Monday, December 13, 2010

The missing billionaire: Why nobody pitching EB-5 investments to Chinese millionaires wants to talk about Mikhail Prokhorov

Part 9 of a series

TThe 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.


Does Russian billionaire Mikhail Prokhorov, majority owner (80%) of the New Jersey Nets and minority owner (45%) of the arena, have anything to do with the "Brooklyn Arena & Infrastructure Project" for which immigrant investor funding is sought?

Of course.

However, when asked during a webcast in September why Chinese investment was needed if Prokhorov was the owner of the Nets, the New York City Regional Center's (NYRC) Gregg D. Hayden simply punted, deflecting the question with a nonsense answer.

Since then, he and colleagues, in presentations to potential investors, have assiduously avoided the suggestion that Prokhorov has a key role in the arena. That's part of the misdirection that characterizes the EB-5 sales job.

A question, on video

In a mid-October Q&A that was webcast by the Kunpeng consultancy (and excerpted below), Hayden again faced a question (at 0:56) about Prokhorov.



Q: "We can see that this latest EB-5 project includes investments from Russia's richest man and the American hip-hop star Jay-Z. The project is called the Brooklyn Stadium Project. Please give us a little background and talk on the progress of the project."

GH: "First of all, let's not confuse the ownership of the stadium between the ownership of the team. Mikhail Prokhorov and Jay-Z, which you refer to in your question, they're owners of the team, the New Jersey Nets, soon to be the Brooklyn Nets. The other owner is Forest City Enterprises. That is, like every project needs, the anchor tenant for the Brooklyn arena. The project itself involves three components, the Brooklyn arena; the related infrastructure to the lands; and the redevelopment and expansion and upgrading of the [city's] third largest transportation hub, in Brooklyn, called the Atlantic Terminal."

Actually, as noted, Prokhorov owns most of the team and nearly half of the arena. He's not seeking EB-5 funding for his share of the arena, but that doesn't mean his role in the arena can be ignored.

Also, the "redevelopment" of the transportation hub involves the Vanderbilt Yard, used to store and service trains. While that's part of the hub, it hardly constitutes the hub. His answer could have left the impression that investors would be upgrading the actual terminal.

More Prokhorov avoidance

In a project video shown to investors, NYCRC principal Paul Levinsohn explains: "To borrow the EB-5 funds is an affiliate of Forest City Enterprises, one of the largest publicly traded real estate firms in the United States with approximately $11.8 billion in total assets. Founded in 1920, Forest City Enterprises has been a publicly traded company for 50 years and is currently traded on the New York Stock Exchange. Forest City Enterprises' real estate portfolio includes over 34,000 residential units, 47 office projects, 46 retail developments, and five hotels. And Forest City is also part owner of the Nets basketball team."

Yes, Forest City, is part owner of the team, but it has a small minority share. Prokhorov is the majority owner.

That significant, strategic omission seems aimed to avoid this question: Why couldn't Prokhorov be asked to pick up the slack?

Answer: Presumably, in exchange for contributing more money, he'd ask for a greater share of the arena itself, rather than accept some murky collateral. And that would lower Forest City Ratner's return.

Selective list of participants

In a session for investors in Beijing, Hayden again stressed FCE ownership, stating, "In addition to Forest City Enterprises as a very strong owner of the Nets organization, we have other sponsors, like Barclays Bank PLC, and Haier organization, as well as the Nets organization, for the arena."

That, of course, was a very selective list, stressing a Chinese sponsor for the arena but again omitting Prokhorov, as well as other sponsors.

The reason for avoidance

Why not mention Prokhorov?

Maybe because it might confuse people, or generate questions such as that mentioned earlier: If Prokhorov has so much money, why was Chinese investment needed on this project?

Though Hayden's answer was a non-sequitur, a Chinese transcript added these astonishingly candid words: "The costs of using investment funds are relatively lower than the costs of bank loans. Although the NBA project funds are sufficient, business is business, and we are in pursuit of profit maximization."

To Chinese investors not hung up on business ethics, this may have sounded like pragmatism.

EB-5 mockery

But it essentially makes a mockery of the EB-5 program, set up to draw job-creating investments.

As a state official acknowledged, funding for the arena is already in place. It will go ahead with or without the $249 million no-interest loan. The same number of jobs would be created.

Thus, the benefit from the immigrant investors' money would go much more to Forest City Ratner than to the public interest.

Note on sourcing

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 in today's 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.

No comments:

Post a Comment