Claimed value of collateral for immigrant investors lowered by lack of timetable for office tower; no publicly announced plan for revenue
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.
Exactly how valuable is the collateral offered to 249 prospective Chinese investors seeking green cards in exchange for each parking $500,000 in an investment pool that would support the Brooklyn Arena and Infrastructure Project under the EB-5 program?
There are several reasons to think that a new appraisal that calculates $542,375,000 for 3,025,654 square feet--seven towers on both the arena block and Block 1129, the southeast block--may have overvalued the development rights.
First, as noted, the MTA in 2005 appraised development rights over the Vanderbilt Yard at $75 a square foot and said in 2009 that it would be dangerous to get a new appraisal because of the bad economy. The new appraisal, which includes some land over the railyard, values development rights at more than $179 a square foot.
Also, as noted, even if the actual value is closer to $179 a square foot, it would be tough for the creditors to unlock the stated value of the collateral without a series of transactions that likely would reduce the value.
Unknown timetable for office tower
Third, included in the collateral is the value of development rights for the tower known as B-1, currently slated to be an office building--for which no market is expected soon.
The new appraisal, by the real estate firm Massey Knakal, has not been made public, but the conclusions have been outlined in both a promotional brochure (excerpt at right) and public presentations by the New York City Regional Center (NYCRC), which is working with Forest City Ratner to raise $249 million from Chinese investors.
There's no demand for office space in Brooklyn. Manhattan already has an over-capacity of office space, plus an additional projected surplus, should the current office space now on the drawing board come to fruition.
B-1 requires both a boost in the economy and an anchor tenant. In November 2009, Forest City Ratner CEO Bruce Ratner asked Crain's rhetorically, “Can you tell me when we are going to need a new office tower?”
At a public meeting held on 9/29/10, FCR executive MaryAnne Gilmartin noted that, "with commercial vacancy rates in New York City exceeding ten percent, and the replacement cost of what it takes to build an office building and the rents that one could charge, economic equation does not pencil out." She said it could take five years, eight years, or even longer for the office market to recover.
As described in Part 1, the Recognition Agreement anticipates a complex process in the case of default; the loan could be restructured, or marketed to a third party after seven years, and a Permitted Developer must be found and contracted.
Beyond that, there are additional hurdles. The value of development rights remain theoretical until and unless there's funding to build.
For the apartment towers, the financing would include construction loans (for condos and market-rate rentals) and tax-exempt bonds (for buildings subsidized under city and state affordable housing programs).
Funding streams for both have been questionable, though Gilmartin recently expressed confidence that, based on the company's success with the 80 DeKalb tower, loans for market-rate rentals would become available.
Also, given statements by the city and state about the projected first tower, subsidies for that residential building, known as B-2, likely will become available. It would be located at Dean Street and Flatbush Avenue.
However, the collateral in the new appraisal includes development rights for other residential buildings, for which there is no committed publicly-aided funding as of now.
Office tower swapped for residential?
Maybe B-1 won't be an office tower after all.
According to the narrator of a promotional video shown to prospective investors in China, "Forest City will construct seven residential towers and there will be 2400 apartment units, on over 3 million square feet of land used as collateral."
That may have been a sloppy or misleading description of plans to build six residential towers and one office tower. Perhaps it was a reference to the fact that B11 could include some residential units along with office space.
However, if that means that Forest City Ratner no longer plans to build an office tower at all, the Atlantic Yards project will have completed a fundamental switch.
When the project was announced in 2003, the four towers on the arena block were to house 10,000 office jobs.
That would have complied with the Commercial Mixed-Use site plan approved by the Empire State Development Corporation in 2006, even though by 2005, most of that office space had been traded for housing, in line with the Residential Mixed-Use site plan also approved by the ESDC and widely seen as the more likely scenario.
Even that plan, however, had office space in one tower: B-1. (See Executive Summary of Final Environmental Impact Statement.)
Impact on public interest
If FCR doesn't plan to build even one office tower, that would delay claimed public benefits.
Given that the loss of projected office space previously helped chop projected tax revenues by nearly one-third, the rosy economic projections by the city and state should have been revised.
(They also should have been revised to account for a delayed buildout as well as a project not built to full capacity.)
What investors should be told
Moreover, I've seen no public acknowledgment of information that the EB-5 consulting firm USAdvisors suggests investors should seek, such as the financial projections for the project, an exit strategy, and the estimated time to positive cash flow.
That may appear in the additional documentation provided to investors, such as the private placement memorandum cited in the brochure.
According to (anonymous) critics of the Victorville Regional Center, a troubled California project that in October became the first regional center (of more than 100) to be terminated by the federal government, potential immigrant investors should ask several questions, including:
- What are the sources of funding for repayment of the investment?
- What can I expect for a rate or return on my investment and how is this paid?
- How risky is the investment and what could happen in a worst case scenario?
Two kinds of risk
However, that doesn't fully explain the risks investors in the "Brooklyn Arena and Infrastructure Project" would face.
Hayden and the NYCRC have continually stressed the issue of immigration risk--the likelihood that investors would get green cards, based on whether the United States Citizenship and Immigration Services would approve the job-creation formulation by the NYCRC.
"It is the safest, most secure, highest job-creating EB-5 project on the market today," Hayden declared confidently (at 5:33 of this excerpt) during a Q&A webcast broadcast in China in October, "and you will have an easy path to your permanent residence status in the United States." (That's not so certain, as I wrote.)
By contrast, the NYCRC in its public presentations has been much quieter about investment risk--the likelihood that investors would get their money back, in full and in a timely fashion. Instead, they stress the collateral.
We now know that it could take seven years to repay the immigrant investors' loan (via the NYCRC) to Forest City Ratner, and that it could trigger a sequence in which the loan is sold.
We also know that, for the loan to be turned into cash, it would have to be re-marketed, presumably at a discount to the appraised value.
Publicity for the project in China has emphasized the success of Forest City Ratner and parent Forest City Enterprises in previous projects (as in the graphic below), but not the source of funds to repay the lenders in the Brooklyn project.
How EB-5 loans could be paid back
The Brooklyn project seemingly differs from EB-5 projects based on more conservative business models. Florida attorney Jose Latour, on his Immigration Insider blog, wrote 10/23/09:
3- The better newer EB-5 Regional Center models (and some of the veteran ones) are increasingly debt-based vs. equity-based. This means that in the pooling of the investor funds, the debt-based models operate as lenders to specific projects. Because the loans are often linked to governmental or quasi-governmental borrowers, bond secured, and finite --these structures, although more conservative on returns than the equity-based models, are increasingly appealing to many prospective EB-5 investors. But don't get me wrong - some of the most successful programs are equity-based).The Brooklyn project would not be linked to governmental or quasi-governmental borrowers. Neither would it be bond-secured.
Rather, it would be linked to a developer with unspecified (at least publicly) plans to repay it.
However, the NYCRC tries to muddy the waters by emphasizing "government involvement," a reference to the subsidies for the arena already committed by the city and state, which does not constitute any security for the immigrant investors.
By claiming the project is secure, the NYCRC and FCR then offer the most conservative returns-zero interest--as do some projects backed by repayment plans based on bonds or a clear revenue stream.
The Brooklyn project, with its 0% return, may fall into a category Latour described 10/26/09:
Just because an EB-5 Regional Center investment predicts a teensy weensy annual return does not necessarily mean that the investment is "safer". It could just mean the project managers are taking a big chunk of profits away from the investors.Beyond the value of the collateral offered, the question remains: what might entice investors?
The answer seems to be basketball.
Note on sourcing
I received the NYCRC brochure via a source in China who got it from a session attendee. I believe it to be an original, complete copy but have not confirmed that; the information comports with other publicly available statements.
I listened to the NYCRC promotional video via an audio recording of a presentation to investors provided to me by Tom Spender, a reporter I engaged to cover an investor session in China. Spender, who approached the session promoters as a stringer for China International Business, covered the session for that publication as well as The National, a newspaper in the United Arab Emirates.
The video cited post is edited from publicly available webcasts produced in China, which include promotional video and Q&A sessions. Hayden's statements in English, which appear in the original videos at various junctures, are edited into a single sequence but otherwise not truncated.