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BusinessWeek takes look at "dodgy" EB-5 program, cites AY figure at $228 million; Forest City claims money is going to infrastructure, but documents suggest it's just replacing land loan

In Coming to U.S. Costs $500K With Dodgy Job Plan, Bloomberg BusinessWeek takes a critical look at the fast-growing EB-5 program, in which developers and others have found a source of cheap financing: immigrants and their families can get green cards for themselves and their families if their $500,000 investment creates ten jobs.

The investigation, which looks at several projects, takes a somewhat critical look at Atlantic Yards, and reveals some new information: a total [corrected] of $228 million (from 456 investors) raised, not the announced $249 million, and a questionable explanation for how the money is being used. But it leaves some lingering questions unanswered or unaddressed.

Overall, the portrait of EB-5 is tough, citing limited federal oversight:
Projects aren’t rigorously vetted and have been hyped by operators and brokers, and immigration authorities have botched visa claims and stranded investors and their families, according to lawsuits and participants critical of government supervision.
Several of the projects described are fairly small time, involving a few million dollars, not the $400 million-plus Brooklyn project.

AY and jobs

The article states:
In one case, Brooklyn’s Atlantic Yards real-estate development, immigrant investors are putting about 30 percent of the capital into one pool financing the project, and claiming all jobs that pool is expected to create, according to George Olsen, managing principal of New York City Regional Center LLC.
The EB-5 program rules don’t demand enough proof that promised jobs, however they’re calculated, will be generated, said Jose Latour, a Miami immigration lawyer who co-owns American Venture Solutions Regional Center LLC in Florida.
“There’s no accountability,” he said. “Atrociously inflated projects are going to result in a lot of rejected green card applications.”
Latour may be right, but that's not an apt criticism of the Atlantic Yards EB-5 venture. In that case, the applications have been approved. The question is whether that approval meets the letter of the law (apparently) and the spirit of the law (dubious).

Who wins?

While the article does mention that "[s]o many people are trying to make money off the EB-5 program," unspecified are the huge benefits to Forest City Ratner, gaining a low-interest loan likely saving more than $100 million, and the fees to the New York City Regional Center and associated lawyers.

In other words, though the EB-5 program, a key part of which is up for renewal this year, is supposed to help the public at large, it seems likely that private beneficiaries, and the investors, gain the most.

Substituting capital

The section on the Atlantic Yards EB-5 project begins with a quote from Michael Gibson, a Tampa-based investment adviser who analyzes EB-5 projects for potential investors:
When a project “substitutes EB-5 capital for more expensive bank financing or bond funding or even equity,” he said, “that isn’t really creating new economic activity. It’s margin for the developer.”
That seems to be what's happening with Atlantic Yards, though the developer, interestingly enough, seems to have found a way of not doing that formally. Nor was the federal agency overseeing the EB-5 program, the United States Citizenship and Immigration Services, questioned about that.

Where the money is going

The article states:
The Atlantic Yards developer, Forest City Ratner Cos., is borrowing $228 million in EB-5 money for a $1.4 billion infrastructure and arena fund that’s paying for a new subway entrance, parking facilities, municipal water and sewer line upgrades and other work in the vicinity of Barclays Center, according to Joe DePlasco, a spokesman for the company. The arena, which is being built for the National Basketball Association’s New Jersey Nets, will be an anchor of the $4.9 billion development, planned to include up to 6,430 housing units and 247,000 square feet of retail space.
The loan money is coming from 456 foreigners through the New York City Regional Center, according to Olsen, the managing principal. Forest City first asked for EB-5 money to pay off loans to the company from a unit of New York-based Gramercy Capital Corp., a real estate investment trust. When USCIS ruled against that, the plan was revised, Olsen said.
Hold on. There's no $1.4 billion infrastructure and arena fund. There is a purported $1.4 billion infrastructure and arena project, a fiction created to market a portion of the overall Atlantic Yards project to investors.

The money for the arena, and infrastructure, was already in place when the then-$498 million investment was marketed to potential investors.  There was an existing arena project, funded mainly by $511 million in bonds, plus private equity and city and state subsidies. And the subsidies were supposed to go to infrastructure, in the main.

And Forest City has always said it would use the money to pay off a land loan. That's what appears to have happened, anyway.

The Gramercy dodge

Drawing on (but not crediting) my reporting, the article states:
Part of one Gramercy loan was taken care of. On July 26, 2011, New York City records show, Forest City paid off some of a loan from the REIT that was secured by property including four lots on Dean Street, Pacific Street and Vanderbilt Avenue. Forest City said it used a line of credit to pay that debt. The next day, according to the records, the regional center loaned Forest City $24 million in EB-5 funds for infrastructure costs, and that loan was secured by the same four lots.
“If this is simply a debt replacement,” Gibson said, it isn’t “bringing new capital to stimulate job creation.”
Forest City’s DePlasco said the company worked with the regional center to make sure EB-rules were followed. Olsen said the investors’ money is “doing what it’s supposed to.”
To win green cards, the foreigners’ $228 million has to generate 4,560 jobs within two years of their investments. Olsen said the EB-5 business plan shows that number will be met, plus a “cushion” that could put it at more than 5,400.
Where's the business plan? The New York City Regional Center has never made that public. Nor have the feds.

Calculating jobs

How do we get 4,560 jobs when there are no permanent jobs yet and only 623 full-time construction workers? According to documents presented to potential investors in South Korea, the project would create 3705 construction jobs.

But the loose rules of the EB-5 program allow an economist's report to estimate the number of jobs created.

The article states:
The number of EB-5 jobs that will be created was calculated by forecasting the jobs the $1.4 billion infrastructure and arena fund will generate, excluding jobs spurred by state money that USCIS rules say can’t be counted, Olsen said.
By his reckoning, the $228 million represents about 30 percent of $760 million in the non-state money -- and the EB-5 investors are allowed to take credit for all the jobs created by the $760 million.
Using a different economic model, Empire State Development has figured all of Atlantic Yards will spur about 8,000 permanent jobs, according to Austin Shafran, a spokesman for the state agency, which oversees the project.
For would-be immigrants to lay claim to so much of the employment for so little money is “shady business,” said Norman Oder, a Brooklyn freelance writer and Atlantic Yards critic who maintains a blog about it.
"Shady business"

Yes, it's "shady business, and for more reasons than those I was asked about. First, the $760 million was not the figure used when the project was marketed to Chinese investors, a time when the business plan was said to have had preliminary approval from the federal agency. (Below, a translation of the marketing materials.).
Second, the immigrant investor money has nothing to do with getting the entire project built, which requires additional housing subsidies and, for the one planned office tower, an anchor tenant.

Third, the purported 8,000 jobs depends on a full buildout of the project, which would take, at minimum, a decade, and more likely closer to the allowed 25 years.

Fourth, and most importantly the figure of 8,000 permanent jobs is an absolute fantasy, based on an long-abandoned variation of the project with four office towers. Yes, that option was mentioned in 2006 approval documents, but even Empire State Development currently uses a small figure.

Unmentioned: marketing

Also deserving of questions is the marketing of the project, surely something of interest to savvy BusinessWeek readers.

Chinese investors were told they were investing in an arena. So were South Korean investors, and Olsen admitted that was misleading. They were told government funds were involved, also a dodge.

And the NYCRC claimed that the investors' money would be safe. In other words, the BusinessWeek article mainly addressed "immigration risk," the chance that the Atlantic Yards investors would get their green cards. Thanks to the loose job-creation rules, that seems likely.

But what about "investment risk," the chance that

As I wrote on Huffington Post, quoting a web video of the New York City Regional Center salesman in China, "The Brooklyn Arena and Infrastructure Project, your EB-5 investment program, is a $1.4 billion project," Gregg Hayden said. "It involves a lot of government, over $740 million of government-related funding. The EB-5 funding, the $249 million we are seeking to raise in the China market, is only 17%, the safest, most secure portion of the capital structure, 17%... portion of the capital structure is the EB-5 portion."

That could leave the impression the capital structure is a series of loans, with the EB-5 portion the safest. Not so. The direct government subsidies have already been allocated. Investors buying $511 million in government-authorized bonds would certainly be repaid first, as those bonds were presented to rating agencies, with the rating based on expected cash flows from the arena.

No rating for the EB-5 debt has been announced, nor is it apparently secured by any specific cash flows. Rather, the collateral offered involves a mortgage on development rights to seven future towers on the development site.

Now, apparently, the EB-5 funding would be a much larger portion of the capital structure, closer to 30%.

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