The effort by the New York City Regional Center (NYCRC), the private investment pool federally authorized to accept immigrant investor funds, and developer Forest City Ratner (FCR) to raise $249 million from 498 Chinese millionaires under the EB-5 immigration program may be legal, but there is ample reason to question whether it will serve the public interest.
Part 1 of this series concerned the seven-year extension available on Phase 1 of the project should Forest City Ratner not repay the EB-5 loan. Part 2 estimated the developer could save at least $191 million. Part 3 examined the sales effort in China, with the arena front and center, even though it's already funded.
Part 4 reported on claims made in China, on video and in person, by public officials supporting the project. Part 5 concerned the value of the development rights, contrasted with those in last year's deal for the Vanderbilt Yard. Part 6 described reasons to think the development rights are overvalued.
Part 7 explained why China is such a popular target for those seeking EB-5 investors. Part 8 provided another reason why the Nets played exhibition games in China in October. Part 9 cited the curious avoidance of Mikhail Prokhorov during the pitch in China.
Part 10 noted NYCRC's belated announcement of the project in a newsletter. Part 11 described misleading promotion in the Chinese media and by Chinese firms working with the NYCRC. Part 12 covered the proclamations that are part of the pageantry in China.
Part 13 concerned the role of the NYCRC's preferred law firm. Part 14 linked the land loan to a previous one from Gramercy Capital. Part 15 analyzed the use of weasel words and ambiguous language. Part 16 took another look at a web video pitching the project.
The wrap-up and FAQ is here.
The Empire State Development Corporation (ESDC), the state agency with oversight over Atlantic Yards, has again extended the deadlines to get the project built, allowing seven additional years for Phase 1.
Why? Because Forest City Ratner wants a valuable, no-interest loan from immigrant investors looking for green cards.
The beneficiaries? The developer, and the Chinese investors who might end up owning nearly half of the non-arena project site, development rights to seven of 16 towers, as shown in the screenshot below right.
The losers? The public, since expected project benefits such as affordable housing and new tax revenues could be delayed, while burdens like an interim surface parking lot could be extended.
Under the scenario--in a Recognition Agreement for the loan approved by ESDC staff, with no need for board action--the 12-year timetable for Phase 1 would be suspended for seven years.
Thus, the minimum square footage required for Phase 1 could take 19 years, nearly twice as long as the entire project was supposed to take.
Is such a delay likely? We can't be sure, but considering the extensive provisions documented in case Forest City Ratner defaults on the loan, the state and the developer seem to take a default scenario seriously.
Indeed, the scenario casts huge doubts on FCR's public rhetoric, via executive MaryAnne Gilmartin (video below) that it is "100 percent committed to delivering the Atlantic Yards project and all of its benefits to the borough of Brooklyn."
And it suggests that the ESDC, rather than protecting the public interest, is more concerned with saving the developer money.
It's the second set of delays for Phase 1, the property west of Sixth Avenue (see graphic below; click to enlarge).
Officially, this first segment, including the four towers on the arena block plus one on adjacent Site 5, was supposed to be completed in four years, as stated in project documents the ESDC approved in both December 2006 and September 2009.
Now the first phase alone could take 19 years.
However, the Development Agreement signed in December 2009--but kept under wraps (suspiciously) by the ESDC until January 2010--gave FCR 12 years for that phase.
According to the 2009 Modified General Project Plan (MGPP) approved by the ESDC in September 2009, Phase I would mix rental and condominium housing, with approximately 1,005 to 2,110 residential units and 30% of the units on the Arena Block (but no less than 300 units) affordable.
The Recognition Agreement
Now, a Recognition Agreement the ESDC signed October 5 with FCR and the New York City Regional Center (NYCRC) essentially modifies the Development Agreement.
(Formally, the signatories are FCR's affiliate AYDC Regional Development Company and the NYCRC's affiliate Brooklyn Arena and Transportation Improvement Fund.)
It reveals that Phase 1 could be delayed seven years more, should FCR choose to not repay its EB-5 loan from immigrant investors via the NYCRC.
That would mean a 19-year Phase 1. The official timetable for the entire project has always been ten years, as in the Modified General Project Plan (MGPP) approved by the ESDC--though the Development Agreement allows 25 years.
The Recognition Agreement, which I received via a Freedom of Information Law request, is embedded below. Neither the Recognition Agreement nor the Development Agreement required action by the ESDC board.
However, "the primary terms [of the Development Agreement] were described to the Directors (in the MGPP) and the Directors authorized the CEO to enter into the Agreement," according to ESDC spokeswoman Elizabeth Mitchell. Recognition Agreement between NYCRC, FCR/AYDC, ESDC
Legal dispute over timetable
The disconnect between the Development Agreement (25 years) and the MGPP (10 years) prompted a lawsuit by two community coalitions, which on 11/9/10 won a preliminary victory as state Supreme Court Justice Marcy Friedman slammed the ESDC for "what appears to be yet another failure of transparency."
They have since requested a stay on construction, with a hearing before Friedman scheduled for December 22. The judge declined to stop arena construction.
The Recognition Agreement is not part of the record in the case. It's unclear whether it could have any impact, given that the petitioners' successful argument concerned the timetable for the project as a whole, not for Phase 1.
However, the Recognition Agreement casts additional doubt on the credibility of the ESDC in enforcing the vague requirement of "commercially reasonable efforts" to get the project built on the approved timetable of ten years.
Loan, then default?
Under the EB-5 program, FCR would get a no-interest (or, possibly, low-interest) loan from investors who prize green cards over any financial return. (The NYCRC is still touring China, trying to raise funds.)
The savings over seven years could easily reach $191 million, and possibly much more.
FCR's decision to not repay the mortgage loan within seven years would trigger a sequence in which the Chinese investors via the NYCRC would gain control over collateral property on part of the Atlantic Yards site.
The collateral involves not the under-construction arena but development rights for future buildings.
Then the NYCRC, as the official mortgagee, would market the loan to a buyer. A successor developer would have to be found.
And that could push the Phase 1 clock back seven years, without penalty.
How would the Recognition Agreement affect Phase 2? As noted below, it's unclear, since accessory documents were unavailable when I asked.
Five years, plus two years
FCR is supposed to pay back the $249 million EB-5 loan in five years.
However, the Recognition Agreement, as noted in the screenshot at left, includes a "forbearance period" of two years during which the Mortgagee "shall forbear from exercising all remedies."
In other words, the loan would last seven years. FCR would get an additional two-year grace period, without penalties, saving an additional tens of millions of dollars in interest.
There would have been little reason for the NYCRC to object. It would have already earned its fees: $38,000 per investor, or nearly $19 million, minus expenses. Its business plan would have been met.
The ESDC, representing the public, presumably might have a greater reason to disagree, but it did not.
ESDC claims "extensive negotiations"
The ESDC, rather than force FCR to spend its money to deliver the project as promised, would seemingly reward the developer for acting like a deadbeat, rather than hold to the original or even revised schedules.
I asked the ESDC the rationale for offering the seven-year extension.
Spokeswoman Mitchell responded, "The project documents reflect extensive negotiations among ESDC, FCR and the lender. Lenders typically receive additional cure time in the event of a default by their borrower."
That may be so, but the ESDC isn't the lender. It doesn't look like the agency pushed hard in the "extensive negotiations."
Consider the unusual configuration here, and the interests of the respective parties.
It looks like the government is bending over backward to accommodate the lender, the private New York City Regional Center (and its immigrant investors), and the borrower, Forest City Ratner, rather than protecting the public interest.
In negotiating the Recognition Agreement, ESDC presumably could have required that the NYCRC and its investors accept the existing timetable and agree to deliver Phase 1 within 12 years, no matter what.
That would put pressure on the lender; given that the loan would last seven years, there would be only five more years to finish Phase 1.
In exchange for taking on more risk, however, the NYCRC would have had to get more collateral from FCR.
But that would not have been in FCR's interest. And the ESDC acquiesced.
That contrasts with FCR executive MaryAnne Gilmartin's rhetoric, as shown on the video below from the 9/29/10 public meeting on the Atlantic Yards plaza.
After discussing plans for Phase 1, she said, reading from prepared remarks, "Let me be clear. Forest City is a company with great determination and deep roots in Brooklyn. We are 100 percent committed to delivering the entire Atlantic Yards project and all of its benefits to the borough of Brooklyn." (Note her facial expression at the end.)
About a week later, Gilmartin flew to China to help convince immigrant investors to put their money into the "Brooklyn Arena and Infrastructure Project" and potentially become owners of part of the development site.
The ESDC's willingness to re-set the clock suggests a dangerous precedent: any developer in the ESDC's good graces could evade its obligations to deliver a project on the agreed timetable should it simply decide to get a new mortgage.
If so, the immigrant investor program, which is supposed to benefit the economy by creating jobs, could seemingly do the opposite.
(To calculate job creation, the United States Citizenship and Immigration Services, the federal agency that oversees the EB-5 program, does not require regional centers to count actual jobs but to provide an economist's report that applies a multiplier to money spent. I've already called that a questionable claim, and will take a closer look in this series.)
The timetable in the Development Agreement
According to the Development Agreement (excerpted at right), the developer would have up to 12 years--with a loophole for delays in affordable housing financing--to construct 1.5 million gross square feet on the arena block and adjacent Site 5, excluding the arena. Most of those buildings would contain housing.
The first tower has to begin within three to four years after delivery of Phase 1 property by eminent domain, which happened this year, or FCR would owe a $5 million penalty to the ESDC. Forest City Ratner has said it plans to begin building that tower, B-2, beginning in 2011.
FCR, according to the Development Agreement, must start the second tower in six years and the third tower in eight years, or would face a $5 million penalty for delays in each.
The 12-year deadline would apply to the minimum square footage for the three towers. Now it has been extended seven years..
The EB-5 transaction
The transaction involving the mortgage begins if and when 498 immigrant investors seeking green cards each put $500,000, plus fees, into the NYCRC.
(At left, graphic from NYCRC describes the sequence for investors. Click to enlarge.)
Should the NYCRC and the investors convince federal immigration authorities that each investment creates ten jobs, the immigrant investors and their families can get conditional green cards. (Permanent green cards would come after two years, following additional federal review.)
The NYCRC, via its Brooklyn Arena Infrastructure and Transportation Improvement Fund, would then lend up to $249 million to FCR. The loan would be money secured by a series of mortgages encumbering the borrower's development leases.
That would make the NYCRC the mortgagee of nearly half of the non-arena site.
What property is at issue?
Which of FCR's leases would be included? They're not specified in the Recognition Agreement.
However, they apparently include three of the four building parcels on the arena block, as well as the four parcels on Block 1129, the southeast block that is used for construction staging and slated for a massive interim surface parking lot.
That information comes from a brochure distributed to potential investors in China. (I was forwarded the brochure via a session attendee.)
The brochure values the development rights at $542 million, well more than the loan.
However, the identity of development sites securing the mortgage could change, at least if FCR fulfills its promise to build additional residential towers after the first tower, B-2, at the corner of Dean and Flatbush Avenues.
The towers would range from 20 to 50 stories.
Would collateral change?
At an 11/4/10 meeting of the Atlantic Yards District Cabinet, a quarterly gathering of government agencies involved in the project, FCR's Gilmartin said (as noted in video below) that the start date for B-3 would be six to nine months after construction of B-2, "that is the hope, and construction of B-4 would begin six to nine months after B-3." (There's no timetable yet for the office tower, B-1.)
As shown in the graphic above, B-1, B-3, and B-4 are all part of the package offered to the Chinese investors.
Should Gilmartin's schedule be met, then the development rights for those towers could no longer secure the mortgage.
Either the Chinese investors would get ownership of the already-built towers, or additional development rights on the Atlantic Yards site would have to be added to the mortgage, complicating the equation.
If new sites, such as the six parcels along the northern border of the Atlantic Yards footprint, were added, that would require a revaluing of the development rights.
After all, it's much easier to build on the arena block and the southeastern block (Block 1129), given the presence of terra firma. Block 1129 for now is slated for construction staging and an 1100-space interim surface parking lot.
The building sites over the railyard presumably would be less valuable because of construction costs. They would require an expensive deck as a precursor, and that would add time to the construction schedule.
What if FCR defaults on loan?
What if FCR doesn't pay back the loan? It could lose development rights.
According to the Recognition Agreement, should there be an Event of Default, NYCRC (the mortgagee) would retain one or more listed "restructuring advisory professional organizations" to assist in resolving the "event."
If after two years the event is not resolved, the mortgagee can sell the loan to another lender. The Recognition Agreement does not establish a firm time period to sell the loan.
Alternatively, the ESDC or its designee has the right to purchase the debt "for an amount equal to the then current Fair Market Value of the Mortgaged Leasehold Estate." It's unclear whether this fallback option would be a good deal for the public.
Fair Market Value
The Recognition Agreement offers a complex process to determine Fair Market Value.
The purchaser would submit its analysis, and the mortgagee could accept it or provide its own figure. If the two parties can't agree, they can jointly select an appraiser, who would choose one sum or the other.
If they can't agree on an appraiser, the state Supreme Court would appoint one.
Liquidated damages for Phase 1 pushed backk
The Development Agreement included liquidated damages for delays on buildings planned for the arena block, as well as the overall Phase 1.
The latter penalties have been relaxed.
According to the Recognition Agreement, a new formula for liquidated damages applies only to Development Leases on the arena block, and in part substitutes for such damages payable to ESDC pursuant to previous documents.
Previously, FCR had to deliver a Phase 1 LOC (Letter of Credit) equal to three years of Liquidated Damages for overall Phase 1 delays. That added up to a little more than $2.6 million in penalties that would kick in after three years, 15 years after Phase 1 construction began.
However, the timetable has been pushed back. The key is the term "Payment Timeline Reset":
...the term of each lease... shall be extended… to allow sufficient time following... an Event of Default… for Mortgagee to foreclosure… and for a Successor Leasehold Owner to make satisfactory arrangements with a Permitted Developer... provided that in each case Mortgagee is acting diligently, in good faith and in a commercially reasonable manner…
Commencing on the date (i) Mortgagee or a Successor Leasehold Owner acquires Developer's interest as a tenant under the Leases or any new Lease and makes satisfactory arrangements with a Permitted Developer, and (ii), to the extent required by the Lease or any New Leases, ESDC approves such Permitted Developer (the "Reset Date"), the Successor Leasehold Owner shall have twelve 12 years... (the Mortgagee Outside Completion Date) … in which to construct or cause the construction and Substantial Completion… of the Development Work.
That 12-year period would not begin for at least seven years, given the time it would take for the loan to go into default.
It might take even longer, depending on when "satisfactory arrangements" are made with a Permitted Developer.
Note that while the language above suggests that there would be a single date when both the Developer's interest would be acquired and satisfactory arrangements with a Permitted Developer would be made, it is more likely those would be different dates.
First, the interest in the property would be transferred.
Second, a new Permitted Developer--a term defined in the Lease, which is not attached--would have to be found.
Forest City Ratner could not be a Successor Leasehold Owner, which would take over the lease following foreclosure.
However, it's unclear from this document whether FCR could be a Permitted Developer and thus return to the site on which it, more than any other developer, has experience with construction.
Minimum required for Phase 1
The Recognition Agreement imposes some confusing but seemingly gentle penalties if sufficient square footage is not built by the Mortgagee Outside Completion Date, which, as noted above, could take 19 years.
The minimum acceptable amount of square footage depends on whether or not Phase 1 includes Site 5, the land currently occupied by P.C. Richard and Modell's across Flatbush Avenue from the arena block.
Site 5 is not included as collateral. In the graphic at right from the project brochure, it's colored yellow and occupies the block at far west of the site, bounded by Flatbush Avenue, Atlantic Avenue, Fourth Avenue, and Pacific Street.
Should Site 5 be included, the minimum required is 1.5 million square feet, not including the arena. (This was in the Development Agreement.)
Should Site 5 not be included, the minimum is 1.3 million square feet.
Both these figures are far smaller than the total square footage--2,692,000 square feet--announced in the 2009 Modified General Project Plan:
Phase I is expected to include at least 336,000 gsf of commercial office space, 165,000 gsf of hotel use (approximately 180 rooms), 91,000 gsf of retail, up to 2.1 million gsf of residential use (approximately 2,110 residential units) and community facility uses, which would occupy portions of the residential and retail space.Penalties murky, no details yet
Penalties due after 19 years, the Mortgagee Outside Completion Date, are calculated in a rather confusing manner:
The annual amount of liquidated damages shall be calculated by multiplying $7.5 million by a percentage, the numerator of which is the maximum amount of gross square footage developable on the Development Parcel pursuant to the Lease as set forth on Exhibit E attached thereto, and the denominator of which is 2,654,957.Penalties can be repeated each year for five years until the Substantial Completion of either the 1.5 million square feet requirement or the 1.3 million square feet requirement.
However, we don't know what's "on the Development Parcel pursuant to the lease," because the announced Exhibit E is not yet attached to the Recognition Agreement.
Why? According to the ESDC, several exhibits will be completed only if and when the EB-5 mortgage is placed on the leasehold. FCR and the NYCRC are still recruiting immigrant investors.
Given the absence of Exhibit E, it's unclear whether the numerator represents the overall land in the mortgage or an individual building plot.
(The document is confusing in another way; while it announces a "percentage," a numerator and denominator constitute a fraction, not a percentage, given that the denominator of the latter is always 100.)
If, say, the numerator represents an individual building plot with 400,000 square feet of development rights, the total penalty could be $1.1 million, or $5.6 million over five years.
If the numerator is 1.3 million square feet--Phase 1, without Site 5--the total penalty could be $3.7 million, or $18.4 million over five years.
Should the numerator be 1.5 million square feet--Phase 1, with Site 5--the total penalty could be $4.2 million, or $21.2 million over five years.
Any of those figures are relatively gentle penalties, given that they wouldn't kick in for 19 years, and represent a fraction of the value of the loan, the savings, and the presumed value of the collateral.
What about Block 1129 timetable?
When would the four towers on Block 1129 be built? The Recognition Agreement is silent on the obligations regarding the rest of the properties at issue.
Article VI of the Recognition Agreement refers to Exhibit E, a schedule "allocating among the Pojrect Site included in the Lease... and the remaining balance of the Project Site... the development and construction requirements..."
I asked for a copy but was told it had not been prepared yet.
However, the Development Agreement, as I wrote in March, requires construction of the first residential building--though not necessarily one with affordable housing--on Block 1129 to begin within a decade after the Effective Date, when the ESDC delivered vacant possession of the Phase 1 Properties to the developer. (That happened this year.)
Except there's a huge loophole: "Market Financing Unavailability."