Monday, February 14, 2011

Bait-and-switch on EB-5: FCR may use immigrant investor funds for housing, not arena, but says "we don't know" where money would go (Is this legit?)

The saga of Forest City Ratner's attempt to raise $249 million from green card-seeking Chinese (and Korean) millionaires under the EB-5 program has reached a new level of absurdity, in which the developer and its allies have offered three separate explanations of how the money might be spent on Atlantic Yards.

This casts further doubt on the logic that each $500,000 investment would create ten jobs, as required under the federal immigration program.

And it suggests a bait-and-switch presented to the potential investors and possibly to the federal government.

Where would it go?

The destination for the funding keeps changing.

Remember, potential investors in the "Brooklyn Arena and Infrastructure Project" were promised glitz: they were told they were investing in an arena, infrastructure, and a railyard, even though the New York City Regional Center admitted to Reuters that the pitch was misleading.

FCR executive MaryAnne Gilmartin told the Wall Street Journal that the money would be used for the railyard, and maybe to pay off a land loan. I pointed to evidence that suggests the $153 million land loan would take precedence.

For housing?

At the Atlantic Yards District Service Cabinet meeting last Thursday, another explanation surfaced.

City Council Member Letitia James asked if the proceeds from the EB-5 program would be used for the financing of Building 2, the first planned (but stalled) tower, or for something else.

"We don’t know where those proceeds are going to go," Forest City executive Bruce Bender responded. "It’s a big project.”

James followed up, asking if it was their objective to use such funds for Building 2.

"I don’t know, but I assure you we are thinking not just of Building 2, but we are thinking of the second phase of the project," responded FCR executive Jane Marshall.

More contradictions

The required transit entrance is covered by bond financing for the arena, she noted. (That's not what potential EB-5 investors were told, since that was lumped in among the "infrastructure" they were said to be financing, as depicted in the screenshot at right.)

Before re-opening the Carlton Avenue Bridge, FCR must complete Stage 2-A of the Vanderbilt Yard reconstruction, "another advancement toward the permanent yard," Marshall said. "That'll be a significant investment by Forest City, about $57 million of work. But that’s only Stage 2... When you get to Stage 3 and 4, it’s a substantial amount of money."

"So I think that, for the purposes of this cabinet," she said, "the $200-plus million [in EB-5 funds] that we raised--we haven't decided how to use it.... and we are looking at Phase 2 of the project as well as the arena block."

Note that the money has apparently been committed by potential investors but has not been delivered, as the investors must be vetted by the United States Citizenship and Immigration Services (USCIS), which also could take a closer look at the "project" in which they are purportedly investing.

The public policy issue: job creation

It's plausible that the developer would like to use money however it chooses, treating such as significant sum as fungible.

But that money was or will be presented to the USCIS as creating jobs.

To a layperson, it's patently ridiculous that the EB-5 investment would create jobs. After all, the Empire State Development Corporation acknowledges the investment "will not create any new jobs beyond those already forecast."

In other words, it's cheap financing.

Even under the USCIS's loose guidelines, which allow jobs to be calculated via an economist's report--with a "multiplier" applied to a base investment figure--this pushes the envelope of logic and legitimacy.

Remember, the multiplier won't be calculated based on the $249 million. Rather, as presented to investors, it would be applied to the entire $1.448 billion "project," consisting of the arena, the infrastructure, and the railyard.

Questions of legitimacy

I've already argued that such logic is dubious, given that the arena and infrastructure are already funded, and would go ahead with or without the EB-5 funds.

Therefore the investors shouldn't get credit for job creation based on money committed long before the EB-5 investment was proposed. After all, if that flies, what's to stop any developer from refinancing with cheap capital?

Now that Forest City Ratner suggests it could use the new money anywhere, that casts further doubt on applying the multiplier to that $1.448 billion.

Something's fishy

It's clear that potential investors have been presented with a bait-and-switch; the New York City Regional Center (NYCRC) admitted as such, though they misleadingly blamed their foreign affiliates.

It's quite possible--though not clear--that the USCIS has been presented with a bait-and-switch. The USCIS approved a business plan, employment creation methodology, and other documents related to the NYCRC's marketing of Atlantic Yards.

None of that has been publicly released. But if it promoted the "Brooklyn Arena and Infrastructure Project," it would be misleading potential investors.

If it did not, it would represent a discrepancy between what was presented to investors and what was presented to the government.

Either way, something's fishy (see p. 40 for graphic above).

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