Thursday, January 30, 2014

Margin for the developer: Forest City says EB-5 funds used for infrastructure; evidence suggests $228M used to retire high-interest loan

Also see coverage today regarding Forest City Ratner's new plans to raise EB-5 funds and two federal reports critical of EB-5.

In a new video, Forest City Ratner CEO MaryAnne Gilmartin tells potential new immigrant investors, who'd offer a low-interest loan in exchange for green cards for themselves and their families, "Several years back, we utilized EB-5 funds to execute other infrastructure improvements in and around the Barclays Center."

It is, at best, a partial truth, for Gilmartin to claim that the $228 million Forest City raised beginning in 2010--likely saving more than $100 million over conventional financing--was used for infrastructure.

Claimed value of collateral
Documentary evidence from the New York City Department of Finance, as well as Forest City's own statements, suggests the money was used, in large portion, to replace a high-interest land loan from Gramercy Capital.

That subverts the intent, if not the letter of the law, which justifies the green cards because each $500,000 investment is supposed to create ten jobs.

After all, as EB-5 analyst Michael Gibson told Business Week, when a project “substitutes EB-5 capital for more expensive bank financing or bond funding or even equity, that isn’t really creating new economic activity. It’s margin for the developer.”

Shifting claims

According to a document published here earlier this week, Forest City told the Empire State Development Corporation (ESDC, or ESD, the state agency overseeing the project) the immigrant investors' money--initially, $249 million--would go to critical infrastructure, given that the arena was already funded.

To the press, however, Forest City was more coy. Officials told the Wall Street Journal and the New York Times that the funds would go for infrastructure (the new railyard) and also to replace that high-interest land loan.

Representatives of the New York City Regional Center (NYCRC), the private firm engaged to market the investment, told potential investors at public events and on webcasts in China that the money would go to an arena.

Just look at one promotional poster (right) for an event aimed to recruit investors.

However, as I reported, the arena was already funded, and the marketing effort raised questions about fraud.

Forest City in March 2012 told Business Week the new money would fund the project's new subway entrance, parking facilities, water and sewer line upgrades and other work.

However, evidence suggests, as I reported, that the money is also going to substitute for an existing high-interest land loan.

For four of the five mortgages within the $228 million, city records indicate that an existing mortgage from Gramercy Capital--which specializes in high-interest financing--was "satisfied" around the time a new mortgage was signed with the "Brooklyn Arena Infrastructure and Transportation Improvement Fund," representing the immigrant investors.

Looking more closely

Let's look more closely at each of the development sites used as collateral for the loan given by the "Brooklyn Arena Infrastructure and Transportation Improvement Fund," the entity set up by the NYCRC.

Six of the seven development sites listed in the graphic at right, which was part of marketing materials in China, were used as collateral.

In other words, if the immigrant investors don't get their money back, they would then own development rights at those sites.

(They couldn't use any of the sites they didn't yet control, including the six parcels that would be built over the railyard north of Pacific Street.)

On Block 1129, the southeast block currently used as interim surface parking, there are four development sites. (Here's the block and lot map.)

Parcel B-11

The site for the B-11 tower, as indicated on the screenshot below, has a $26.9 million mortgage. The document was created 2/28/12. Four days before, on 2/24/12, the Gramercy mortgage was satisfied. This, like the other Gramercy mortgages, links to a mortgage pool once valued at $117 million.

But Forest City owed Gramercy $153.9 million in December 2009. It's not clear how much Forest City owed Gramercy when it got the $228 million. But it does seem clear the money helped clear the Gramercy debt.
$26.9M for Parcel B-11, Block 1129
Parcel B-12

The site for the B-12 tower, as indicated on the screenshot below, has a $24.7 million mortgage. That document was created 7/27/11. On 2/24/12, the Gramercy mortgage was declared satisfied. Note the sequence, linking back to the previously mentioned mortgage pool.

$24.7M, for Parcel B-12 on Block 1129
Parcels B-13/14

The site for the B-13 and B-14 towers, as indicated on the screenshot below, has a $48 million mortgage. That document was created 2/28/12. Again, on 2/24/12, the Gramercy mortgage was declared satisfied. This also links back to the previously mentioned mortgage pool.
$47.995M, for Parcels B-13/14 on Block 1129
Parcel B-1

The site for the B-1 office tower, over the arena plaza,, as indicated on the screenshot below, has a $68 million mortgage. That document was created 2/28/12. Again, on 2/24/12, the Gramercy mortgage was declared satisfied. This also links back to the previously mentioned mortgage pool.
$68M, for Parcel B-1 on Blocks 1118/1119
Parcel B-4

The site for the B-4 residential tower, at the northeast corner of the arena block, as indicated on the screenshot below, has a $60.3 million mortgage. That document was created 4/23/12. 

This does not link to the satisfaction of a Gramercy mortgage, though it links back to the previously mentioned mortgage pool. So perhaps this sum of money was indeed used for infrastructure.
$60.3M, for Parcel B44 on Block 1119

Adding up a mystery

The rounded-off sums--$26.9M+$24.7M+$48M+$68M+$60.3M--add up to just about $228 million.

It's not clear why Forest City did not raise the $249 million originally sought. But since they raised less money, the didn't have to use the B-3 site as collateral.

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