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.
Under the EB-5 program, investment pools known as regional centers--an increasingly popular increasingly-popular way to raise cheap financing--can solicit immigrant investors from around the world to park $500,000 each in a job-creating investment.
However, the New York City Regional Center (NYCRC), in the case of the "Brooklyn Arena and Infrastructure Project," has focused on China, a country that offers a particular set of advantages to EB-5 promoters, and an even greater set of advantages for this project.
For the NYCRC and Forest City Ratner, China presents a valuable, unique opportunity, given the confluence of basketball fever, plentiful new money, the desire to get children educated (and other opportunities) in the United States, a language barrier, limited watchdog reporting on this issue, little emphasis on transparency, variable amounts of business sophistication, and flexible business ethics.
It's the new Wild Wild West.
Even before a series of high-profile sales sessions in major cities in October, involving developer Bruce Ratner and the Empire State Development Corporation's Peter Davidson (but not, as once billed, Brooklyn Borough President Marty Markowitz), the NYCRC was hustling.
As the NYCRC's Gregg Hayden said during a webcast produced by the Kunpeng immigration consultancy (excerpts) in mid-October, "Myself and my assistant General Manager, Zachary Woods, from Shanghai, have just finished a 45-day, 23-city tour, of the China market, raising preliminary interest and pre-sales for this project, and they're going extremely well, we have a lot of strong interest, because of the safety and security of this program, and the abundant job creation that we are producing with this project."
(Well, that's their story. This series challenges the claims of safety, security, and "abundant job creation.")
Since the October sessions, the NYCRC on November 12 began an 11-event, nine-city tour around the country, scheduled to end December 19 in Chongqing.
But the larger question is: Why China?
Why such multiple tours and, in mid-October, why bring big guns such as Darryl (Chocolate Thunder) Dawkins, Ratner, and Davidson, and why show videos touting the project with appearances by officials from Brooklyn, New York City, and New York State?
Well, promotional videos, like the one excerpted below from a webcast produced by an immigration consultancy in China, provide a sense of the atmosphere at the road shows.
And below are my answers, some more speculative than others, regarding the choice of China.
Money and demand
1) Quite simply, China is where the money is. It's the largest country in the world, and it's full of nouveau riche. The New York Times Magazine 11/28/10 reported that "Beijing alone has some 150,000 residents worth more than $1.5 million."
EB-5 consultant Brian Su, who helps firms market their projects, wrote 10/31/10 (typos in original):
As the world largest "immigrant exporter", investors in China have a strong interest in EB-5 program as it is the easiest and quickies way to emigrate to the US. However, due to the Chinese government's recent restrictions on over-heated real estate industry and banks tight control over 2nd mortgage lending, it will have an negative impact on US bound immigration.2) The demand for green cards is high. Many of those new millionaires want desperately to get their kids educated in the United States, as the NYCRC's Hayden told The National: "Most of the investors are interested in emigrating to the U.S. for education purposes."
The EB-5 program for some may be an investment opportunity, but not this one, if no interest will be paid. More likely the lure includes other lifestyle factors, as reported by Press TV: "China’s Overseas Affairs Office say many rich Chinese citizens are also emigrating because of the cleaner environment, safer food, and free medical service in the developed world."
Scratch "free medical service" from the U.S. and consider what Peter Hessler wrote in his 2006 book Oracle Bones: A Journey Between China's Past and Present. While many Chinese may believe "that America was evil incarnate... I also met others who had complete faith in the wealth, opportunity, and freedom of the United States."
Presumably those pursuing green cards are in the latter category.
3) Basketball is the most popular sport in China, as noted by China Daily. It would be much harder to turn heads concerning a questionable "arena project" in a country where soccer or cricket or hockey ruled.
4) Compounding that basketball fever, the NYCRC and FCR were able to market this project in October in conjunction with two pre-season basketball games, both involving the Nets and the Houston Rockets (the team of China's most famous player, Yao Ming), along with raffles, autographed basketballs, and retired NBA stars to add flavor.
The Chinese market
5) The New York City Regional Center already has experience in China, marketing two previous EB-5 projects, involving the Brooklyn Navy Yard, to a group that included a significant share of Chinese investors.
6) Business is conducted in translation, so the potential investors do not necessarily know what they're missing. Public presentations, for example, stress information about the job creation aspects of the investment and the collateral, but not the plan to pay them back.
Promotional videos, like the one excerpted below, aim to convey excitement and luxury. (As noted, the excerpts come from webcasts in China.)
Little transparency and marketing misrepresentations
7) Chinese business culture relies significantly on personal relationships. News articles, promotional web copy, and statements in China regarding this project stress the commitment of the "New York Government," a misleading formulation but one that suggests official support.
(While there has been government investment in the Atlantic Yards project, it has not come through the NYCRC, and it was committed long before the "Brooklyn Arena and Infrastructure Project" was conceived.)
In China, there's "a love of ceremony and ostentation and obsession with brands," as Christina Larson wrote in the November/December 2010 issue of the Washington Monthly, all of which play into the elaborate seminars presented to potential investors.
8) Neither the United States Citizenship and Immigration Services (USCIS) nor any foreign governments have scrutinized EB-5 marketing schemes too thoroughly, though that may be changing.
Even some official bodies in China are looking more closely. In August, EB5info.com reported:
In July, the Guangdong Provincial Exit and Entry Administration issued a warning about the EB5 investment visa program stating that the projects are risky and advising migration brokers and potential investors to exercise caution when considering the large volume of EB5 visa regional center projects and investment immigration initiatives now being marketed.Flexible attitude toward truth
9) It's easier to push questionable marketing claims, as Chinese business culture has a far more flexible attitude toward truth, according to James McGregor's 2005 book One Billion Customers: Lessons from the Front Lines of Doing Business in China:
The sad fact is that the Chinese system today is almost incompatible with honesty.Contrasting guilt and shame in the west and in China, McGregor writes:
As a result, the Chinese can feel pretty good about doing almost anything as long as they don't get caught.The New York City Regional Center, along with its Chinese partners, as I have described, have presented numerous questionable statements and exaggerations. The Chinese media have provided more promotional copy than scrutiny of the project, as I will describe.
China is not the legalistic society that typifies the West. If the Chinese want to do something, they find a way to skirt rules or laws.That's still the case, apparently; see the 10/7/10 New York Times article headlined Rampant Fraud Threat to China’s Brisk Ascent.
China: home of the hard sell
10) Any tendency toward civic skepticism may be trumped by the desire to get ahead. McGregor writes:
A country that was until recently poor but safe has become one that is unsettled and insecure. There is nothing to believe in but making money.Because of the latter, and other cultural factors, Chinese investors may be particularly vulnerable to the hard sell, as some EB-5 observers have noted.
Florida immigration attorney Jose Latour, writing in his Immigration Insider blog in May, suggested that China was the country where unsophisticated EB-5 investors could best be found:
Still, despite their best efforts at selecting qualified translators, the intricacies associated with both the investment and immigration aspects of the EB-5 are such that even fairly accurate translations tend to miss the subtleties and nuances which, in and of themselves, provide the "big picture" needed before a rational person is willing to plunk down a half million dollars. (It is notable that in the Far East, particularly China, this issue is substantially tempered; perhaps for cultural reasons -- certainly not because the Chinese investor is any less concerned about his or her investment than an investor of another nationality -- or perhaps due to a pragmatic understanding of the value of a clear path to US permanent residency, the Chinese EB-5 investors tend to commit more rapidly to a particular regional center, most often without an in depth understanding of the particular investment program to which they are committing.).(Emphasis added)
A month earlier, Latour put it more pointedly:
Besides, except for the mass marketing of the Far East, I haven't met a single EB-5 RC prospect who could be "sold" via a hard sell...these people didn't make their money by being dumb.(Emphasis added)
"Dumb money" and Atlantic Yards
In other words, many Chinese investors have what Slate's Daniel Gross described, in another context, as "dumb money."
It's dumb money susceptible to ambiguous messages from New York officials, the exotic presence of Chocolate Thunder, the hollow pageantry of official honors to Chinese partners, questionable collateral, photos of NBA players in action, and marketing material that places an already funded arena front and center.
It's a magical moment of international arbitrage, as slick marketing and basketball fever aim to sell investors on their green card dreams, perhaps distracting them from due diligence.