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.
Where would the $249 million in EB-5 funding go?
In an unskeptical 9/21/10 article, Ratner Mulls Visa Financing, the Wall Street Journal nonetheless provided this important detail, one that seems contradicted by the project's promotion in China:
[Forest City Ratner executive MaryAnne] Gilmartin said she expects much of the money raised through the program would go toward financing the construction of a new rail yard for the Long Island Rail Road to replace the one that occupied a large portion of the site. Some may also be used to help pay off land loans on the project, she said.(Emphasis added)
That last sentence is key. As I wrote in Part 3, Forest City Ratner need not begin to build the railyard until June 2012. The EB-5 loan would arrive next year.
Rather, new evidence suggests that a primary goal would be paying off land loans, thus arresting a cycle known in the real estate industry as "extend and pretend" (or sometimes "pretend and extend"), in which borrowers are simply given more time under the hope that the situation will improve.
"Extend and pretend" at Atlantic Yards
The developer's land loan from Gramercy Capital was reported 3/31/10 to be $161.9 million, and was refinanced earlier this year.
Earlier that month, Bruce Ratner suggested at the arena groundbreaking, Gramercy progressed from "our land lender" to "our partner." Apparently Gramercy, having already extended the loan, was given a piece of the Atlantic Yards project.
Yesterday, as I reported, an ESDC response to the State Supreme Court's 11/9/10 order regarding the failure to study a 25-year buildout confirmed that suggestion.
It reveals that, on 12/23/09, the ESDC signed a Recognition Agreement with Gramercy Warehouse Funding. That agreement--not yet made public nor previously announced--granted additional time for certain properties if FCR defaulted on its obligation to Gramercy, which "holds a leasehold mortgage on certain Project parcels."
Neither the additional time nor the parcels were specified, but it seems likely there's some (if not full) overlap with the Recognition Agreement the ESDC signed in October allowed potential immigrant investors development rights to part of the future Atlantic Yards site.
Arresting the cycle
Thus, with a no-interest loan (or possibly a low-interest one), Forest City Ratner would be trading high-cost capital for low-cost capital.
It would come just in time, given that, as Bloomberg reported 10/13/10:
Lenders will shift toward amending commercial mortgages next year instead of extending maturities, leading to increased sales of distressed real estate, according to a survey of almost 900 property professionals.That means if borrowers like Forest City Ratner don't pay,, their lender would take the collateral. Gramercy doesn't really want the land. Nor does Forest City Ratner want to give it up.
The magical solution
So they've apparently found a magical solution: Forest City Ratner would use part of the $249 million loan from Chinese investors, via the EB-5 program, to replace the Gramercy funding.
(The Chinese investors may think that investing in the "Brooklyn Arena and Infrastructure Project" means they're helping build an arena. It more likely means they're offering cheaper capital for a piece of the already-funded arena. Oh, semantics.)
It looks like a win-win-win. Forest City would save money. Gramercy would get its loan repaid. The immigrant investors would get their green cards and, they hope, their money back.
Who wouldn't win?
The EB-5 program is supposed to attract immigrant investors who make job-creating investments. As explained in Part 3, the arena's already funded.
It's preposterous to credit the immigrant investors for jobs created by their capital, much less their capital added to more than $1 billion already invested and committed in the arena and associated infrastructure.
Forest City doesn't need the money. (It would like the money.)
The city and state and borough, in support of the developer's quest, are helping Forest City save money. They're helping Gramercy. They're helping the potential investors.
It's a neat trick, and one for the annals of real estate lending: "Extend, pretend, and find some Chinese friends."