Forest City Enterprises, Inc.

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Forest City Enterprises, Inc.

10800 Brookpark Road
Cleveland, Ohio 44130
U.S.A.
(216) 267-1200
Fax: (216)433-1827

Public Company
Incorporated: 1960
Employees: 3,287
Operating Revenues: $506.89 million (fiscal 1996)
Stock Exchanges: American
SICs: 6513 Apartment Building Operators; 6512 Nonresidential Building Operators

With properties in 25 states worth a total of $2.6 billion, Forest City Enterprises, Inc. is a developer and manager of commercial and multifamily residential real estate. By the mid-1990s, Forest City’s apartment division ranked among America’s 20 largest owners of multifamily developments. The firm’s real estate portfolio nearly quadrupled from $434 million in 1985 to $2.4 billion in 1995, as it concentrated on larger, more ambitious projects. In addition to its real estate interests, the 75-year-old company operates North America’s second largest lumber wholesaler. In 1996, descendants of the founding Ratner family continued to own a controlling interest in the company. President and Chief Executive Officer Charles A. Ratner appeared poised to lead the corporation into the 21st century.

Foundation and Development in Early 20th Century

The family affair began in 1905, when members of the Ratner clan began to emigrate to the United States from their native Poland in 1905. Charles, the eldest and first to arrive in Cleveland, Ohio, founded Forest City Lumberyard in 1922. Upon their arrival, Leonard and younger siblings Max, Fannye, and Dora borrowed money to start a small creamery offering milk, butter and eggs. Trained as a weaver, Leonard joined his older brother in the lumber business mid-decade, opening Buckeye Lumber in 1924. Two years later, the Ratners sold their creameries to focus on the lumber and building materials market. In the late 1920s, Leonard and Charles turned the lumberyard over to brother Max, who had just earned a law degree from Case Western Reserve’s John Marshall Law School. Fannye’s husband, Nathan Shafran, came into the lumber business around this same time. Leonard and Charles founded B & F Building Co., which constructed single-family homes on Cleveland’s east side. Leonard rejoined the family lumber firm in 1934, bringing with him his expertise in residential construction.

Although the company sold construction materials primarily to contractors in the 1920s, 1930s and 1940s, it also reached out to the general public during the Great Depression. At this time, Forest City Lumber started a lending program that enabled homeless people to borrow $549 toward the purchase of building materials. By investing their own “sweat equity,” these struggling individuals could build a very inexpensive home.

Forest City made its first forays into the real estate business during the 1930s and 1940s by acquiring inexpensive land that had been repossessed by banks and other institutions. Some lots were purchased as cheaply as $10 each. During the interwar period, the company lent land and building materials to local builders with the understanding that they would pay for both when they sold the homes. Forest City became a pioneer in the construction of prefabricated homes in 1941, but this activity was interrupted by World War II, during which the company made wooden munitions boxes.

Sam Miller, who joined the company in 1947, has been credited with launching Sunrise Land Co., the land development arm of the business. Miller became a full-fledged member of the family shortly thereafter, when he married Leonard’s daughter Ruth. Envisioning an opportunity for growth in the postwar housing shortage, the Ratners entered residential construction, and was a key developer of some of Cleveland’s largest suburbs. The group also began to develop its extensive landholdings into apartments and shopping centers. This new focus on consumers may have lead the company to begin converting its lumberyards into do-it-yourself home stores in 1955. Forest City’s early entry into this important market helped make it Ohio’s biggest building materials company by the end of the decade.

Incorporation Signals Transition

Forest City Enterprises was incorporated in 1960 with Leonard Ratner as chairman and Max Ratner as president. The company made an initial public stock offering that same year, selling a 19.5 percent stake at a face value of $4.5 million. Forest City’s stock was listed on the American Stock Exchange by 1965. Although the company continued to develop its retail and wholesale lumber businesses during the 1960s and 1970s, this corporate reorganization represented a turning point for the company, when real estate came to the fore.

Under the direction of Max Ratner’s son, Charles, beginning in 1966, Forest City’s building materials chain grew from $12 million in annual sales to nearly $200 million over the next two decades. The division added one of America’s largest lumber distributors, an Oregon company, to its portfolio in 1969. Over the course of the 1960s and 1970s, it opened stores in Detroit, Chicago and Akron. By the late 1970s, the chain boasted 20 do-it-yourself centers.

Forest City’s real estate developments took several forms. The company built, owned and operated shopping centers, malls, office buildings, industrial parks and hotels. It also acquired Akron’s Thomas J. Dillon & Co., Inc., a construction company in 1968. Under the guidance of Nathan Shafran, Forest City applied its patented method of modular high-rise housing construction to this new subsidiary. The firm’s “Operation Breakthrough” program erected nearly 60,000 units of low-cost housing for the elderly over the next 30 years. By the end of the 1970s, Forest City owned 17 shopping centers and 39 apartment buildings with a combined total of 10,800 housing units. The company had also diversified into mortgage banking, property leasing, and property management, as well as petroleum and natural gas development.

Albert B. Ratner advanced to the presidency in 1973, when Max assumed the chairmanship and Leonard took the title of founder chairman. Corporate revenues increased from $32 million in 1963 to $235.3 million by 1979, but net income only grew from $1 million to $1.4 million.

Major Urban Projects Characterize 1980s

At the dawn of the 1980s, Forest City began to phase out its smaller ventures and concentrate its resources on larger urban developments. The most significant divestment of this transition came in 1987, when the company sold its Forest City Materials chain to Handy Andy Home Improvement Centers, Inc. Forest City had dominated the local home improvement market until the early 1980s, when DIY Home Warehouse and Kmart Corp.’s Builders Square infiltrated Cleveland. Forest City tried to match the competition with deep discounts and a switch to a warehouse format, but soon realized that it needed more volume and more buying power to compete with these large, well-financed national chains. This dramatic break with the company’s traditional business freed it to focus on the mega-projects for which it would become nationally known in the 1980s and 1990s.

Forest City played a key role in the revitalization of downtown Cleveland, then applied the skills it had gained to urban projects throughout the United States. In 1980, the company bought Cleveland’s Terminal Tower, a passenger rail terminal originally built before the Great Depression. Although the $250 million project endured several fits and starts, it would become a cornerstone of the city’s rebirth. When completed in 1990, the three million square foot, multi-use urban renewal redevelopment featured hotels, a mall, and offices. Renamed Tower City, the project helped push Forest City’s real estate portfolio over the $2 billion mark in 1991. Major retail and commercial projects in Boston, Pittsburgh, Brooklyn, Los Angeles, Tucson, San Francisco, Chicago, and elsewhere echoed the scale and impact of Tower City in Cleveland. Forest City also continued to pursue residential developments throughout this period, creating everything from single-family inner-city projects to luxury apartments and condominiums.

Although Forest City sailed through the late 1980s, early 1990s credit crunch better than many of its competitors, it was compelled to eliminate its quarterly dividend in 1991 and put the brakes on 17 projects in 1992.

Foreign Investment and Casinos Carry Forest City into 21st Century

Having specialized in large urban redevelopments for about a decade, a confident Forest City wagered future prosperity on international projects and gambling houses. The company made its first international foray via a 1993 joint venture with Mexico’s Grupo Protexa. Ian Bacon, the executive in charge of this endeavor, compared Mexico to the United States of the 1950s and 1960s: a market ripe for the development of regional malls and shopping centers.

Company Perspectives

Forest City Enterprises is a national owner and developer of real estate, committed to building superior, long term value for its shareholders and customers. We accomplish this through the operation, acquisition and development of commercial, rental housing, urban entertainment and land development projects. We operate by developing meaningful relationships and leveraging our unparalleled entrepreneurial capabilities with creative talent in a fully integrated real estate organization.

The developer became increasingly involved in the construction and management of casinos—euphemistically dubbed “urban entertainment” in the industry—in the mid-1990s. Projects in Pittsburgh, Las Vegas, and Atlantic City either planned for or proposed gambling. Although gambling and its social and economic effects were hotly contested topics in the early 1990s, analyst Sheldon Grodsky wryly told the Cleveland Plain Dealer’s Bill Lubinger that “This is what they do, whether they do it with gambling-related property or retail or mixed use or apartments—that’s real estate development.” Clearly, Forest city and the Ratner family had long been winners at the real estate game, and there was no reason to believe that a losing streak was at hand.

Charles A. Ratner, son of Max, became president and chief operating officer that same year, and assumed the chief executive office in 1995. That year, which marked the company’s 75th anniversary, the new CEO revealed a strategic plan that outlined financial goals and the strategies necessary to reach them, a mission statement, and a set of core values. The new CEO hoped that these guidelines would help Forest City continue to increase its revenues and net income, which had grown from $499.6 million and $6.8 million, respectively, in fiscal 1995 (ended January 31) to record-setting $506.9 million and $13.5 million in fiscal 1996.