(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

(Former name, former address and former fiscal year, if changed since last report)

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      þ      No      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 þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     o     No     þ

Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at December 4, 2008
Class A Common Stock, $.33 1/3 par value		80,657,248 shares
Class B Common Stock, $.33 1/3 par value		22,798,375 shares

 

 

Forest City Enterprises, Inc. and Subsidiaries

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets October 31, 2008 and January 31, 2008			2
Consolidated Statements of Operations Three and Nine Months Ended October 31, 2008 and 2007			3
Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended October 31, 2008 and 2007			4
Consolidated Statements of Shareholders’ Equity Nine Months Ended October 31, 2008 and 2007			5
Consolidated Statements of Cash Flows Nine Months Ended October 31, 2008 and 2007			6
Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures about Market Risk			68
Item 4. Controls and Procedures			72
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			73
Item1A. Risk Factors			73
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			77
Item 6. Exhibits			78
Signatures			82
Certifications
EX-3.1
EX-10.44
EX-10.46
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

Forest City Enterprises, Inc. and Subsidiaries

		October 31, 2008				January 31, 2008
		(Unaudited)
		(in thousands)
Assets
Real Estate
Completed rental properties		$	8,006,522			$	7,561,685
Projects under development			1,925,644				1,499,495
Land held for development or sale			194,873				155,524
Total Real Estate			10,127,039				9,216,704
Less accumulated depreciation			(1,382,020	)			(1,244,391	)
Real Estate, net			8,745,019				7,972,313
Cash and equivalents			164,677				254,434
Restricted cash			332,683				248,262
Notes and accounts receivable, net			417,357				419,090
Investments in and advances to affiliates			419,925				495,828
Other assets			869,160				829,998
Operating property assets held for sale			-				31,672
Total Assets		$	10,948,821			$	10,251,597
Liabilities and Shareholders’ Equity
Liabilities
Mortgage debt, nonrecourse		$	6,827,774			$	6,338,610
Notes payable			169,936				143,874
Bank revolving credit facility			213,500				39,000
Senior and subordinated debt			871,900				886,900
Accounts payable and accrued expenses			1,116,920				1,015,844
Deferred income taxes			473,920				477,238
Liabilities of operating property held for sale			-				28,498
Total Liabilities			9,673,950				8,929,964
Minority Interest			372,804				349,517
Commitments and Contingencies			-				-
Company-Obligated Trust Preferred Securities			-				-
Shareholders’ Equity
Preferred stock - without par value; 10,000,000 shares authorized; no shares issued			-				-
Common stock - $.33 1/3 par value
Class A, 271,000,000 shares authorized, 80,076,130 and 78,237,993 shares issued and 80,075,668 and 78,201,673 shares outstanding, respectively			26,692				26,079
Class B, convertible, 56,000,000 shares authorized, 22,798,375 and 24,387,607 shares issued and outstanding, respectively; 26,257,961 issuable			7,599				8,129
			34,291				34,208
Additional paid-in capital			241,725				229,358
Retained earnings			690,942				782,871
Less treasury stock, at cost; 462 and 36,320 Class A shares, respectively			(9	)			(1,665	)
			966,949				1,044,772
Accumulated other comprehensive loss			(64,882	)			(72,656	)
Total Shareholders’ Equity			902,067				972,116
Total Liabilities and Shareholders’ Equity		$	10,948,821			$	10,251,597

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended October 31,								Nine Months Ended October 31,
		2008				2007				2008				2007
		(in thousands, except per share data)
Revenues from real estate operations		$	334,530			$	333,626			$	972,415			$	889,577
Expenses
Operating expenses			200,857				201,274				594,623				547,052
Depreciation and amortization			65,443				54,414				202,290				169,942
Provision for decline in real estate			-				-				365				-
			266,300				255,688				797,278				716,994
Interest expense			(98,544	)			(88,241	)			(264,265	)			(237,748	)
Amortization of mortgage procurement costs			(2,944	)			(3,568	)			(9,051	)			(8,971	)
Gain (Loss) early extinguishment of debt			4,181				(4,719	)			(1,050	)			(8,903	)
Interest and other income			6,789				17,544				28,077				52,366
Gain on disposition of other investments			-				172				150				603
Loss before income taxes			(22,288	)			(874	)			(71,002	)			(30,070	)
Income tax expense (benefit)
Current			(4,389	)			(16,353	)			(14,561	)			(16,274	)
Deferred			(7,025	)			18,059				(12,709	)			3,331
			(11,414	)			1,706				(27,270	)			(12,943	)
Minority interest			(4,462	)			(2,308	)			(10,324	)			(10,375	)
Equity in earnings (loss) of unconsolidated entities			(3,198	)			(6,526	)			(18,422	)			2,608
Loss from continuing operations			(18,534	)			(11,414	)			(72,478	)			(24,894	)
Discontinued operations, net of tax:
Operating earnings from rental properties			-				1,273				69				110
Gain (loss) on disposition of rental properties			-				(633	)			5,294				64,604
			-				640				5,363				64,714
Net earnings (loss)		$	(18,534	)		$	(10,774	)		$	(67,115	)		$	39,820
Basic and diluted earnings (loss) per common share
Loss from continuing operations		$	(0.18	)		$	(0.11	)		$	(0.70	)		$	(0.24	)
Earnings from discontinued operations, net of tax			-				-				0.05				0.62
Net earnings (loss)		$	(0.18	)		$	(0.11	)		$	(0.65	)		$	0.38

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended October 31,
		2008				2007
		(in thousands)
Net loss		$	(18,534	)		$	(10,774	)
Other comprehensive income, net of tax and minority interest:
Unrealized net gains (losses) on investment securities			(273	)			21
Change in unrealized net losses on interest rate derivative contracts			(6,704	)			(18,963	)
Foreign currency translation adjustment			(960	)			-
Other comprehensive loss, net of tax and minority interest		$	(7,937	)		$	(18,942	)
Comprehensive loss		$	(26,471	)		$	(29,716	)

		Nine Months Ended October 31,
		2008				2007
		(in thousands)
Net earnings (loss)		$	(67,115	)		$	39,820
Other comprehensive income (loss), net of tax and minority interest:
Unrealized net losses on investment securities			(111	)			(135	)
Change in unrealized net gains (losses) on interest rate derivative contracts			8,845				(17,842	)
Foreign currency translation adjustment			(960	)			-
Other comprehensive income (loss), net of tax and minority interest		$	7,774			$	(17,977	)
Comprehensive income (loss)		$	(59,341	)		$	21,843

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

																																		Accumulated
		Common Stock																Additional																Other
		Class A								Class B								Paid-In				Retained				Treasury Stock								Comprehensive
		Shares				Amount				Shares				Amount				Capital				Earnings				Shares				Amount				(Loss) Income				Total
		(in thousands)
Nine Months Ended October 31, 2008
Balances at January 31, 2008			78,238			$	26,079				24,388			$	8,129			$	229,358			$	782,871				36			$	(1,665	)		$	(72,656	)		$	972,116
Net loss																							(67,115	)															(67,115	)
Other comprehensive income, net of tax and minority interest																																			7,774				7,774
Dividends $.24 per share																							(24,814	)															(24,814	)
Purchase of treasury stock																											17				(651	)							(651	)
Conversion of Class B to Class A shares			1,590				530				(1,590	)			(530	)																							-
Exercise of stock options			43				15												(1,189	)							(53	)			2,307								1,133
Restricted stock vested			77				26												(26	)																			-
Stock-based compensation																			13,556																				13,556
Conversion of Class A Common Units			128				42												3,736																				3,778
Distribution of accumulated equity to minority partners																			(3,710	)																			(3,710	)
Balances at October 31, 2008			80,076			$	26,692				22,798			$	7,599			$	241,725			$	690,942				-			$	(9	)		$	(64,882	)		$	902,067
Nine Months Ended October 31, 2007
Balances at January 31, 2007			76,693			$	25,564				25,254			$	8,418			$	247,884			$	762,062				65			$	(3,449	)		$	(14,668	)		$	1,025,811
Cumulative effect of change in accounting for uncertainty in income taxes																							245																245
Net Earnings																							39,820																39,820
Other comprehensive income, net of tax and minority interest																																			(17,977	)			(17,977	)
Dividends $.23 per share																							(23,621	)															(23,621	)
Purchase of treasury stock																											50				(3,138	)							(3,138	)
Conversion of Class B to Class A shares			636				212				(636	)			(212	)																							-
Exercise of stock options			455				152												6,910																				7,062
Restricted stock granted out of treasury			(107	)			(36	)											(6,020	)							(107	)			6,056								-
Restricted stock vested			135				45												(45	)																			-
Stock-based compensation																			13,571																				13,571
Distribution of accumulated equity to minority partners																			(41,202	)																			(41,202	)
Balances at October 31, 2007			77,812			$	25,937				24,618			$	8,206			$	221,098			$	778,506				8			$	(531	)		$	(32,645	)		$	1,000,571

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Nine Months Ended October 31,
		2008				2007
		(in thousands)
Net Earnings (Loss)		$	(67,115	)		$	39,820
Depreciation and amortization			202,290				169,942
Provision for decline in real estate			365				-
Amortization of mortgage procurement costs			9,051				8,971
(Gain) loss on early extinguishment of debt, net of cash prepayment penalties			(4,434	)			8,903
Gain on disposition of other investments			(150	)			(603	)
Deferred income tax expense (benefit)			(12,709	)			3,331
Minority interest			10,324				10,375
Equity in (earnings) loss of unconsolidated entities			18,422				(2,608	)
Cash distributions from operations of unconsolidated entities			40,317				23,163
Other income - net gain on sale of an ownership interest in parking management company (2008) and net gain on sale of development project (2007)			(3,350	)			(17,830	)
Stock-based compensation			7,016				7,924
Amortization and mark-to-market adjustments of derivative instruments			17,268				1,411
Write-off of abandoned development projects			41,452				9,419
Discontinued operations:
Depreciation and amortization			95				1,941
Amortization of mortgage procurement costs			11				80
Loss on early extinguishment of debt			-				363
Gain on disposition of operating properties			(8,627	)			(105,287	)
Deferred income tax expense			4,496				15,485
Cost of sales of land included in projects under development or completed rental properties			13,076				21,397
Increase in land held for development or sale			(17,164	)			(27,473	)
Decrease (increase) in notes and accounts receivable			20,567				(12,916	)
Decrease in other assets			4,468				11,248
Decrease (increase) in restricted cash used for operating purposes			538				(13,089	)
Decrease in accounts payable and accrued expenses			(45,763	)			(37,316	)
Net cash provided by operating activities			230,444				116,651
Cash Flows from Investing Activities
Capital expenditures, including real estate acquisitions			(822,844	)			(992,538	)
Payment of lease procurement costs and other assets, net			(60,261	)			(72,675	)
(Increase) decrease in restricted cash used for investing purposes			(123,872	)			89,927
Proceeds from disposition of rental properties and other investments			15,309				290,692
Increase in investments in and advances to affiliates			(41,936	)			(68,461	)
Net cash used in investing activities			(1,033,604	)			(753,055	)
Cash Flows from Financing Activities
Proceeds from nonrecourse mortgage debt			1,052,737				1,643,003
Principal payments on nonrecourse mortgage debt			(533,383	)			(784,271	)
Proceeds from notes payable			55,098				57,876
Payments on notes payable			(30,924	)			(65,913	)
Borrowings on bank revolving credit facility			462,500				465,000
Payments on bank revolving credit facility			(288,000	)			(465,000	)
Purchase of Puttable Equity-Linked Senior Notes			(10,571	)			-
Change in restricted cash and book overdrafts			43,993				(5,937	)
Payment of deferred financing costs			(31,859	)			(32,033	)
Purchase of treasury stock			(651	)			(3,138	)
Exercise of stock options			1,133				7,062
Distributions of accumulated equity to minority partners			(3,710	)			(41,202	)
Dividends paid to shareholders			(24,742	)			(22,558	)
Increase (decrease) in minority interest			21,782				(33,263	)
Net cash provided by financing activities			713,403				719,626
Net (decrease) increase in cash and equivalents			(89,757	)			83,222
Cash and equivalents at beginning of period			254,434				254,213
Cash and equivalents at end of period		$	164,677			$	337,435

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

The table below represents the effect of the following non-cash transactions for the nine months ended October 31, 2008 and 2007:

		Nine Months Ended October 31,
		2008				2007
		(in thousands)
Operating Activities
(Increase) decrease in land held for development or sale (1)(7)(8)(11)		$	(31,058	)		$	9,297
Increase in notes and accounts receivable (1)(2)(3)(6)			(693	)			(39,118	)
Increase in other assets (1)(2)(3)(6)			(47,012	)			(66,777	)
Increase in restricted cash (1)(2)(6)			(74	)			(2,486	)
Increase in accounts payable and accrued expenses (1)(2)(3)(6)(8)(11)			115,873				118,073
Total effect on operating activities		$	37,036			$	18,989
Investing Activities
Increase in projects under development (1)(7)(8)(9)		$	(108,543	)		$	(29,687	)
Decrease (increase) in completed rental properties (1)(2)(3)(5)(6)(7)10)			29,783				(56,662	)
Increase in restricted cash (1)(2)			(244	)			(16	)
Non-cash proceeds from disposition of properties (4)			26,119				77,960
Decrease (increase) in investments in and advances to affiliates (1)(2)			31,836				(3,915	)
Total effect on investing activities		$	(21,049	)		$	(12,320	)
Financing Activities
Decrease in nonrecourse mortgage debt (1)(2)(3)(4)(6)(10)		$	(15,360	)		$	(9,841	)
Increase in restricted cash (2)			-				(1,412	)
Increase in Class A common stock (5)			42				-
Increase in additional paid-in capital (5)(9)			10,276				5,647
Decrease in minority interest (1)(5)(6)			(10,873	)			-
Dividends declared but not yet paid			(72	)			(1,063	)
Total effect on financing activities		$	(15,987	)		$	(6,669	)

	(1)		Change to full consolidation method of accounting from equity method due to the occurrence of a triggering event as described in FIN No. 46(R), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), for Gladden Forest in the Land Development Group and Shops at Wiregrass, a retail development project in the Commercial Group, during the nine months ended October 31, 2008, and Oceanpointe Towers apartments in the Residential Group during the nine months ended October 31, 2007.
	(2)		Change to full consolidation method of accounting from equity method due to the acquisition of partners’ interest in Village Center apartment community during the nine months ended October 31, 2008 and in Midtown Towers, Sterling Glen of Glen Cove and Sterling Glen of Great Neck apartments during the nine months ended October 31, 2007 in the Residential Group.
	(3)		Amounts related to purchase price allocations in the Commercial Group during the nine months ended October 31, 2008 for the following office buildings: New York Times, Twelve MetroTech Center, Commerce Court, Colorado Studios and Richmond Office Park, and during the nine months ended October 31, 2007 for the New York portfolio transaction that closed in November 2006 and Galleria at Sunset Mall.
	(4)		Assumption of nonrecourse mortgage debt by the buyer upon sale of Sterling Glen of Lynbrook during the nine months ended October 31, 2008 and Sterling Glen of Bayshore and Sterling Glen of Roslyn, a development project, during the nine months ended October 31, 2007 in the Residential Group.
	(5)		Exchange of the Class A Common Units during the nine months ended October 31, 2008 (see Note M).
	(6)		Acquisition of minority ownership interests in two entities in exchange for the Company’s majority ownership interests in seventeen single-tenant pharmacy properties during the nine months ended October 31, 2008 (see Note M).
	(7)		Commercial Group and Residential Group outlots reclassified prior to sale from projects under development or completed rental properties to land held for sale.
	(8)		Increase or decrease in construction payables included in accounts payable and accrued expenses.
	(9)		Capitalization of stock-based compensation granted to employees directly involved with the acquisition, development and construction of real estate.
	(10)		Assumption of nonrecourse mortgage debt due to acquisition of properties in the Commercial Group during the nine months ended October 31, 2007.
	(11)		Exercise of the option to purchase a piece of land in Prosper, Texas that was deconsolidated during the nine months ended October 31, 2007 due to a triggering event as described in FIN No. 46(R).

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

A. Accounting Policies

Basis of Presentation

The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended January 31, 2008, including the Report of Independent Registered Public Accounting Firm. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments considered necessary for a fair statement of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, provisions for decline in real estate and the computation of expected losses on Variable Interest Entities (“VIEs”). As a result of the nature of estimates made by the Company, actual results could differ.

In March 2007, management approved a plan to demolish two buildings owned by the Company 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, which resulted in approximately $7,837,000 of accelerated depreciation expense reflected in the Consolidated Statements of Operations during the nine months ended October 31, 2007.

Reclassification

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.

Restricted Cash

Restricted cash represents legally restricted deposits with financial institutions for taxes and insurance, security deposits, capital replacement, improvement and operating reserves, bond funds, development escrows, construction escrows and collateral on total rate of return swaps, as well as certain restricted deposits with qualified intermediaries related to like-kind exchanges.

Capitalized Software Costs

Costs related to software developed or obtained for internal use are capitalized pursuant to Statement of Position No. 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and amortized using the straight-line method over their estimated useful life, which is primarily three years. The Company capitalizes significant costs incurred in the acquisition or development of software for internal use, including the costs of the software, materials, consultants, interest and payroll and payroll-related costs for employees directly involved in developing internal-use computer software once final selection of the software is made. Costs incurred prior to the final selection of software, costs not qualifying for capitalization and routine maintenance costs are charged to expense as incurred.

At October 31 and January 31, 2008, the Company has capitalized $20,015,000 and $26,840,000, respectively, of software costs net of accumulated amortization of $20,296,000 and $11,393,000, respectively. Total amortization of capitalized software costs amounted to $3,000,000 and $9,053,000 for the three and nine months ended October 31, 2008, respectively, and $3,251,000 and $6,599,000 for the three and nine months ended October 31, 2007, respectively.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

Military Housing Fee Revenues

Revenues for development fees related to the Company’s 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. The Company also recognizes additional development incentive fees based 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 $16,792,000 and $55,500,000 were recognized during the three and nine months ended October 31, 2008, respectively, and $25,826,000 and $34,003,000 during the three and nine months ended October 31, 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. The Company also recognized certain construction incentive fees based upon successful completion of certain criteria as set forth in the construction contract. Revenues of $3,172,000 and $11,022,000 were recognized during the three and nine months ended October 31, 2008, respectively, and $3,037,000 and $7,062,000 during the three and nine months ended October 31, 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. The Company also recognizes certain property management incentive fees based upon successful completion of certain criteria as set forth in the property management agreement. Property management and asset management fees of $3,741,000 and $10,683,000 were recognized during the three and nine months ended October  31, 2008, respectively, and $5,287,000 and $6,206,000 during the three and nine months ended October 31, 2007, respectively, which were recorded in revenues from real estate operations in the Consolidated Statements of Operations.

Historic and New Market Tax Credit Entities

The Company has certain investments in properties that have received, or the Company believes 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. The Company typically enters 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 the Company may be obligated (or entitled) to repurchase the financial investors’ interest. The Company has consolidated each of these properties in its consolidated financial statements, and has reflected the investors’ contribution as a liability in its Consolidated Balance Sheets.

The Company guarantees the financial investor that in the event of a subsequent recapture by a taxing authority due to the Company’s noncompliance with applicable tax credit guidelines that it will indemnify the financial investor for any recaptured tax credits. The Company initially records a liability for the cash received from the financial investor. The Company generally records 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 three and nine months ended October 31, 2008, the Company recognized income related to tax credits of $1,562,000 and $4,544,000, respectively, which were recorded in interest and other income in its Consolidated Statements of Operations. During the three and nine months ended October 31, 2007, the Company recognized income related to tax credits of $888,000 and $2,664,000, respectively, which were recorded in interest and other income in its Consolidated Statements of Operations.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

Distribution of Accumulated Equity to Minority Partners

Distributions to minority partners in excess of their recorded minority interest balance related to refinancing proceeds from nonrecourse debt, which generally arise from appreciation of the underlying real estate assets, are reported as a reduction of additional paid-in capital in the Consolidated Statements of Shareholders’ Equity. During the nine months ended October 31, 2008, the Company refinanced Nine MetroTech Center North, an office building located in Brooklyn, New York. Of the total nonrecourse refinancing proceeds distributed to its minority partner in this property during the nine months ended October 31, 2008, $3,710,000 was in excess of its minority partner’s book capital account. During the nine months ended October 31, 2007, the Company refinanced New York Times, an office building located in Manhattan, New York, Eleven MetroTech Center and Fifteen MetroTech Center, office buildings located in Brooklyn, New York, Promenade in Temecula, a regional mall located in Temecula, California and Columbia Park Center, a specialty retail center located in North Bergen, New Jersey. Of the total nonrecourse refinancing proceeds distributed to the Company’s minority partners in these five properties during the nine months ended October 31, 2007, $41,202,000 was in excess of the minority partners’ book capital accounts.

Accumulated Other Comprehensive Loss

Net unrealized gains or losses on securities are included in accumulated other comprehensive income (loss) (“OCI”) and represent the difference between the market value of investments in unaffiliated companies that are available-for-sale at the balance sheet date and the Company’s cost. Another component of accumulated OCI is foreign currency translation adjustments related to the Company’s London, England operations whose functional currency is the British pound. The assets and liabilities related to these operations are translated into U.S. dollars at current exchange rates; revenues and expenses are translated at average exchange rates. Also included in accumulated OCI is the Company’s portion of the unrealized gains and losses on the effective portions of derivative instruments designated and qualifying as cash flow hedges. The following table summarizes the components of accumulated OCI included within the Company’s Consolidated Balance Sheets.

		October 31, 2008				January 31, 2008
		(in thousands)
Unrealized gains (losses) on securities		$	(119	)		$	91
Unrealized loss on foreign currency translation			(1,564	)			-
Unrealized losses on interest rate contracts			(104,522	)			(119,953	)
			(106,205	)			(119,862	)
Minority interest and income tax benefit			(41,323	)			(47,206	)
Accumulated Other Comprehensive Loss		$	(64,882	)		$	(72,656	)

Accounting for Derivative Instruments and Hedging Activities

During the three and nine months ended October 31, 2008, the Company recorded interest expense of $457,000 and $482,000, respectively, in the Consolidated Statements of Operations, representing the total ineffectiveness of all cash flow hedges. During the three and nine months ended October 31, 2007, the Company recorded interest expense of $188,000 and $136,000, respectively, in the Consolidated Statements of Operations, representing the total ineffectiveness of all cash flow hedges. For the three and nine months ended October 31, 2008 and 2007, the amount of hedge ineffectiveness relating to hedges designated and qualifying as fair value hedges under Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), was not material. The amount of derivative gains (losses) reclassified into earnings from accumulated OCI as a result of forecasted transactions that did not occur by the end of the originally specified time period or within an additional two-month period of time thereafter was ($131,000) for the three and nine months ended October 31, 2008, and $-0- and $50,000 for the three and nine months ended October 31, 2007, respectively. As of October 31, 2008, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $18,677,000, net of tax.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

The Company entered into various forward swaps to protect itself against fluctuations in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At the time the Company secures and locks an interest rate on an anticipated financing, it intends to simultaneously terminate the forward hedge associated with that financing. The table below lists the forward swaps outstanding as of October 31, 2008 (in thousands):

Forward Swaps

										Property Accounted for
		Fully Consolidated								under the Equity Method
		Properties (1)								of Accounting (2)
Expirations for Years Ending		Notional								Notional
January 31,		Amount				Rate				Amount				Rate
2009		$	-				-			$	-				-
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, the Company’s portion of unrealized gains and losses on the effective portion of the hedges has been recorded in accumulated OCI. To the extent effective, the receipt or payment of cash at termination on these forward swaps will be recorded in accumulated OCI and 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 is marked to market through earnings on a quarterly basis. The Company recorded $2,058 and $(75) as an increase in (reduction of) interest expense related to this forward swap in its Consolidated Statements of Operations for the three and nine months ended October 31, 2008, respectively, and $3,134 and $1,684 for the three and nine months ended October 31, 2007, respectively.

From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings generally held by the Company 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 the Company and/or the Joint Ventures pay a variable rate, generally based on the Security Industry and Financial Markets Association (“SIFMA”) rate. At October 31, 2008, the SIFMA rate is 1.82%. Additionally, the Company 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 the Company and/or the Joint Ventures. At October 31, 2008, the aggregate notional amount of TRS in which the Company and/or the Joint Ventures have an interest is approximately $476,195,000 (which includes the TRS on the $20,400,000 redevelopment bonds (refer to Note D – Senior and Subordinated Debt)). The Company believes the economic return and related risk associated with a TRS is generally comparable to that of nonrecourse variable-rate mortgage debt. In addition, at October 31, 2008, the Company held an interest in a TRS on a taxable variable rate borrowing with a notional amount of $25,000,000. The underlying TRS borrowings are subject to a fair value adjustment (refer to Note F – Fair Value Measurements).

In addition, in May 2004 Stapleton Land, LLC, a consolidated subsidiary, entered into an agreement to purchase $200,000,000 of tax increment revenue bonds issued by the Denver Urban Renewal Authority (“DURA”) from a trust if they are not repurchased or remarketed between June 1, 2007 and June 1, 2009 (see the Other Structured Financing Arrangements section of Note E). Stapleton Land, LLC is entitled to receive a fee upon removal of the DURA bonds from the trust. The purchase obligation and fee have been accounted for as a derivative with changes in fair value recorded through earnings. During the nine months ended October 31, 2008, $100,000,000 of the DURA bonds were remarketed and Stapleton Land, LLC received $13,838,000 in cash, which represented the portion of the fee related to the remarketed bonds and was recorded as a reduction of the asset’s carrying value. During the three months ended October 31, 2008, Lehman Brothers, Inc. (“Lehman”), the third party obligated to pay the purchase obligation and fee to the Company, filed for bankruptcy. As a result, the Company has reassessed the collectibility of the purchase obligation and fee and has decreased the fair value to $-0-, resulting in an increase to operating expenses in the Consolidated Statements of Operations of $13,816,000 for the three months ended October 31, 2008. The fair value at January 31, 2008 of $23,108,000 is recorded in other assets in the Consolidated Balance Sheets.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

The Company estimates the fair value of its hedging instruments based on interest rate market and bond pricing models. At October 31 and January 31, 2008, interest rate caps and swaptions were reported at fair value of approximately $4,496,000 and $209,000, respectively, in other assets in the Consolidated Balance Sheets. At October 31 and January 31, 2008, interest rate swap agreements and TRS, which had a positive fair value of approximately $2,581,000 and $3,019,000, respectively, were included in other assets in the Consolidated Balance Sheets. At October 31 and January 31, 2008, interest rate swap agreements and TRS, which had a negative fair value of approximately $126,935,000 and $109,232,000, respectively, (which includes the forward swaps) were included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

Variable Interest Entities

As of October 31, 2008, the Company determined that it is the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”) of 33 VIEs representing 22 properties (20 VIEs representing 10 properties in Residential Group, 11 VIEs representing 10 properties in Commercial Group and 2 VIEs/properties in Land Development Group). As of October 31, 2008, the Company held variable interests in 42 VIEs for which it is not the primary beneficiary. As of October 31, 2008, the maximum exposure to loss as a result of the Company’s involvement with these unconsolidated VIEs is limited to its recorded investments in those VIEs totaling approximately $101,000,000. The Company’s 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.

In addition to the VIEs described above, the Company has also determined that it is the primary beneficiary of a VIE that holds collateralized borrowings of $29,000,000 (see Note D – Senior and Subordinated Debt) as of October 31, 2008.

New Accounting Standards

In November 2008, the FASB voted on the effective date and other amendments of Proposed FASB Staff Position (“FSP”) No. FAS 140-e and FIN 46(R)-e, “Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP will require additional disclosures about transfers of financial assets and involvement with variable interest entities. This statement is expected to be issued in December 2008 and will be effective for all reporting periods ending after December 15, 2008 and will require additional disclosures in the Company’s Form 10-K for the year ending January 31, 2009.

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 FAS 157-2”). FSP FAS 157-1 excludes SFAS No. 13, “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. The Company adopted this statement for its financial assets and liabilities on February 1, 2008 (see Note F – Fair Value Measurements).

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 the Company’s consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

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, beginning on or after November 15, 2008. The Company is currently assessing the impact FSP No. 133-1 and FIN 45-4 will have on its consolidated financial statement disclosures.

In June 2008, the FASB issued FSP Emerging Issues Task Force (“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. The Company is currently assessing the impact that FSP EITF 03-6-1 will have on its 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 the Company’s 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. The Company is currently assessing the impact EITF 07-5 will have on its 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 the Company’s 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, the Company expects to record additional capitalized interest based on its qualifying expenditures on its 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 (net of capitalized interest on the Company’s qualifying expenditures) for the year ended January 31, 2009.

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 Securities and Exchange Commission’s (“SEC”) 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.” The Company does not expect adoption of SFAS No. 162 to have a material impact on its consolidated financial statements.

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 the Company to use its 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. The Company does not expect the application of this FSP to have a material impact on its consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

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. The Company is currently assessing the impact SFAS No. 161 will have on its 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 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. The Company is currently assessing the impact SFAS No. 160 will have on its consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

B. Investments in and Advances to Affiliates

Included in investments in and advances to affiliates are unconsolidated investments in entities that the Company does not control and/or is not deemed to be the primary beneficiary, and which are accounted for under the equity method of accounting, as well as advances to partners and other affiliates.

Following is a reconciliation of members’ and partners’ equity to the Company’s carrying value in the accompanying Consolidated Balance Sheets:

		October 31,				January 31,
		2008				2008
		(in thousands)
Members’ and partners’ equity, as below		$	669,911			$	741,871
Equity of other members and partners			524,689				553,842
Company’s investment in partnerships			145,222				188,029
Advances to and on behalf of other affiliates			274,703				307,799
Total Investments in and Advances to Affiliates		$	419,925			$	495,828

Summarized financial information (at 100%) for the equity method investments is as follows:

		(Combined 100%)
		October 31,				January 31,
		2008				2008
		(in thousands)
Balance Sheet:
Real Estate
Completed rental properties		$	3,587,094			$	2,989,525
Projects under development			1,364,408				1,271,998
Land held for development or sale			266,575				265,943
Total Real Estate			5,218,077				4,527,466
Less accumulated depreciation			(657,601	)			(606,961	)
Real Estate, net			4,560,476				3,920,505
Restricted cash - military housing bond funds			928,422				1,264,941
Other restricted cash			261,294				339,200
Other assets			502,947				409,973
Total Assets		$	6,253,139			$	5,934,619
Mortgage debt, nonrecourse		$	4,664,014			$	4,486,786
Other liabilities			919,214				705,962
Members’ and partners’ equity			669,911				741,871
Total Liabilities and Members’/Partners’ Equity		$	6,253,139			$	5,934,619

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

B. Investments in and Advances to Affiliates (continued)

		(Combined 100%)								(Combined 100%)
		Three Months Ended October 31,								Nine Months Ended October 31,
		2008				2007				2008				2007
		(in thousands)								(in thousands)
Operations:
Revenues		$	223,276			$	191,637			$	717,424			$	642,774
Operating expenses			(157,859	)			(135,392	)			(527,215	)			(446,394	)
Interest expense including early extinguishment of debt			(57,104	)			(57,610	)			(172,266	)			(159,955	)
Provision for decline in real estate (1)			-				-				(45,348	)			-
Depreciation and amortization			(27,893	)			(28,002	)			(106,253	)			(103,001	)
Interest and other income including preferred return on disposition			13,646				16,938				45,456				45,479
Earnings (loss) from continuing operations			(5,934	)			(12,429	)			(88,202	)			(21,097	)
Discontinued operations:
Gain on disposition of rental properties (2)			400				-				3,470				4,212
Income (loss) from discontinued operations			78				148				(21	)			968
Discontinued operations subtotal			478				148				3,449				5,180
Net earnings (loss) (pre-tax)		$	(5,456	)		$	(12,281	)		$	(84,753	)		$	(15,917	)
Company’s portion of net earnings (loss) (pre-tax)		$	(3,198	)		$	(6,526	)		$	(18,422	)		$	2,608

(1)		The following table shows the detail of the provision for decline in real estate for equity method investments:

						Nine Months Ended October 31,
						2008				2007
						(in thousands)
Navy Midwest (Military Housing Project) (a)		(Chicago, Illinois)				$	30,000			$	-
Mercury (Condominium)		(Los Angeles, California)					12,006				-
El Centro Mall (Specialty Retail Center)		(El Centro, California)					3,342				-
Total provision for decline for equity method properties						$	45,348			$	-
Company’s portion of provision for decline in real estate for equity method properties						$	5,661			$	-
(a)      Amount relates to impairment of land located in Puerto Rico held by Navy Midwest.

(2)		The following table shows the detail of gain on disposition of rental properties that were held by equity method investments:

						Three Months Ended October 31,									Nine Months Ended October 31,
						2008				2007					2008				2007
						(in thousands)									(in thousands)
One International Place (Office Building)		(Cleveland, Ohio)				$	-			$	-				$	3,070			$	-
Emery-Richmond (Office Building)		(Warrensville Heights, Ohio)					400				-					400				-
White Acres (Apartments)		(Richmond Heights, Ohio)					-				-					-				4,212
Total gain on disposition for equity method rental properties						$	400			$	-				$	3,470			$	4,212
Company’s portion of gain on disposition of equity method rental properties						$	200			$	-				$	1,081			$	2,106

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

B. Investments in and Advances to Affiliates (continued)

Included in the amounts above are the following amounts for the three and nine months ended October 31, 2008 and 2007 related to the Company’s investment in an entity that is reported in the Nets segment. This entity primarily reports on the operations of the New Jersey Nets basketball team, a franchise of the National Basketball Association, in which the Company has been an equity method investor since August 16, 2004. Summarized financial information for this equity method investment is as follows:

		Three Months Ended October 31,									Nine Months Ended October 31,
		2008				2007					2008				2007
		(in thousands)									(in thousands)
Operations:
Revenues and interest income		$	2,050			$	2,683				$	59,567			$	60,289
Operating expenses			(13,279	)			(12,729	)				(80,427	)			(79,826	)
Interest expense			(1,373	)			(2,830	)				(4,913	)			(7,294	)
Depreciation and amortization			(160	)			(377	)				(24,230	)			(24,746	)
Net loss (pre-tax)		$	(12,762	)		$	(13,253	)			$	(50,003	)		$	(51,577	)
Company’s portion of net loss (pre-tax)		$	(9,681	)		$	(9,277	)			$	(30,817	)		$	(13,286	)

C. Bank Revolving Credit Facility

At October 31 and January 31, 2008, the Company’s bank revolving credit facility, as most recently amended on September 10, 2008 for technical clarifications, provides for maximum borrowings of $750,000,000 and matures in March 2010. The facility bears interest at the Company’s option at either (1) a LIBOR-based rate plus 1.45% (5.11% and 4.89% at October 31 and January 31, 2008, respectively), or (2) a Prime-based rate plus .50%. The Company has historically elected the LIBOR-based rate option. 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, specified levels of net worth (as defined in the credit facility) and a dividend and stock repurchase limitation of $40,000,000 per annual period. At October 31, 2008, the Company was in compliance with all of these financial covenants.

Available credit on the bank revolving credit facility at October 31 and January 31, 2008 was as follows:

		October 31, 2008				January 31, 2008
		(in thousands)
Maximum borrowings		$	750,000			$	750,000
Less outstanding balances:
Borrowings			213,500				39,000
Letters of credit			93,855				71,802
Surety bonds			-				-
Available credit		$	442,645			$	639,198

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

D. Senior and Subordinated Debt

The Company’s Senior and Subordinated Debt is comprised of the following at October 31 and January 31, 2008:

		October 31, 2008				January 31, 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			20,400				20,400
Subordinate Tax Revenue Bonds due 2013			29,000				29,000
Total Subordinated Debt			49,400				49,400
Total Senior and Subordinated Debt		$	871,900			$	886,900