 
               
Related Terms:
               
Weighted average interest rate
    2.98%       4.89%
LIBOR rate option
  2.50% + LIBOR     1.45% + LIBOR
Prime rate option
  1.50% + prime rate     0.50% + prime rate
Interest incurred and paid on the bank revolving credit facility was as follows:
                         
    Years Ended January 31,  
    2009     2008     2007  
    (in thousands)  
 
                       
Interest incurred
  $ 8,211     $ 9,449     $ 6,676  
Interest paid
  $ 7,422     $ 10,292     $ 7,867  
Senior and Subordinated Debt
Our Senior and Subordinated Debt is comprised of the following at January 31, 2009 and 2008:
 
    January 31,          
    2009     2008          
    (in thousands)          
 
                       
Senior Notes:
               
3.625% Puttable Equity-Linked Senior Notes due 2011
  $ 272,500     $ 287,500          
 
                       
Other Senior Notes:
               
7.625% Senior Notes due 2015
    300,000       300,000          
6.500% Senior Notes due 2017
    150,000       150,000  
7.375% Senior Notes due 2034
    100,000       100,000          
             
Total Senior Notes
    822,500       837,500  
             
 
                       
Subordinated Debt:
                       
Redevelopment Bonds due 2010
    18,910       20,400  
Subordinate Tax Revenue Bonds due 2013
    29,000       29,000          
             
Total Subordinated Debt
    47,910       49,400  
             
 
                       
Total Senior and Subordinated Debt
  $ 870,410     $ 886,900          
             

60



Table of Contents

Puttable Equity-Linked Senior Notes
On October 10, 2006, we issued $287,500,000 of 3.625% puttable equity-linked senior notes due October 15, 2011 in a private placement. The proceeds from this offering (net of $25,000,000 of offering costs, underwriting fees and the cost of the puttable note hedge and warrant transactions described below) were used to repurchase $24,962,000 of our Class A common stock, to repay the outstanding balance of $190,000,000 under our bank revolving credit facility (see the “Bank Revolving Credit Facility” section of the MD&A) and for general working capital purposes. The notes were issued at par and accrued interest is payable semi-annually in arrears on April 15 and October 15 of each year, which began on April 15, 2007. We may not redeem these notes prior to maturity. The notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness.
During the year ended January 31, 2009, we purchased, on the open market, $15,000,000, in principal, of our puttable equity-linked senior notes for $10,571,000 in cash, resulting in a gain, net of associated deferred financing costs, of $4,181,000, which is recorded as early extinguishment of debt in the Consolidated Statements of Operations.
Holders may put their notes to us at their option on any day prior to the close of business on the scheduled trading day immediately preceding July 15, 2011 only under the following circumstances: (1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of that measurement period was less than 98% of the product of the last reported sale price of our Class A common stock and the put value rate (as defined) on each such day; (2) during any fiscal quarter after the fiscal quarter ending January 31, 2007, if the last reported sale price of our Class A common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the applicable put value price in effect on the last trading day of the immediately preceding fiscal quarter; or (3) upon the occurrence of specified corporate events as set forth in the applicable indenture. On and after July 15, 2011 until the close of business on the scheduled trading day immediately preceding the maturity date, holders may put their notes to us at any time, regardless of the foregoing circumstances. In addition, upon a designated event, as defined, the holders may require us to purchase for cash all or a portion of their notes for 100% of the principal amount of the notes plus accrued and unpaid interest, if any, as set forth in the applicable indenture. At January 31, 2009, none of the aforementioned circumstances have been met.
If a note is put to us, a holder would receive (i) cash equal to the lesser of the principal amount of the note or the put value and (ii) to the extent the put value exceeds the principal amount of the note, shares of our Class A common stock, cash, or a combination of Class A common stock and cash, at our option. The initial put value rate was 15.0631 shares of Class A common stock per $1,000 principal amount of notes (equivalent to a put value price of $66.39 per share of Class A common stock). The put value rate will be subject to adjustment in some events but will not be adjusted for accrued interest. In addition, if a “fundamental change,” as defined, occurs prior to the maturity date, we will in some cases increase the put value rate for a holder that elects to put its notes to us.
Concurrent with the issuance of the notes, we purchased a call option on our Class A common stock in a private transaction. The purchased call option allows us to receive shares of our Class A common stock and/or cash from counterparties equal to the amounts of Class A common stock and/or cash related to the excess put value that we would pay to the holders of the notes if put to us. These purchased call options will terminate upon the earlier of the maturity dates of the notes or the first day all of the notes are no longer outstanding due to a put or otherwise. The purchased call options, which cost an aggregate $45,885,000 ($28,155,000 net of the related tax benefit), were recorded net of tax as a reduction of shareholders’ equity through additional paid-in capital during the year ended January 31, 2007. In a separate transaction, we sold warrants to issue shares of our Class A common stock at an exercise price of $74.35 per share in a private transaction. If the average price of our Class A common stock during a defined period ending on or about the respective settlement dates exceeds the exercise price of the warrants, the warrants will be settled in shares of our Class A common stock. Proceeds received from the issuance of the warrants totaled approximately $28,923,000 and were recorded as an addition to shareholders’ equity through additional paid-in capital during the year ended January 31, 2007.
Other Senior Notes
On May 19, 2003, we issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a public offering under our shelf registration statement. Accrued interest is payable semi-annually on December 1 and June 1. These senior notes may be redeemed by us, at any time on or after June 1, 2008 at a redemption price of 103.813% beginning June 1, 2008 and systematically reduced to 100% in years thereafter.
On January 25, 2005, we issued $150,000,000 of 6.500% senior notes due February 1, 2017 in a public offering under our shelf registration statement. Accrued interest is payable semi-annually on February 1 and August 1. These senior notes may be redeemed by us, at any time on or after February 1, 2010 at a redemption price of 103.250% beginning February 1, 2010 and systematically reduced to 100% in the years thereafter.

61



Table of Contents

On February 10, 2004, we issued $100,000,000 of 7.375% senior notes due February 1, 2034 in a public offering under our shelf registration statement. Accrued interest is payable quarterly on February 1, May 1, August 1, and November 1. These senior notes may be redeemed by us, in whole or in part, at any time on or after February 10, 2009 at a redemption price equal to 100% of their principal amount plus accrued interest.
Our senior notes are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of our subsidiaries to the extent of the value of the collateral securing such other debt, including our bank revolving credit facility. The indentures governing our senior notes contain covenants providing, among other things, limitations on incurring additional debt and payment of dividends.
Subordinated Debt
In November 2000, we issued $20,400,000 of redevelopment bonds in a private placement. The bonds bear a fixed interest rate of 8.25% and are due September 15, 2010. We have entered into a total rate of return swap (“TRS”) for the benefit of these bonds that expires on September 15, 2009. Under this TRS, we receive a rate of 8.25% and pay the Security Industry and Financial Markets Association (“SIFMA”) rate plus a spread (0.90% through the expiration date). Interest is payable semi-annually on March 15 and September 15. This debt is unsecured and subordinated to the senior notes and the bank revolving credit facility.
The TRS, accounted for as a derivative, is required to be marked to fair value at the end of each reporting period. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133), any fluctuation in the value of the TRS would be offset by the fluctuation in the value of the underlying borrowings. At January 31, 2009, the fair value of the TRS was $(1,490,000); therefore, the fair value of the bonds was reduced by the same amount to $18,910,000.
In May 2003, we purchased $29,000,000 of subordinate tax revenue bonds that were contemporaneously transferred to a custodian, which in turn issued custodial receipts that represent ownership in the bonds to unrelated third parties. The bonds bear a fixed interest rate of 7.875%. We evaluated the transfer pursuant to the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”), and have determined that the transfer does not qualify for sale accounting treatment principally because we have guaranteed the payment of principal and interest in the unlikely event that there is insufficient tax revenue to support the bonds when the custodial receipts are subject to mandatory tender on December 1, 2013. As such, we are the primary beneficiary of this VIE (see the “Variable Interest Entities” section of the MD&A) and the book value (which approximates amortized costs) of the bonds was recorded as a collateralized borrowing reported as senior and subordinated debt and as held-to-maturity securities reported as other assets in the Consolidated Balance Sheets.
The following table summarizes interest incurred and paid on senior and subordinated debt.
                         
    Years Ended January 31,  
    2009     2008     2007  
    (in thousands)  
 
                       
Interest incurred
    $ 51,935       $ 52,105       $ 44,896  
Interest paid
    $ 52,095       $ 52,250       $ 41,683  
Financing Arrangements
Collateralized Borrowings
On July 13, 2005, the Park Creek Metropolitan District (the “District”) issued $65,000,000 Senior Subordinate Limited Property Tax Supported Revenue Refunding and Improvement Bonds, Series 2005 (the “Senior Subordinate Bonds”) and Stapleton Land II, LLC, a consolidated subsidiary, entered into an agreement whereby it will receive a 1% fee on the Senior Subordinate Bonds in exchange for providing certain credit enhancement. We recorded $652,000, $722,000 and $1,031,000 of interest income related to this arrangement in the Consolidated Statements of Operations for the years ended January 31, 2009, 2008 and 2007, respectively. The counterparty to the credit enhancement arrangement also owns the underlying Senior Subordinate Bonds and can exercise our rights requiring payment from Stapleton Land II, LLC upon an event of default of the Senior Subordinate Bonds, a refunding of the Senior Subordinate Bonds, or failure of Stapleton Land II, LLC to post required collateral. The agreement is scheduled to expire on July 1, 2009. The maximum potential amount of payments Stapleton Land II, LLC could be required to make under the agreement is the par value of the Senior Subordinate Bonds. We do not have any rights or obligations to acquire the Senior Subordinate Bonds under this agreement. At January 31, 2009, the fair value of this agreement, which is deemed to be a derivative financial instrument, was immaterial. Subsequent changes in fair value, if any, will be marked to market through earnings.
On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated Bonds initially were to pay a variable rate of interest.

62



Table of Contents

Upon issuance, the Junior Subordinated Bonds were purchased by a third party and the sales proceeds were deposited with a trustee pursuant to the terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005 Investment Agreement, after March 1, 2006, the District may elect to withdraw funds from the trustee for reimbursement for certain qualified infrastructure and interest expenditures (“Qualifying Expenditures”). In the event that funds from the trustee are used for Qualifying Expenditures, a corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed rate and matures in December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC, a consolidated subsidiary, entered into a Forward Delivery Placement Agreement (“FDA”) whereby Stapleton Land, LLC was entitled and obligated to purchase the converted fixed rate Junior Subordinated Bonds through June 2, 2008. The District withdrew $58,000,000 ($44,000,000 at January 31, 2008) of funds from the trustee for reimbursement of certain Qualifying Expenditures by June 2, 2008. Therefore, a corresponding amount of the Junior Subordinated Bonds became Converted Bonds and were acquired by Stapleton Land, LLC under the terms of the FDA. Stapleton Land, LLC immediately transferred the Converted Bonds to investment banks and we simultaneously entered into a TRS with a notional amount of $58,000,000. We receive a fixed rate of 8.5% and pay SIFMA plus a spread on the TRS related to the Converted Bonds. We determined that the sale of the Converted Bonds to the investment banks and simultaneous execution of the TRS did not surrender control; therefore, the Converted Bonds have been recorded as a secured borrowing in the Consolidated Balance Sheets. During the year ended January 31, 2009, one of our consolidated subsidiaries purchased $10,000,000 of the Converted Bonds from one of the investment banks. As a result, on September 12, 2008, a $10,000,000 TRS contract was terminated and the corresponding amount of the secured borrowing was removed from the Consolidated Balance Sheet. The Converted Bonds are available for sale. The fair value of the Converted Bonds was $58,000,000 and $44,000,000, respectively, at January 31, 2009 and 2008. In connection with the Senior Subordinate Bonds agreement described above and the TRS contracts related to $48,000,000 of the Converted Bonds, Stapleton Land II, LLC has provided certain notes receivable owned by us as collateral aggregating $18,000,000 as of January 31, 2009. We recorded net interest income of $3,205,000, $1,451,000 and $268,000 related to the TRS in the Consolidated Statements of Operations for the years ended January 31, 2009, 2008 and 2007, respectively.
Other Structured Financing Arrangements
In May 2004, Lehman purchased $200,000,000 in tax increment revenue bonds issued by the DURA, with a fixed-rate coupon of 8.0% and maturity date of October 1, 2024, which were used to fund the infrastructure costs associated with phase II of the Stapleton development project. The DURA bonds were transferred to a trust that issued floating rate trust certificates. Stapleton Land, LLC entered into an agreement with Lehman to purchase the DURA bonds from the trust if they are not repurchased or remarketed between June 1, 2007 and June 1, 2009. Stapleton Land, LLC is entitled to receive a fee upon removal of the DURA bonds from the trust equal to the 8.0% coupon rate, less the SIFMA index, less all fees and expenses due to Lehman Brothers, Inc. (“Lehman”) (collectively, the “Fee”). On July 1, 2008, $100,000,000 of the DURA bonds were remarketed. On July 15, 2008, Stapleton Land, LLC was paid $13,838,000 of the fee, which represented the fee earned on the remarketed DURA bonds.
We have concluded that the trust described above is considered a qualified special purpose entity pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of FIN No. 46(R). As a result, the DURA bonds and the activity of the trust have not been recorded in the consolidated financial statements. The Fee has been accounted for as a derivative with changes in fair value recorded through earnings. During the year ended January 31, 2009 Lehman, the third party obligated to pay the Fee to us filed for bankruptcy. As a result, we reassessed the collectibility of the Fee during the third quarter of 2008 and decreased the fair value of the Fee to $-0-, resulting in an increase to operating expenses in the Consolidated Statements of Operations of $13,816,000 for the year ended January 31, 2009. The fair value of the Fee of $23,108,000 at January 31, 2008 is recorded in other assets in the Consolidated Balance Sheets. We recorded interest income of $4,546,000, $8,018,000 and $7,847,000, related to the change in fair value of the Fee in the Consolidated Statements of Operations for the years ended January 31, 2009, 2008 and 2007, respectively.
Stapleton Land, LLC has committed to fund $24,500,000 to the District to be used for certain infrastructure projects and has funded $15,834,000 of this commitment as of January 31, 2009.
Mortgage Financings
We use taxable and tax-exempt nonrecourse debt for our real estate projects. For those real estate projects financed with taxable debt, we generally seek long-term, fixed-rate financing for those operating projects whose loans mature within the next 12 months or are projected to open and achieve stabilized operations during that same time frame. However, due to the limited availability of long-term fixed rate mortgage debt based upon current market conditions, we are attempting to extend maturities with existing lenders at current market terms. For real estate projects financed with tax-exempt debt, we generally utilize variable-rate debt. For construction loans, we generally pursue variable-rate financings with maturities ranging from two to five years.

63



Table of Contents

We are actively working to refinance and/or extend the maturities of the nonrecourse debt that is coming due in the next 24 months. During the year ended January 31, 2009, we completed the following financings:
         
Purpose of Financing   Amount  
 
    (in thousands)  
 
       
Refinancings
    $ 579,789  
Development projects and acquisitions(1)
    1,083,625  
Loan extensions/additional fundings
    643,234  
 
   
 
    $ 2,306,648  
 
   
   (1)  
Represents the full amount available to be drawn on the loan.
The table listed above is the result of our success in not only refinancing scheduled maturities, but also includes early financings of future loan maturities on existing properties and additional proceeds related to our development and acquisition pipeline. Subsequent to January 31, 2009, we addressed approximately $182,689,000 of maturities due during fiscal year ending January 31, 2010, through closed nonrecourse mortgage financing transactions and another $69,213,000 through signed lender commitments and/or automatic extensions. We also have extension options available on $416,128,000 of the mortgage debt maturing during the year ended January 31, 2010, all of which require some hurdle or milestone as defined in the specific agreement in order to qualify for the extension. We cannot give assurance that the defined hurdles or milestones will be achieved to qualify for these extensions.
Interest Rate Exposure
At January 31, 2009, the composition of nonrecourse mortgage debt was as follows:
                                         
                                    Total
    Operating   Development   Land           Weighted
    Properties   Projects   Projects   Total   Average Rate
     
    (dollars in thousands)
 
                                       
Fixed
    $ 4,080,906       $ 30,677       $ 3,162       $ 4,114,745       6.04 %
Variable (1)
                                       
Taxable
    1,402,537       633,866       39,617       2,076,020       4.32 %
Tax-Exempt
    602,875       236,750       48,000       887,625       1.76 %
             
 
    $ 6,086,318       $ 901,293   (2)   $ 90,779       $ 7,078,390       5.00 %
             
 
                                       
Total commitment from lenders
            $ 2,172,224       $ 98,209                  
 
                               
  (1)  
Taxable variable-rate debt of $2,076,020 and tax-exempt variable-rate debt of $887,625 as of January 31, 2009 is protected with swaps and caps described below.
 
  (2)  
$50,455 of proceeds from outstanding debt described above is recorded as restricted cash in our Consolidated Balance Sheets. For bonds issued in conjunction with development, the full amount of the bonds is issued at the beginning of construction and must remain in escrow until costs are incurred.
To mitigate short-term variable-interest rate risk, we have purchased interest rate hedges for our variable-rate debt as follows:
Taxable (Priced off of LIBOR Index)
                                 
    Caps   Swaps(1)
    Notional   Average Base   Notional   Average Base
Period Covered   Amount   Rate   Amount   Rate
 
    (dollars in thousands)
 
                               
02/01/09-02/01/10 (2)
    $ 1,375,722       5.05 %     $ 1,093,432       4.88 %
02/01/10-02/01/11
    426,116       5.74       1,032,081       4.28  
02/01/11-02/01/12
    -       -       730,656       5.37  
02/01/12-02/01/13
    476,100       5.50       729,110       5.37  
02/01/13-02/01/14
    476,100       5.50       685,000       5.43  
02/01/14-09/01/17
    -       -       640,000       5.50  
  (1)  
Excludes the forward swaps discussed below.
 
  (2)  
These LIBOR-based hedges as of February 1, 2009 protect the debt currently outstanding as well as the anticipated increase in debt outstanding for projects under development or anticipated to be under development during the year ending January 31, 2010.

64



Table of Contents

Tax-Exempt (Priced off of SIFMA Index)
                                 
    Caps   Swap
    Notional   Average Base   Notional   Average Base
Period Covered   Amount   Rate   Amount   Rate
 
    (dollars in thousands)
 
                               
02/01/09-02/01/10
    $ 232,025       5.98 %     $ 57,000       3.21 %
02/01/10-02/01/11
    175,025       5.84       57,000       3.21  
02/01/11-02/01/12
    41,115       6.00       57,000       3.21  
02/01/12-02/01/13
    12,715       6.00       57,000       3.21  
The tax-exempt caps and swap expressed above mainly represent protection that was purchased in conjunction with lender hedging requirements that require the borrower to protect against significant fluctuations in interest rates. Outside of such requirements, we generally do not hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged 3.03% and has never exceeded 8.00%.
The interest rate hedges summarized in the previous tables were purchased to mitigate variable interest rate risk. We entered into various forward swaps to protect ourselves against fluctuations in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At the time we secure and lock an interest rate on an anticipated financing, it is our intention to simultaneously terminate the forward swap associated with that financing. The table below lists the forward swaps outstanding as of January 31, 2009:
Forward Swaps
                                 
    Fully Consolidated   Unconsolidated
    Properties(1)   Property(2)
Expirations for Years Ending   Notional           Notional    
January 31,   Amount   Rate   Amount   Rate
 
            (dollars in thousands)        
 
                               
 
                               
2010
    $ 91,625       5.72 %     $ 120,000       5.93 %
Thereafter
    $ -       -       $ -       -  
  (1)  
As these forward swaps have been designated and qualify as cash flow hedges under SFAS No. 133, our portion of unrealized gains and losses on the effective portion of the hedges has been recorded in Other Comprehensive Income (“OCI”). To the extent effective, amounts recorded in accumulated OCI will be amortized as either an increase or decrease to interest expense in the same periods as the interest payments on the financing.
 
  (2)  
This forward swap does not qualify as a cash flow hedge under the provisions of SFAS No. 133 because it relates to an unconsolidated property. Therefore, the change in the fair value of this swap must be marked to market through earnings on a quarterly basis. For the years ended January 31, 2009, 2008 and 2007, we recorded $14,564, $7,184 and $3,509, respectively, of interest expense related to this forward swap in our Consolidated Statements of Operations. During the year ended January 31, 2009, we purchased an interest rate floor in order to mitigate the interest rate risk on the forward swap should rates fall below a certain level.
Additionally, we recorded $5,877,000 of interest expense for the year ended January 31, 2007 related to forward swaps that did not qualify for hedge accounting which were terminated prior to January 31, 2009.
Including the effect of the protection provided by the interest rate swaps, caps and long-term contracts in place as of January 31, 2009, a 100 basis point increase in taxable interest rates (including properties accounted for under the equity method and corporate debt and the effect of interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our variable-rate debt by approximately $13,606,000 at January 31, 2009. Although tax-exempt rates generally move in an amount that is smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates (including properties accounted for under the equity method and subordinate debt) would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt by approximately $9,752,000 at January 31, 2009. The analysis above includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans for which the interest expense is capitalized.
From time to time we and/or certain of our joint ventures (the “Joint Ventures”) enter into TRS on various tax-exempt fixed-rate borrowings generally held by us and/or within the Joint Ventures. The TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require that we and/or the Joint Ventures pay a variable rate, generally equivalent to the SIFMA rate. At January 31, 2009 the SIFMA rate is .53%. Additionally, we and/or the Joint Ventures have guaranteed the fair value of the underlying borrowing. Any fluctuation in the value of the guarantee would be offset by the fluctuation in the value of the underlying borrowing, resulting in no financial impact to us or the Joint Ventures. At January 31, 2009, the aggregate notional amount of TRS in which we and the Joint

65



Table of Contents

Ventures have an interest is $536,480,000 (which includes the TRS on the $20,400,000 redevelopment bonds (refer to the “Senior and Subordinated Debt” section of the MD&A)). We believe the economic return and related risk associated with a TRS is generally comparable to that of nonrecourse variable-rate mortgage debt. The underlying TRS borrowings are subject to a fair value adjustment.
Cash Flows
Operating Activities
Net cash provided by operating activities was $297,454,000, $271,805,000 and $309,879,000 for the years ended January 31, 2009, 2008 and 2007, respectively. The increase in net cash provided by operating activities for the year ended January 31, 2009 compared to the year ended January 31, 2008 of $25,649,000 and the decrease in net cash provided by operating activities for the year ended January 31, 2008 compared to the year ended January 31, 2007 of $38,074,000 are the result of the following:
                 
    Years Ended January 31,
    2009 vs. 2008   2008 vs. 2007
     
    (in thousands)  
 
               
Increase (decrease) in rents and other revenues received
    $ 166,970     $ (21,964 )
Decrease in interest and other income received
    (17,223 )     (14,956 )
Increase (decrease) in cash distributions from unconsolidated entities
    11,099       (3,570 )
Decrease in proceeds from land sales - Land Development Group
    (44,185 )     (13,817 )
(Decrease) increase in proceeds from land sales - Commercial Group
    (39,083 )     13,830  
Decrease in land development expenditures
    7,491       31,230  
Increase in operating expenditures
    (19,625 )     (20,384 )
Increase in interest paid
    (39,795 )     (8,443 )
     
Net increase (decrease) in cash provided by operating activities
    $ 25,649     $ (38,074 )
     
(Cash Flows discussion is continued on the next page)

66



Table of Contents

Investing Activities
Net cash used in investing activities was $1,262,971,000, $1,168,917,000 and $821,168,000 for the years ended January 31, 2009, 2008 and 2007, respectively. The net cash used in investing activities consisted of the following:
                         
    Years Ended January 31,
    2009     2008     2007  
    (in thousands)
 
                       
Capital expenditures, including real estate acquisitions*
    $ (1,078,727 )   $ (1,239,793 )   $ (979,647
 
                       
Payment of lease procurement costs and other assets, net
    (79,212 )     (147,474 )     (90,398 )
 
                       
(Increase) decrease in restricted cash used for investing purposes:
                       
Beekman, a mixed-use residential project under construction in Manhattan, New York
    $ (30,219 )   $ -     $ -  
Collateral required for a forward swap on East River Plaza, an unconsolidated entity in Manhattan, New York
    (22,552 )     -       -  
80 DeKalb, a residential project under construction in Brooklyn, New York
    (20,237 )     -       -  
Collateral required for a TRS on Sterling Glen of Rye Brook, a supported-living community in Rye Brook, New York
  (12,500 )     -       -  
One MetroTech Center, an office building in Brooklyn, New York
    (8,791 )     -       -  
Promenade Bolingbrook, a regional mall in Bolingbrook, Illinois
    (5,040 )     -       1,406  
250 Huron (formerly Chase Financial Center), an office building in Cleveland, Ohio
    (3,688 )     (20 )     (20 )
Atlantic Yards, a commercial development project in Brooklyn, New York
    (2,842 )     4,030       5,389  
New York Times, an office building in Manhattan, New York
    11,677       (15,033 )     -  
Sky55, an apartment complex in Chicago, Illinois
    4,692       -       -  
Illinois Science and Technology Park-Building A, an office building in Skokie, Illinois
    2,587       538       680  
Fairmont Plaza, an office building in San Jose, California
    1,692       (1,704 )     -  
Terminal Tower, an office building in Cleveland, Ohio
    1,610       (1,552 )     (669 )
Victoria Gardens, a retail center in Rancho Cucamonga, California
    -       19,509       (5,152 )
Investment in a development opportunity in Ardsley, New York
    -       15,000       (15,000 )
Ridge Hill, a retail center under construction in Yonkers, New York
    -       4,331       (3,080 )
Higbee Building, an office building in Cleveland, Ohio
    -       3,492       (3,818 )
Tangerine Crossing, a land development project in Tucson, Arizona
    -       3,293       (3,293 )
Sale proceeds released from (placed in) escrow for acquisitions:
                       
Mount Vernon Square, an apartment complex in Alexandria, Virginia
    -       51,943       (51,613 )
Battery Park City, a specialty retail center in Manhattan, New York
    -       25,125       (25,125 )
Other
    1,532       (7,076 )     (1,806 )
     
Subtotal
    $ (82,079 )   $ 101,876     $ (102,101 )
     
 
                       
Proceeds from disposition of rental properties and other investments:
                       
Sterling Glen supported-living communities
    $ 33,959     $ 187,468     $ -  
Landings of Brentwood, an apartment complex in Nashville, Tennessee
    -       67,756       -  
Sterling Glen of Roslyn, a development project in Roslyn, New York
    -       41,141       -  
Proceeds from a note receivable related to disposition of Lumber Group
    1,108       1,047       760  
Embassy Suites, a hotel in Manhattan, New York
    -       -       133,458  
Hilton Times Square, a hotel in Manhattan, New York
    -       -       120,400  
Mount Vernon Square, an apartment complex in Alexandria, Virginia
    -       -       51,919  
Battery Park City, a specialty retail center in Manhattan, New York
    -       -       29,994  
Providence at Palm Harbor, an apartment complex in Tampa, Florida
    -       -       7,250  
G Street, a retail center in Philadelphia, Pennsylvania
    -       -       805  
Ownership interest in a parking management company and other
    4,150       751       -  
     
Subtotal
    $ 39,217     $ 298,163     $ 344,586  
     
 
                       
 
                       
(Investment activities discussion continued on the next page)
                       
 
                       
*Capital expenditures were financed as follows:
                       
New nonrecourse mortgage indebtedness
    $ 639,362     $ 1,053,162     $ 481,620  
Proceeds from disposition of rental properties and other investments including release of investing escrows
    39,217       186,631       267,848  
Cash provided by operating activities
    297,454       -       230,179  
Borrowings on bank revolving credit facility
    102,694       -       -  
     
 
                       
Total Capital Expenditures
    $ 1,078,727     $ 1,239,793     $ 979,647  
     

67



Table of Contents

Investing Activities (continued)
                         
    Years Ended January 31,
    2009     2008     2007  
    (in thousands)
 
Change in investments in and advances to affiliates - (investment in) or return of investment:
                       
Acquisitions:
                       
Legacy Arboretum and Barrington Place, unconsolidated apartment complexes in Charlotte and Raleigh, North Carolina
    $ (7,448 )   $ -     $ -  
Legacy Crossroads, an unconsolidated apartment complex in Cary, North Carolina
    (4,631 )     -       -  
818 Mission Street, an unconsolidated office building in San Francisco, California
    (7,797 )     -       -  
Navy Northwest, an unconsolidated military housing complex in Seattle, Washington
    -       (5,597 )     -  
Metreon, an unconsolidated retail project in San Francisco, California
    -       -       (20,836 )
Dispositions:
                       
One International Place, an unconsolidated office building in Cleveland, Ohio
    1,589       -       -  
Emery Richmond, an unconsolidated office building in Warrensville Heights, Ohio
    300       -       -  
Midtown Plaza, an unconsolidated retail project in Parma, Ohio
    -       -       6,944  
Victor Village, an unconsolidated land development project in Victorville, California
    -       -       3,604  
Land Development:
                       
Mesa del Sol, an unconsolidated project in Albuquerque, New Mexico
    (2,041 )     (11,532 )     (14,248 )
San Antonio I & II, an unconsolidated project in San Antonio, Texas
    3,810       (10,000 )     -  
B&G/Sunrise Joint Venture, an unconsolidated project in El Paso, Texas
    3,848       -       -  
Sweetwater Ranch, an unconsolidated project in Austin, Texas
    -       -       21,081  
Central Station, an unconsolidated project in Chicago, Illinois
    -       -       (3,905 )
Residential Projects:
                       
1100 Wilshire, an unconsolidated condominium development project in Los Angeles, California
    2,275       -       (1,718 )
Ohana Military Communities, an unconsolidated military housing complex in Honolulu, Hawaii
    (2,212 )     -       -  
Uptown Apartments, an unconsolidated project in Oakland, California
    (4,566 )     2,249       (2,352 )
Tamarac, primarily refinancing proceeds from an unconsolidated apartment complex in Willoughby, Ohio
    4,988       -       -  
Fort Lincoln III & IV, primarily refinancing proceeds from an unconsolidated apartment complex in Washington, D.C.
    -       5,152       -  
Hamptons, primarily refinancing proceeds from an unconsolidated apartment complex in Beachwood, Ohio
    -       8,298       -  
Mercury, an unconsolidated condominium development project in Los Angeles, California
    -       (6,575 )     (6,226 )
Met Lofts, an unconsolidated apartment complex in Los Angeles, California
    -       (1,862 )     -  
Classic Residences by Hyatt, primarily refinancing proceeds from two unconsolidated apartment complexes in Teaneck, New Jersey and Chevy Chase, Maryland
    -       -       18,331  
New York City Projects:
                       
East River Plaza, an unconsolidated retail development project in Manhattan, New York
    (23,429 )     (20,923 )     (15,279 )
Sports arena complex and related development projects in Brooklyn, New York currently in pre-development; excess funds from year ended January 31, 2009 to be reinvested during construction phase
    7,317       (34,932 )     (23,345 )
The Nets, a National Basketball Association franchise
    (21,678 )     (25,345 )     -  
Commercial Projects:
                       
350 Massachusetts Avenue, primarily refinancing proceeds from an unconsolidated office building in Cambridge, Massachusetts
    24,417       -       -  
Liberty Center, primarily refinancing proceeds from an unconsolidated office building in Pittsburgh, Pennsylvania
    9,961       -       -  
Marketplace at River Park, primarily refinancing proceeds from an unconsolidated regional mall in Fresno, California
    1,920       -       -  
Mesa del Sol Town Center, an unconsolidated office building in Albuquerque, New Mexico
    (2,055 )     -       -  
Unconsolidated development activity in Las Vegas, Nevada(1)
    (17,299 )     (26,333 )     -  
Village at Gulfstream, an unconsolidated development project in Hallendale, Florida(1)
    (14,297 )     (14,699 )     (5,660 )
Waterfront Station, an unconsolidated development project in Washington, D.C.(1)
    (10,961 )     (27,420 )     -  
Bulletin Building, primarily refinancing proceeds for the year ended January 31, 2008 and acquisition of an unconsolidated office building in San Francisco, California during the year ended January 31, 2007
    -       8,648       (13,722 )
Charlestown Town Center, primarily refinancing proceeds from an unconsolidated regional mall in Charleston, West Virginia
    -       21,676       -  
Hispanic Retail Group Coachella, an unconsolidated project in Coachella, California
    -       (2,311 )     -  
San Francisco Centre-Emporium, primarily refinancing proceeds for the year ended January 31, 2007 from an unconsolidated regional mall in San Francisco, California
    -       (5,275 )     61,514  
Shops at Wiregrass, an unconsolidated retail development project in Tampa, Florida(1)
    -       (23,478 )     -  
Advent Solar, an unconsolidated office building in Albuquerque, New Mexico
    -       -       (2,537 )
Other net (advances) returns of investment of equity method investments and other advances to affiliates
    (4,181 )     (11,430 )     4,746  
         
Subtotal
    $ (62,170 )   $ (181,689 )   $ 6,392  
         
 
                       
Net cash used in investing activities
    $ (1,262,971 )   $ (1,168,917 )   $ (821,168 )
     
  (1)   During 2008, these projects changed from the equity method of accounting to full consolidation. Amounts reflected above represent investments in development projects prior to the change to full consolidation.

68



Table of Contents

Financing Activities
Net cash provided by financing activities was $978,388,000, $897,333,000 and $510,768,000 for the years ended January 31, 2009, 2008 and 2007, respectively. The net cash provided by financing activities consisted of the following:
                         
    Years Ended January 31,  
    2009     2008     2007  
    (in thousands)
 
                       
Proceeds from nonrecourse mortgage debt
    $ 1,210,657     $ 1,930,368     $ 1,036,067  
Principal payments on nonrecourse mortgage debt
    (571,295 )     (877,206 )     (554,447 )
Net increase (decrease) in notes payable
    38,045       (771 )     (76,786 )
Borrowings on bank revolving credit facility
    670,000       527,000       393,000  
Payments on bank revolving credit facility
    (343,500 )     (488,000 )     (475,500 )
Purchase of Puttable Equity-Linked Senior Notes
    (10,571 )     -       -  
Proceeds from issuance of Puttable Equity-Linked Senior Notes
    -       -       287,500  
Payment of Puttable Equity-Linked Senior Notes issuance costs
    -       -       (7,356 )
Payment of purchased call option transaction
    -       -       (45,885 )
Proceeds from warrant transaction
    -       -       28,923  
Cash consideration exchanged for minority interests
    -       -       (48,883 )
 
Decrease (increase) in restricted cash used for financing purposes:
                       
Hamel Mill Lofts, an apartment complex in Haverhill, Massachusetts
    30,723       (49,014 )     -  
Lucky Strike,an apartment complex in Richmond, Virginia
    7,665       (5,354 )     (2,457 )
Edgeworth Building, an office building in Richmond, Virginia
    2,981       1,015       (4,707 )
Prosper, a land development project in Prosper, Texas
    2,688       (2,764 )     -  
Metro 417, an apartment complex in Los Angeles, California
    2,545       (5,077 )     -  
101 San Fernando, an apartment complex in San Jose, California
    2,509       -       992  
Promenade Bolingbrook, a regional mall in Bolingbrook, Illinois
    2,300       (2,300 )     -  
Uptown Apartments, a residential project under construction in Oakland, California
    2,051       (1,296 )     19,562  
100 Landsdowne, an apartment complex in Cambridge, Massachusetts
    1,751       2,379       2,958  
Sterling Glen of Great Neck, a supported-living community in Great Neck, New York
    1,520       (228 )     -  
Stapleton Medical Office Building, in Denver, Colorado
    200       -       (2,000 )
Easthaven at the Village, an apartment community in Beachwood, Ohio
    (2,148 )                
Sky55, an apartment complex in Chicago, Illinois
    (1,672 )     4,935       15,902  
Legacy Lakes, a land development project in Aberdeen, North Carolina
    (1,000 )     -       -  
1251 S. Michigan, an apartment complex in Chicago, Illinois
    (68 )     1,642       7,368  
250 Huron (formerly Chase Financial Center), an office building in Cleveland, Ohio
    (11 )     (201 )     7,663  
Stapleton, a mixed-use development project in Denver, Colorado
    -       6,000       4,000  
Sterling Glen of Roslyn, a development project in Roslyn, New York, sold in July 2007
    -       2,781       20,806  
Sterling Glen of Lynbrook, a supported-living community in Lynbrook, New York, sold in May 2008
    -       1,099       290  
New York Times, an office building in Manhattan, New York
    -       (1,038 )     -  
Lenox Club, an apartment complex in Arlington, Virginia
    -       -       5,066  
Lenox Park, an apartment complex in Silver Spring, Maryland
    -       -       3,683  
Consolidated-Carolina, an apartment complex in Richmond, Virginia
    -       -       3,170  
Other
    495       706       30  
         
Subtotal
    52,529       (46,715 )     82,326  
         
 
                       
(Decrease) increase in book overdrafts, representing checks issued but not yet paid
    (9,617 )     (4,433 )     3,332  
Payment of deferred financing costs
    (34,491 )     (37,321 )     (31,599 )
Purchase of treasury stock related to Puttable Equity-Linked Senior Notes
    -       -       (24,962 )
Purchase of other treasury stock
    (663 )     (4,272 )     (966 )
Exercise of stock options
    1,133       8,714       9,725  
Excess income tax benefit from stock-based compensation
    (3,569 )     3,569       -  
Distribution of accumulated equity to minority partners
    (3,710 )     (43,770 )     -  
Dividends paid to shareholders
    (33,020 )     (30,784 )     (26,512 )
Increase (decrease) in minority interest
    16,460       (39,046 )     (37,209 )
     
 
                       
Net cash provided by financing activities
    $ 978,388     $ 897,333     $ 510,768  
     

69



Table of Contents

CLASS A COMMON UNITS
Master Contribution Agreement
We and certain of our affiliates (the “FCE Entities”) entered into a Master Contribution and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), an Executive Vice President and Director of ours, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) on August 14, 2006. Pursuant to the Master Contribution Agreement, on November 8, 2006, we issued Class A Common Units (“Units”) in a jointly-owned limited liability company to the BCR Entities in exchange for their interests in a total of 30 retail, office and residential operating properties, and certain service companies, all in the greater New York City metropolitan area. We accounted for the issuance of the Units in exchange for the minority interests under the purchase method of accounting. The Units may be exchanged for one of the following forms of consideration at our sole discretion: (i) an equal number of shares of our Class A common stock or, (ii) cash based on a formula using the average closing price of the Class A common stock at the time of conversion or, (iii) a combination of cash and shares of our Class A common stock. We have no rights to redeem or repurchase the Units. Also pursuant to the Master Contribution Agreement, we and Mr. Ratner agreed that certain projects under development would remain owned jointly until such time as each individual project was completed and achieved “stabilization.” As each of the development projects achieves stabilization, it is valued and we, in our discretion, choose among various options for the ownership of the project following stabilization consistent with the Master Contribution Agreement. The development projects were not covered by the Tax Protection Agreement that the parties entered into in connection with the Master Contribution Agreement. The Tax Protection Agreement indemnified the BCR Entities included in the initial closing against taxes payable by reason of any subsequent sale of certain operating properties.
New York Times and Twelve MetroTech Center
Two of the development projects, New York Times, an office building located in Manhattan, New York and Twelve MetroTech Center, an office building located in Brooklyn, New York, recently achieved stabilization. During the year ended January 31, 2009, we elected to cause certain of our affiliates to acquire for cash the BCR Entities’ interests in the two projects pursuant to agreements dated May 6, 2008 and May 12, 2008, respectively. In accordance with the agreements, the applicable BCR Entities assigned and transferred their interests in the two projects to affiliates of ours and will receive approximately $121,000,000 over a 15 year period. An affiliate of ours has also agreed to indemnify the applicable BCR Entity against taxes payable by it by reason of a subsequent sale or other disposition of one of the projects. The tax indemnity provided by the affiliate of ours expires on December 31, 2014 and is similar to the indemnities provided for the operating properties under the Tax Protection Agreement.
The consideration exchanged by us for the BCR Entities’ interest in the two development projects has been accounted for under the purchase method of accounting. Pursuant to the agreements, the BCR Entities received an initial cash amount of $49,249,000. We calculated the net present value of the remaining payments over the 15 year period using a discounted interest rate. This discounted amount of $56,495,000 was recorded in accounts payable and accrued expenses on our Consolidated Balance Sheets and will be accreted up to the total liability through interest expense over the next 15 years using the effective interest method.
The following table summarizes the final allocation of the consideration exchanged for the BCR Entities’ interests in the two projects (in thousands):
         
Completed rental properties (1)
  $ 102,378  
   
Notes and accounts receivable, net (2)
    132  
   
Other assets (3)
    12,513  
   
Accounts payable and accrued expenses (4)
    (9,279 )  
 
   
   
Total purchase price allocated
  $ 105,744  
 
   
Represents allocation for:
 
(1)   Land, building and tenant improvements associated with the underlying real estate
(2)   Above market leases
(3)   In-place leases, tenant relationships and leasing commissions
(4)   Below market leases

70



Table of Contents

Exchange of Units
In July 2008, the BCR Entities exchanged 247,477 of the Units. We issued 128,477 shares of our Class A common stock for 128,477 of the Units and paid cash of $3,501,000 for 119,000 Units. We accounted for the exchange as a purchase of minority interest, resulting in a reduction of minority interest of $12,624,000. The following table summarizes the components of the exchange transaction (in thousands):
         
Reduction of completed rental properties
  $ 5,345  
   
Reduction of cash and equivalents
    3,501  
   
Increase in Class A common stock - par value
    42  
   
Increase in additional paid-in capital
    3,736  
 
   
   
Total reduction of minority interest
  $ 12,624    
 
   
Other Related Party Transactions
During the year ended January 31, 2009, in accordance with the parties prior understanding, we redeemed Mr. Ratner’s minority ownership interests in two entities in exchange for our majority ownership interests in 17 single-tenant pharmacy properties and $9,043,000 in cash. This transaction was accounted for in accordance with SFAS No. 141, “Business Combinations” as acquisitions of the minority interests in the subsidiaries. The fair value of the consideration paid was allocated to the acquired ownership interests, which approximated the fair value of the 17 single-tenant pharmacy properties. This transaction resulted in a reduction of minority interest of $14,503,000 and did not result in a gain or loss. The earnings of these properties have not been reclassified to discontinued operations for the year ended January 31, 2009, 2008 and 2007 as the results do not have a material impact on the Consolidated Statements of Operations.
COMMITMENTS AND CONTINGENCIES
We have adopted the provisions of FIN No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”). We believe the risk of payment under these guarantees, as described below, is remote and, to date, no payments have been made under these guarantees.
As of January 31, 2009, we have a guaranteed loan of $1,400,000 relating to our share of a bond issue made by the Village of Woodridge, relating to a Land Development Group project in suburban Chicago, Illinois. This guarantee was entered into prior to January 31, 2003; therefore, it has not been recorded in our consolidated financial statements at January 31, 2009, pursuant to the provisions of FIN No. 45. This bond issue guarantee terminates April 30, 2015, unless the bonds are paid sooner, and is limited to $500,000 in any one year. We also had outstanding letters of credit of $65,949,000 as of January 31, 2009. The maximum potential amount of future payments on the guaranteed loan and letters of credit we could be required to make is the total amounts noted above.
We have entered into certain partnerships whereby the outside investment partner is allocated certain tax credits. These partnerships typically require us to indemnify, on an after-tax or “grossed up” basis, the investment partner against the failure to receive or the loss of allocated tax credits and tax losses. At January 31, 2009, the maximum potential payment under these tax indemnity guarantees was approximately $92,471,000 (of which $31,285,000 has been recorded in accounts payable and accrued expenses in our Consolidated Balance Sheets). We believe that all necessary requirements for qualifications for such tax credits have been and will continue to be met and that our investment partners will be able to receive expense allocations associated with the properties. We do not expect to make any payments under these guarantees.
Our mortgage loans are nonrecourse; however, in some cases, lenders carve out certain items from the nonrecourse provisions. These carve-out items enable the lenders to seek recourse if we or the joint venture engage in certain acts as defined in the respective agreements such as commit fraud, intentionally misapply funds, or intentionally misrepresent facts. We have also provided certain environmental guarantees. Under these environmental remediation guarantees, we must remediate any hazardous materials brought onto the property in violation of environmental laws. The maximum potential amount of future payments we could be required to make on the environmental guarantees is limited to the actual losses suffered or actual remediation costs incurred. A portion of these carve-outs and guarantees have been made on behalf of joint ventures and while the amount of the potential liability is currently indeterminable, we believe any liability would not exceed our partners’ share of the outstanding principal balance of the loans in which these carve-outs and environmental guarantees have been made. At January 31, 2009, the outstanding balance of the partners’ share of these loans was approximately $465,712,000. We believe the risk of payment on the carve-out guarantees is mitigated, in most cases, by the fact that we manage the property, and in the event our partner did violate one of the carve-out items, we would seek recovery from our partner for any payments we would make. Additionally, we further mitigate our exposure through environmental insurance and other types of insurance coverage.
We monitor our properties for the presence of hazardous or toxic substances. Other than those environmental matters identified during the acquisition of a site (which are generally remediated prior to the commencement of development), we are not aware of any environmental liability with respect to our operating properties that would have a material adverse effect on our financial

71



Table of Contents

position, cash flows or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on our results of operations and cash flow. We carry environmental insurance and believe that the policy terms, conditions, limits and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice.
We customarily guarantee lien-free completion of projects under construction. Upon completion as defined, the guarantees are released. Additionally, we also provide lien-free completion guarantees on the infrastructure of the land we develop and is later sold to customers or is held for master-planned communities or mixed-use projects. We have provided the following completion guarantees:
                 
    Total     Percent  
    Costs(1)     Completed  
       
    (dollars in thousands)  
 
               
Openings and acquisitions
     $ 1,304,265       78 %
Under construction
    2,816,153       51 %
Military housing
    2,441,954       58 %
       
Total Real Estate
     $ 6,562,372       59 %
       
 
               
Land
     $ 665,683       42 %
 
(1)   Inclusive of land sales and TIF financings.
Our subsidiaries have been successful in consistently delivering lien-free completion of construction and land projects, without calling our guarantees of completion.
We are also involved in certain claims and litigation related to our operations and development. Based on the facts known at this time, management has consulted with legal counsel and is of the opinion that the ultimate outcome of all such claims and litigation will not have a material adverse effect on our financial condition, results of operations or cash flows.
On August 16, 2004, we purchased an ownership interest in the NBA franchise known as The Nets that is reported on the equity method of accounting. Although we have an ownership interest of approximately 23% in The Nets, we recognized approximately 54%, 25% and 17% of the net loss for the years ended January 31, 2009, 2008 and 2007, respectively, because profits and losses are allocated to each member based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets. In connection with the purchase of the franchise, we and certain of our partners have provided an indemnity guarantee to the NBA for any losses arising from the transaction, including the potential relocation of the team. Our indemnity is limited to $100,000,000 and is effective as long as we own an interest in the team. The indemnification provisions are standard provisions that are required by the NBA. We have insurance coverage of approximately $100,000,000 in connection with such indemnity. We evaluated the indemnity guarantee in accordance with FIN No. 45 and determined that the fair value for our liability for our obligations under the guarantee was not material.
Certain of our ground leases include provisions requiring us to indemnify the ground lessor against claims or damages occurring on or about the leased property during the term of the ground lease. These indemnities generally were entered into prior to January 31, 2003; therefore, they have not been recorded in our consolidated financial statements at January 31, 2009 in accordance with FIN No. 45. The maximum potential amount of future payments we could be required to make is limited to the actual losses suffered. We mitigate our exposure to loss related to these indemnities through insurance coverage.
We are party to an easement agreement under which we have agreed to indemnify a third party for any claims or damages arising from the use of the easement area of one of our development projects. We have also entered into an environmental indemnity at one of our development projects whereby we agree to indemnify a third party for the cost of remediating any environmental condition. The maximum potential amount of future payments we could be required to make is limited to the actual losses suffered or actual remediation costs incurred. We mitigate our exposure to loss related to the easement agreement and environmental indemnity through insurance coverage.
We are party to an agreement whereby we have issued a $40,000,000 guarantee in connection with certain environmental work at a mixed-use development project in Brooklyn, New York. As stipulated in the agreement, the guarantee expires at some point in

72



Table of Contents

time between six and nine years after completion of the investigative work, which occurred on July 16, 2006. We have recorded a liability of $2,850,000 related to this agreement for the year ended January 31, 2009, which is included in accounts payable and accrued expenses in our Consolidated Balance Sheets. We mitigate our exposure to loss related to this agreement through an environmental insurance policy.
Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be used for certain infrastructure projects and has funded $15,834,000 of this commitment as of January 31, 2009.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
As of January 31, 2009, we are subject to certain contractual obligations, some of which are off-balance sheet, as described in the table below:
                                                         
    Payments Due by Period  
    January 31,
    Total     2010     2011     2012     2013     2014     Thereafter  
     
    (in thousands)
 
Long-Term Debt:
                                                       
Nonrecourse mortgage debt (1)
     $ 7,078,390     $ 882,716     $ 666,869     $ 590,003     $ 581,049     $ 829,233     $ 3,528,520  
Share of nonrecourse mortgage debt of unconsolidated entities
    1,475,014       227,157       38,643       102,975       33,441       49,875       1,022,923  
Notes payable
    181,919       14,782       1,287       1,355       52,631       55,178       56,686  
Share of notes payable of unconsolidated entities
    90,013       13,910       2,941       13,069       28,449       4,308       27,336  
Bank revolving credit facility
    365,500       -       365,500       -       -       -       -  
Senior and subordinated debt
    870,410       -       18,910       272,500       -       -       579,000  
Operating leases
    815,117       19,700       19,277       16,860       16,450       16,790       726,040  
Share of operating leases of unconsolidated entities
    98,277       2,902       2,890       2,596       2,352       2,219       85,318  
Construction contracts
    937,070       550,201       289,892       96,884       93       -       -  
Military housing construction contracts (2)
    524,543       284,765       164,558       68,720       6,500       -       -  
The Nets contracts (3)
    167,965       73,259       50,320       24,941       13,353       5,242       850  
Other (4)(5)
    187,343       182,965       633       1,529       1,986       230       -  
                 
 
                                                       
Total Contractual Obligations
     $ 12,791,561     $ 2,252,357     $ 1,621,720     $ 1,191,432     $ 736,304     $ 963,075     $ 6,026,673  
     
(1)  
We have a substantial amount of non-recourse mortgage debt, the details of which are further described within the Interest Rate Exposure section of the MD&A. We are contractually obligated to pay the interest and principal when due on these mortgages. Because we utilize mortgage debt as one of our primary sources of capital, the balances and terms of the mortgages, and therefore the estimate of future contractual obligations, are subject to frequent changes due to property dispositions, mortgage refinancings, changes in variable interest rates and new mortgage debt in connection with property additions. We believe that the information contained within the MD&A provides reasonable information to assist an investor in estimating the future interest obligations related to the non-recourse mortgage debt reflected on our Consolidated Balance Sheets.
 
(2)  
These amounts represent funds that we are obligated to pay under various construction contracts related to our military housing projects where we act as the construction manager. These obligations are primarily reimbursable costs from the respective projects and a corresponding account receivable is recorded when the costs are incurred.
 
(3)  
These amounts primarily represent obligations at 100% to be paid under various player and executive contracts. We have an ownership interest of approximately 23% in The Nets. The timing of these obligations can be accelerated or deferred due to player retirements, trades and renegotiations.
 
(4)  
These amounts represent funds that we are legally obligated to pay under various service contracts, employment contracts and licenses over the next several years as well as unrecognized tax benefits. These contracts are typically greater than one year and either do not contain a cancellation clause or cannot be terminated without substantial penalty. We have several service contracts with vendors related to our property management including maintenance, landscaping, security and phone service. In addition, we have other service contacts that we enter into during our normal course of business which extend beyond one year and are based on usage including snow plowing, answering services, copier maintenance and cycle painting. As we are unable to predict the usage variables, these contracts have been excluded from our summary of contractual obligations at January 31, 2009.
 
(5)  
Refer to the Financing Arrangements section of the MD&A for information related to certain off-balance sheet arrangements related to Stapleton that are included in the table above.

73



Table of Contents

DIVIDENDS
The Board of Directors declared regular quarterly cash dividends on both Class A and Class B common shares as follows:
                              
Date Declared   Date of Record   Payment Date   Amount Per Share
 
 
                   
  June 2, 2008   June 17, 2008   $ 0.08      
  August 29, 2008   September 15, 2008   $ 0.08      
  December 1, 2008   December 15, 2008   $ 0.08      
On December 5, 2008, our Board of Directors suspended the cash dividends on shares of Class A and Class B common stock following the payment of dividends on December 15, 2008, until such dividends are reinstated. Our bank revolving credit facility, as amended January 30, 2009, prohibits us from paying any dividends on our capital stock through March 2010.

INFLATION
Substantially all of our long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling us to receive additional rental income from escalation clauses, which generally increase rental rates during the terms of the leases and/or percentage rentals based on tenants’ gross sales. Such escalations are determined by negotiation, increases in the consumer price index or similar inflation indices. In addition, we seek increased rents upon renewal at market rates for our short-term leases. Most of our leases require the tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation.

LEGAL PROCEEDINGS
We are involved in various claims and lawsuits incidental to our business, and management and legal counsel believe that these claims and lawsuits will not have a material adverse effect on our consolidated financial statements.

NEW ACCOUNTING STANDARDS
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The purpose of this FSP is to improve disclosures by public entities and enterprises until the pending amendments to FASB Statement No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, and FASB Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities”, are finalized and approved by the Board. The FSP amends Statement 140 to require public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets. It also amends Interpretation 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim and annual reporting periods ending after December 15, 2008 and should be applied prospectively. We have included the disclosures required by FSP FAS 140-4 and FIN 46(R)-8 in our consolidated financial statement disclosures.
In November 2008, the FASB issued EITF No. 08-6, “Equity Method Accounting Considerations” (“EITF 08-6”), which clarifies accounting and impairment considerations involving equity method investments after the effective date of both SFAS 141 (R) and SFAS 160. EITF 08-6 provides clarification of how business combination and noncontrolling interest accounting will impact equity method investments. EITF 08-6 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2008 and early adoption is prohibited. We are currently assessing the impact EITF 08-6 will have on our consolidated financial statements.
Previously, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about the use of fair value measurements. SFAS No. 157 does not require new fair value measurements, but applies to accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued two Staff Positions on SFAS No. 157: (1) FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”) and (2) FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP FAS 157-1 excludes SFAS No. 13,

74



Table of Contents

“Accounting for Leases” (“SFAS No. 13”) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13 from SFAS No. 157’s scope. FSP FAS 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We adopted this statement for our financial assets and liabilities on February 1, 2008.
In October 2008, FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS No. 157-3”), which clarifies the application of SFAS No. 157. FSP FAS No. 157-3 provides guidance in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption of this standard as of October 31, 2008 did not have a material impact on our consolidated financial statements.
In September 2008, the FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: an Amendment of SFAS No. 133 and FIN No. 45; and Clarification of the Effective Date of SFAS No. 161” (“FSP SFAS 133-1 and FIN 45-4”). FSP SFAS 133-1 and FIN 45-4 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of how credit derivatives and any hybrid instruments affect an entity’s financial position, financial performance and cash flows. FSP SFAS 133-1 and FIN 45-4 also expands the disclosure requirements of FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” by requiring the seller of a credit derivative to disclose the current status of the payment/performance risk of the guarantee. This statement is effective for fiscal years, and interim reporting periods within those fiscal years, ending on or after November 15, 2008. The adoption of FSP SFAS 133-1 and FIN 45-4 did not have a material impact on our consolidated financial statement disclosures.
In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). This new standard requires that nonvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents be treated as participating securities in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 will be applied retrospectively to all periods presented for fiscal years beginning after December 15, 2008. We are currently assessing the impact that FSP EITF 03-6-1 will have on our consolidated financial statements and results of operations for the share-based payment programs currently in place.
In June 2008, the FASB ratified EITF Issue 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to our own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. EITF 07-5 will be effective for the first annual reporting period beginning after December 15, 2008, and early adoption is prohibited. We do not expect adoption of EITF 07-5 to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This statement will change the accounting treatment for our 3.625% Puttable Equity-Linked Senior Notes due October 2011, which were issued in October 2006. FSP APB 14-1 requires the initial debt proceeds from the sale of a company’s convertible debt instrument to be allocated between a liability component and an equity component. The resulting debt discount will be amortized over the debt instrument’s expected life as additional non-cash interest expense. Due to the increase in interest expense, we expect to record additional capitalized interest based on the qualifying expenditures on our development projects. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. The impact of the retrospective application of FSP APB 14-1 is expected to result in additional non-cash interest expense of approximately $1,500,000, $1,600,000 and $400,000, respectively (net of capitalized interest on our qualifying expenditures) for the years ended January 31, 2009, 2008 and 2007 in future consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which is intended to improve financial reporting by identifying a consistent framework or hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.

75



Table of Contents

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. This FSP allows us to use our historical experience in renewing or extending the useful life of intangible assets. This FSP is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and shall be applied prospectively to intangible assets acquired after the effective date. We do not expect the application of this FSP to have a material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows. These disclosure requirements include a tabular summary of the fair values of derivative instruments and their gains and losses, disclosure of derivative features that are credit risk related to provide more information regarding an entity’s liquidity and cross-referencing within footnotes to make it easier for financial statement users to locate important information about derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. We are currently assessing the impact SFAS No. 161 will have on our consolidated financial statement disclosures.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) provides greater consistency in the accounting and financial reporting of business combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. In February 2009, the FASB voted to issue FSP FAS 141(R)-a, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS 141(R)-a”). FSP FAS 141(R)-a amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS No. 141(R). FSP FAS 141(R)-a requires that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. Otherwise, companies would typically account for the acquired contingencies in accordance with SFAS No. 5, “Accounting for Contingencies”. FSP FAS 141(R)-a is effective for fiscal years beginning after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” an Amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). A non-controlling interest, sometimes called minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of operations; (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently and requires that they be accounted for similarly, as equity transactions; (iv) when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value, the gain or loss on the deconsolidation of the subsidiary is measured using fair value of any non-controlling equity investments rather than the carrying amount of that retained investment; and (v) entities provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interest of the non-controlling owners. This statement is effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We are currently assessing the impact SFAS No. 160 will have on our consolidated financial statements.

76



Table of Contents

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, together with other statements and information publicly disseminated by us, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements reflect management’s current views with respect to financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ from the results discussed in the forward-looking statements. Risk factors discussed in Item 1A of this Form 10-K and other factors that might cause differences, some of which could be material, include, but are not limited to, the impact of current market conditions on our liquidity, ability to finance or refinance projects and repay our debt, general real estate investment and development risks, vacancies in our properties, further downturns in the housing market, competition, illiquidity of real estate investments, bankruptcy or defaults of tenants, anchor store consolidations or closings, international activities, the impact of terrorist acts, risks associated with an investment in a professional sports team, 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, effects of uninsured or underinsured losses, environmental liabilities, conflicts of interest, risks associated with developing and managing properties in partnership with others, the ability to maintain effective internal controls, compliance with governmental regulations, volatility in the market price of our publicly traded securities, litigation risks, as well as other risks listed from time to time in our reports filed with the Securities and Exchange Commission. We have no obligation to revise or update any forward-looking statements, other than imposed by law, as a result of future events or new information. Readers are cautioned not to place undue reliance on such forward-looking statements.

77



Table of Contents


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Ongoing economic conditions have negatively impacted the lending and capital markets. Our market risk includes the inability to obtain construction loans, refinance existing construction loans into long-term fixed-rate nonrecourse financing, refinance existing nonrecourse financing at maturity, obtain renewals or replacement of credit enhancement devices, such as letters of credit, or otherwise obtain funds by selling real estate assets or by raising equity (see the “Market Conditions May Negatively Impact Our Liquidity and Our Ability to Finance or Refinance Projects or Repay Our Debt” section of Item 1A. Risk Factors). We also have interest-rate exposure on our current variable-rate debt portfolio. During the construction period, we have historically used variable-rate debt to finance developmental projects. At January 31, 2009, our outstanding variable-rate debt portfolio consisted of $2,441,520,000 of taxable debt (which includes $365,500,000 related to the bank revolving credit facility) and $906,535,000 of tax-exempt variable-rate debt (which includes $18,910,000 of subordinated debt). Upon opening and achieving stabilized operations, we have historically procured long-term fixed-rate financing for our rental properties. However, due to the current market conditions, when available, the Company is currently extending maturities with existing lenders at current market terms. Additionally, we are exposed to interest rate risk upon maturity of our long-term fixed-rate financings.
To mitigate short-term variable interest rate risk, we have purchased interest rate hedges for our variable-rate debt as follows:
Taxable (Priced off of LIBOR Index)
                                 
    Caps   Swaps(1)
    Notional   Average Base   Notional   Average Base
Period Covered   Amount   Rate   Amount   Rate
    (dollars in thousands)
 
                               
02/01/09-02/01/10 (2)
  $   1,375,722       5.05 %   $   1,093,432       4.88 %
02/01/10-02/01/11
    426,116       5.74       1,032,081       4.28  
02/01/11-02/01/12
    -       -       730,656       5.37  
02/01/12-02/01/13
    476,100       5.50       729,110       5.37  
02/01/13-02/01/14
    476,100       5.50       685,000       5.43  
02/01/14-09/01/17
    -       -       640,000       5.50  
 
(1)
 
Excludes the forward swaps discussed below.
(2)
 
These LIBOR-based hedges as of February 1, 2009 protect the debt currently outstanding as well as the anticipated increase in debt outstanding for projects under development or anticipated to be under development during the year ending January 31, 2010.
Tax-Exempt (Priced off of SIFMA Index)
                                 
    Caps   Swap
    Notional   Average Base   Notional   Average Base
Period Covered   Amount   Rate   Amount   Rate
    (dollars in thousands)
 
                               
02/01/09-02/01/10
  $      232,025       5.98 %   $        57,000       3.21 %
02/01/10-02/01/11
    175,025       5.84       57,000       3.21  
02/01/11-02/01/12
    41,115       6.00       57,000       3.21  
02/01/12-02/01/13
    12,715       6.00       57,000       3.21  
The tax-exempt caps and swap expressed above mainly represent protection that was purchased in conjunction with lender hedging requirements that require the borrower to protect against significant fluctuations in interest rates. Outside of such requirements, we generally do not hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged 3.03% and has never exceeded 8.00%.

78



Table of Contents

The interest rate hedges summarized in the previous tables were purchased to mitigate variable interest rate risk. We entered into various forward swaps to protect ourselves against fluctuations in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At the time we secure and lock an interest rate on an anticipated financing, it is our intention to simultaneously terminate the forward swap associated with that financing. The table below lists the forward swaps outstanding as of January 31, 2009:
Forward Swaps
                                 
    Fully Consolidated   Unconsolidated
    Properties(1)   Property(2)
Expirations for Years Ending   Notional           Notional    
January 31,   Amount   Rate   Amount   Rate
    (dollars in thousands)
 
2010
        91,625       5.72 %         120,000       5.93 %
Thereafter
  -       -     -       -  
 
(1)
 
As these forward swaps have been designated and qualify as cash flow hedges under SFAS No. 133, our portion of unrealized gains and losses on the effective portion of the hedges has been recorded in accumulated OCI. To the extent effective, amounts recorded in accumulated OCI will be amortized as either an increase or decrease to interest expense in the same periods as the interest payments on the financing.
 
(2)
 
This forward swap does not qualify as a cash flow hedge under the provisions of SFAS No. 133 because it relates to an unconsolidated property. Therefore, the change in the fair value of this swap must be marked to market through earnings on a quarterly basis. For the years ended January 31, 2009, 2008 and 2007, we recorded $14,564, $7,184 and $3,509, respectively, of interest expense related to this forward swap in our Consolidated Statements of Operations. During the year ended January 31, 2009, we purchased an interest rate floor in order to mitigate the interest rate risk on the forward swap should rates fall below a certain level.
Additionally, we recorded $5,877,000 in interest expense for the year ended January 31, 2007 related to forward swaps that did not qualify for hedge accounting which were terminated prior to January 31, 2009.
Including the effect of the protection provided by the interest rate swaps, caps and long-term contracts in place as of January 31, 2009, a 100 basis point increase in taxable interest rates (including properties accounted for under the equity method, corporate debt and the effect of interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our variable-rate debt by approximately $13,606,000 at January 31, 2009. Although tax-exempt rates generally move in an amount that is smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates (including properties accounted for under the equity method and subordinated debt) would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt by approximately $9,752,000 at January 31, 2009. The analysis above includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans for which the interest expense is capitalized.
We estimate the fair value of our hedging instruments based on interest rate market and bond pricing models. At January 31, 2009 and 2008, interest rate caps, floors and swaptions were reported at fair value of approximately $2,419,000 and $209,000, respectively, in other assets in the Consolidated Balance Sheets. At January 31, 2009 and 2008, interest rate swap agreements and TRS, which had a negative fair value of approximately $247,048,000 and $109,232,000, respectively, (which includes the forward swaps) were included in accounts payable and accrued expenses in the Consolidated Balance Sheets. At January 31, 2009 and 2008, interest rate swap agreements and TRS, which had a positive fair value of approximately $7,364,000 and $3,019,000, respectively, were included in other assets in the Consolidated Balance Sheets.
We estimate the fair value of our long-term debt instruments by market rates, if available, or by discounting future cash payments at interest rates that approximate the current market. Based on these parameters, the table below contains the estimated fair value of our long-term debt at January 31, 2009.
                         
                    Fair Value
                    with 100 bp Decrease
    Carrying Value   Fair Value   in Market Rates
            (in thousands)        
 
                       
Fixed
  $     4,966,245     $     4,313,068     $     4,518,131  
Variable
                       
Taxable
    2,441,520       2,227,107       2,292,197  
Tax-Exempt
    906,535       816,054       945,565  
The following tables provide information about our financial instruments that are sensitive to changes in interest rates.

79



Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk (continued)
January 31, 2009
                                                                 
    Expected Maturity Date              
    Year Ending January 31,              
                                                    Total     Fair Market  
                                            Period     Outstanding     Value  
Long-Term Debt   2010     2011     2012     2013     2014     Thereafter     1/31/09     1/31/09  
                            (dollars in thousands)                          
Fixed:
                                                               
Fixed-rate debt
  $ 182,492     $ 220,677     $ 371,070     $ 331,067     $ 782,056     $ 2,227,383     $ 4,114,745     $ 3,904,730  
Weighted average interest rate
    6.74   %     7.17   %     7.04   %     5.97   %     5.82   %     5.80   %     6.04   %        
 
                                                               
Senior & subordinated debt (1)
    -       -       272,500       -       -       579,000       851,500       408,338  
Weighted average interest rate
    -   %     -   %     3.63   %     -   %     -   %     7.30   %     6.13   %        
     
Total Fixed-Rate Debt
    182,492       220,677       643,570       331,067       782,056       2,806,383       4,966,245       4,313,068  
     
 
                                                               
Variable:
                                                               
Variable-rate debt
    700,224       446,192       185,413       45,366       46,412       652,413       2,076,020       1,861,607  
Weighted average interest rate(2)
    3.63   %     2.45   %     3.55   %     6.26   %     6.05   %     6.31   %     4.32   %        
 
                                                               
Tax-exempt
    -       -       33,520       204,616       765       648,724       887,625       797,144  
Weighted average interest rate(2)
    -   %     -   %     3.11   %     2.46   %     1.03   %     1.47   %     1.76   %        
 
                                                               
Bank revolving credit facility (1)
    -       365,500       -       -       -       -       365,500       365,500  
Weighted average interest rate(2)
    -   %     2.98   %     -   %     -   %     -   %     -   %     2.98   %        
 
                                                               
Subordinated debt (1)
    -       18,910       -       -       -       -       18,910       18,910  
Weighted average interest rate
    -   %     1.43   %     -   %     -   %     -   %     -   %     1.43   %        
     
Total Variable-Rate Debt
    700,224       830,602       218,933       249,982       47,177       1,301,137       3,348,055       3,043,161  
     
 
                                                               
Total Long-Term Debt
  $ 882,716     $ 1,051,279     $ 862,503     $ 581,049     $ 829,233     $ 4,107,520     $ 8,314,300     $ 7,356,229  
     
 
                                                               
Weighted average interest rate
    4.27   %     3.61   %     5.06   %     4.76   %     5.83   %     5.41   %     5.02   %        
     
 
(1)
 
Represents recourse debt.
(2)
 
Weighted average interest rate is based on current market rates as of January 31, 2009.

80



Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk (continued)
January 31, 2008
                                                                 
    Expected Maturity Date              
    Year Ending January 31,              
                                                    Total     Fair Market  
                                            Period     Outstanding     Value  
Long-Term Debt   2009     2010     2011     2012     2013     Thereafter     1/31/08     1/31/08  
    (dollars in thousands)  
Fixed:
                                                               
Fixed-rate debt
    $   84,220       $   327,885       $   174,421       $   375,489       $   319,644     $ 2,650,047     $ 3,931,706     $ 4,062,237  
Weighted average interest rate
    6.53   %     6.92   %     6.78   %     7.03   %     5.98   %     5.79   %     6.08   %        
 
                                                               
Senior & subordinated debt (1)
    -       -       20,400       287,500       -       579,000       886,900       812,040  
Weighted average interest rate
    -   %     -   %     8.25   %     3.63   %     -   %     7.30   %     6.13   %        
     
Total Fixed-Rate Debt
    84,220       327,885       194,821       662,989       319,644       3,229,047       4,818,606       4,874,277  
     
 
                                                               
Variable:
                                                               
Variable-rate debt
    672,218       152,872       170,753       10,056       45,366       653,826       1,705,091       1,705,091  
Weighted average interest rate (2)
    6.68   %     6.78   %     6.28   %     5.61   %     6.37   %     6.39   %     6.52   %        
 
                                                               
Tax-exempt
    85,413       1,160       1,140       505       540       613,055       701,813       701,813  
Weighted average interest rate (2)
    3.12   %     2.81   %     3.00   %     3.36   %     3.36   %     3.11   %     3.11   %        
 
                                                               
Bank revolving credit facility (1)
    -       -       39,000       -       -       -       39,000       39,000  
Weighted average interest rate (2)
    -   %     -   %     4.89   %     -   %     -   %     -   %     4.89   %        
     
Total Variable-Rate Debt
    757,631       154,032       210,893       10,561       45,906       1,266,881       2,445,904       2,445,904  
     
 
                                                               
Total Long-Term Debt
    $   841,851       $   481,917       $   405,714       $   673,550       $   365,550     $ 4,495,928     $ 7,264,510     $ 7,320,181  
     
 
                                                               
Weighted average interest rate
    6.30   %     6.86   %     6.45   %     5.55   %     6.02   %     5.71   %     5.89   %        
     
 
(1)
 
Represents recourse debt.
(2)
 
Weighted average interest rate is based on current market rates as of January 31, 2008.

81



Table of Contents


Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
         
    Page
 
       
Consolidated Financial Statements:
       
    83  
    84  
    85  
    86  
    87  
    88  
    92  
 
       
Supplementary Data:
       
    143  
 
       
Financial Statement Schedules:
       
    153  
    154  
 
       
All other schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or the notes thereto.
       
 
       
Individual financial statements of entities accounted for by the equity method have been omitted because such entities would not constitute a significant subsidiary or it has been determined that inclusion of such financial statements are not required at this time. Audited financial statements for Nets Sports and Entertainment, LLC, an equity method investment, will be filed as an exhibit to an amended form 10-K within 90 days of its June 30, 2009 fiscal year end.
       

82



Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Forest City Enterprises, Inc:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Forest City Enterprises, Inc and its subsidiaries (the “Company”) at January 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control over Financial Reporting” appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
March 30, 2009

83



Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Balance Sheets
                 
    January 31,  
    2009     2008  
    (in thousands)  
 
Assets
               
Real Estate
               
Completed rental properties
    $   8,203,095       $   7,561,685  
Projects under development
    2,233,576       1,499,495  
Land held for development or sale
    195,213       155,524  
     
Total Real Estate