Friday, October 08, 2010

The fundamental lie at the heart of the "green cards for investors" scheme (and why the Chinese investors face a higher risk than acknowledged)

There's a fundamental lie at the heart of the attempt by Forest City Ratner and its partner, the New York City Regional Center (NYCRC), to raise $249 million in no-interest (or low-interest) financing under the EB-5 visa program from Chinese millionaires seeking green cards.

They've redefined the "project" as a $1.448 billion project that includes the Barclays Center arena, related infrastructure, and a new railyard that Forest City Ratner is required to build.

And only by defining the "project" anew, and thus tacking the railyard on to already funded components, does the risk to investors seem diminished.

Rather, investors likely face a much higher risk than acknowledged. And the collateral offered would not be easily convertible into cash but would require a sophisticated development partner.

(Why is New York State's Empire State Development Corporation playing along, accepting the claim of a $1.448 billion project and sending Executive Director Peter Davidson to China next week? He is the only government official on the trip.)

Previous project definitions

No one else has defined any phase of the $4.9 billion Atlantic Yards project in this way. Consider that, according to an Offering Statement for Arena bonds issued last December, the Arena Project was defined at $904.3 million, not $1.448 billion.

(Click on graphic to enlarge.)

Why is the NYCRC statement a lie?

A promotion by a NYCRC partner in China offers a misleading portrayal.


Here's the translation. (Click to enlarge)

And consider the claim by NYCRC representative Gregg Hayden:
The project is $1.4 billion in total size, and all of the money for the project is available and on deposit in an escrow account. The only money that has not been raised is the $249 million that we're raising from the EB-5 market. That $249 million represents 17% of the total project cost; 17% EB-5 to total project costs is a very safe, a very secure position to be in...
17% EB-5 to total project costs?

Actually, the investment would appear to be much less safe.

None of the funding--the bonds, the city subsidies, the state subsidies--mentioned in the graphic is directed to the railyard.

The arena project and the associated infrastructure (which, as defined below, does not include the permanent railyard) can be funded--and has been funded--without the $249 million sought from Chinese investors.

They're tacking on the railyard to the "project."

It would be much more precise to say that the "project" in this case consists mainly of a new railyard, for which the funding would be mostly (or all) from immigrant investors. (Bruce Ratner has said the money also could be used to pay off a land loan.)

That's a much higher risk.

The Arena Project

Consider this graphic from the Offering Statement. It mentions city and state funding for the Arena Project, not beyond it. (Click to enlarge.)


The components

Nowhere is the new permanent railyard mentioned in the Offering Statement.

It explains the use of government funding:
The City‘s capital contribution for the Arena Project, agreed under the City Funding Agreement to be in the aggregate amount of $131 million, will be made available to NYCEDC. The State, acting through ESDC, will make a capital contribution of $100 million for certain costs incurred and to be incurred in connection with the construction of certain items of Atlantic Yards Project infrastructure (which items are described in detail in Exhibit C to the State Funding Agreement), which include a portion of the Related Infrastructure, which benefits but is not a part of the Arena Project.
This excludes the permanent railyard.

The components include:
Arena Infrastructure
ArenaCo or its affiliates will enter into contracts with contractors and/or construction managers for the development and construction of the Arena Infrastructure, which will include, without limitation, the following items: the Transit Improvements, the Urban Experience and other site work, and the Fourth Avenue Reconfiguration (as such items are described in more detail below)...

The Arena Premises―Site Work will include the design and construction of the sidewalks for the Arena Premises, bollards and street trees. Site Work will also include construction of the Urban Experience,which is an interim condition until a so-called Urban Room is developed by AYDC or its affiliate or assignee, as required by the Development Agreement between ESDC and the Developer. The Urban Experience will be an outdoor urban plaza...

The Fourth Avenue Reconfiguration work consists of street, curb and sidewalk improvements which will eliminate northbound traffic on Fourth Avenue between Flatbush Avenue and Atlantic Avenue...

The Related Infrastructure will include the following work necessary for the development, construction, equipment and operation of the Arena: construction of a temporary rail yard in order to move most of LIRR operations off of the Arena Premises; excavation and relocation of sewer pipes and water mains from Fifth Avenue and Pacific Avenue to permit construction of the Arena Project and to service the Arena; demolition of existing improvements; environmental remediation; and the rebuilding of the Carlton Avenue Bridge which links Atlantic Avenue and Pacific Street on the East side of the AY Project Site, between Sixth Avenue and Vanderbilt Avenue.
Note the mention of a temporary railyard, which is already constructed, not a permanent one.

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