Skip to main content

Forest City (thanks to Greenland) easily raises $249M in immigrant investor funding, but questions pile up: were investors misled? where does money go? is EB-5 for Atlantic Yards a (modified) Ponzi scheme?

“We'll figure something out,” Atlantic Yards developer Bruce Ratner famously told Crain's New York Business in November 2009. And they have, again and again, even if "figuring something out" may strain the boundaries of credulity or ethics.

In fact, they're pioneers. In 2010-11, they used $228 million from immigrant investors to replace a land loan, even though such bridge financing was dubious under the then-current interpretation of the federal government's EB-5 program.

Today, such bridge financing is A-OK. Developers can hawk green cards to immigrant investors as long as they have a economist's study that claims the project will create jobs.

The new money from immigrant investors--Forest City Ratner last year began seeking $249 million more in what was dubbed "Atlantic Yards II"--need not create the jobs itself.

That $249 million is apparently already in the bag, despite, as I reported, numerous lies and misrepresentations in the marketing of the project.

New York-based attorney Yi Song reported 4/7/14 on the LexisNexis Venture Capital blog:
...Chinese real estate gurus have been aggressively investing overseas... one of the leading Chinese real estate developers – Greenland, acquired 70% equity of the Atlantic Yards project in New York City late last year. As a direct response to the acquisition, the 498-investor EB-5 project, Atlantic Yards II in New York City was fully subscribed in under three months.
In other words, even though the deal with the Chinese government-owned Greenland Group is not yet approved--"acquired" is premature--the role of the big Chinese investor apparently helped give individual millionaires the confidence to park their money in "Atlantic Yards II" in exchange for green cards.

Angles for scrutiny

As I wrote, it sounds like something from The Onion, but it's real: the Chinese government would profit by selling U.S. green cards to Chinese immigrants.

That, on its face, boggles the mind, since the creation of"jobs" is so dubious, and the program seems geared far more to helping developers and entrepreneurs than the public interest.

The dishonest promotion of the $1.235 billion "Atlantic Yards II" as equivalent to the full $5 billion "Atlantic Yards" should, on its face, prompt investigation.

But other angles deserve scrutiny.

Where's the money going?

They can call it the "NBA Stadium, Infrastructure & Residential Project," and they can say its involves $1.235 billion, but--at least in the promotional materials--they don't say how it will be spent.

The arena (not a stadium) is already built. The only way investors' money could go into the arena would be if they're paying for the new green roof.

What about residential? Well, the money could be part of the funding for the future residential towers, which also would rely on tax-exempt financing.

Infrastructure? EB-5 funds could help build the permanent railyard.

Paying back previous EB-5 investors?

The money, I speculate, may be spent in another way.

Remember, Forest City must still to pay off the $228 million it raised from the first round of EB-5 investors, which is due in five to seven years, or beginning next year. If that loan was consistent with others raised through the New York City Regional Center, not only was the interest rate low (4-5% or lower, vs. 12% on the open market), but the loans were initially interest-only.

What's 4% of $228 million? That's $9.12 million a year, not the heaviest lift.

How are they paying back the principal?

There was no public claim on any revenue stream, so that invites speculation. The investors had no claim on arena revenues, as far as I know. The collateral consisted not of revenue-producing property but claims on development rights to future Atlantic Yards sites, rights that Forest City surely had no intention of giving up.

What's left? They could refinance.

So I wonder if the new EB-5 money will be used, at least in part, to pay off the first round of investors.

Of course they haven't said that. I can't prove it, and without a forensic accountant, we can't be sure.

Perhaps money from Greenland, not the new EB-5 investors, will be used to pay back the first round of EB-5 investors. But money's fungible, right, and won't Greenland then get the benefit of the new EB-5 money?

It deserves an outside investigation.

To the newest round of investors, the marketers of "Atlantic Yards II" offer more public assurances. They claim--as in the screenshot at right--that the loan will be paid off after current loans for Atlantic Yards apartment towers get refinanced, thanks to substantial cash flow after "completion and stabilization of the project" (whatever the "project" means).

It it a Ponzi scheme (of sorts)?

If--as speculated--Forest City (with  Greenland) pays off the previous EB-5 funding with new EB-5 funding, they will take the already sketchy EB-5 program to a new level.

Consider that scenario a modified Ponzi scheme--one that may be legal. Think about it. A typical Ponzi scheme, like that of swindler Bernie Madoff, relies on a continuing stream of new investors to pay off old ones at a high interest rate, rather than than using profits.

But Ponzi schemes, which draw new investors because of deceptively high returns, have an expiration point. Because of that high interest rate, the scammer must constantly seek new investors, and is vulnerable whenever earlier investors want their money back. The scheme ultimately blows up.

Under the EB-5 variant, it seem, as long as there's a supply of green cards--and a purportedly job-creating investment packaged to federal standards, to legitimize those green cards--there'd be a potential unending stream of new investors.

(For the first EB-5 investment, as far as I can tell, jobs were calculated based on arena construction; for the new one, jobs are calculated based on a new stage.)

Unlike with a standard Ponzi scheme, there's a lot more slack; there's no need to produce lucrative returns. Yes, the investors want their money back, eventually. But they want to be paid in green cards first.

Ultimately, Forest City and Greenland will have to return the principal to the new investors. And they'd have to have a large enough "project" to create the required jobs, on paper.

But the EB-5 variant--if it operates as I speculate--would be far less precarious than the standard Ponzi scheme. And if it's legal, it would further strain the legitimacy of the EB-5 program.

It's another aspect of "Atlantic Yards II" that deserves an investigation.

Comments

Popular posts from this blog

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…

Is Barclays Center dumping the Islanders, or are they renegotiating? Evidence varies (bond doc, cash receipts); NHL attendance biggest variable

The Internet has been abuzz since Bloomberg's Scott Soshnick reported 1/30/17, using an overly conclusory headline, that Brooklyn’s Barclays Center Is Dumping the Islanders.

That would end an unusual arrangement in which the arena agrees to pay the team a fixed sum (minus certain expenses), in exchange for keeping tickets, suite, and sponsorship revenue.

The arena would earn more without the hockey team, according to Bloomberg, which cited “a financial projection shared with potential investors showed the Islanders won’t contribute any revenue after the 2018-19 season--a clear signal that the team won’t play there, the people said."

That "signal," however, is hardly definitive, as are the media leaks about a prospective new arena in Queens, as shown in the screenshot below from Newsday. Both sides are surely pushing for advantage, if not bluffing.

Consider: the arena and the Islanders can't even formally begin their opt-out talks until after this season. The disc…

Skanska says it "expected to assemble a properly designed modular building, not engage in an iterative R&D experiment"

On 12/10/16, I noted that FastCo.Design's Prefab's Moment of Reckoning article dialed back the gush on the 461 Dean modular tower compared to the publication's previous coverage.

Still, I noted that the article relied on developer Forest City Ratner and architect SHoP to put the best possible spin on what was clearly a failure. From the article: At the project's outset, it took the factory (managed by Skanska at the time) two to three weeks to build a module. By the end, under FCRC's management, the builders cut that down to six days. "The project took a little longer than expected and cost a little bit more than expected because we started the project with the wrong contractor," [Forest City's Adam] Greene says.Skanska jabs back
Well, Forest City's estranged partner Skanska later weighed in--not sure whether they weren't asked or just missed a deadline--and their article was updated 12/13/16. Here's Skanska's statement, which shows th…

Not just logistics: bypassing Brooklyn for DNC 2016 also saved on optics (role of Russian oligarch, Shanghai government)

Surely the logistical challenges of holding a national presidential nominating convention in Brooklyn were the main (and stated) reasons for the Democratic National Committee's choice of Philadelphia.

And, as I wrote in NY Slant, the huge security cordon in Philadelphia would have been impossible in Brooklyn.

But consider also the optics. As I wrote in my 1/21/15 op-ed in the Times arguing that the choice of Brooklyn was a bad idea:
The arena also raises ethically sticky questions for the Democrats. While the Barclays Center is owned primarily by Forest City Ratner, 45 percent of it is owned by the Russian billionaire Mikhail D. Prokhorov (who also owns 80 percent of the Brooklyn Nets). Mr. Prokhorov has a necessarily cordial relationship with Russia’s president, Vladimir V. Putin — though he has been critical of Mr. Putin in the past, last year, at the Russian president’s request, he tried to transfer ownership of the Nets to one of his Moscow-based companies. An oligarch-owned a…