Wednesday, April 09, 2014

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.

No comments:

Post a Comment