Part 1 concerned the overall plan. Part 2 addressed the curious politics of a Community Benefits Agreement. Part 3 addressed the astonishing pitch in China for EB-5 investment. This discusses Forest City's claim, at the Nassau County Legislature, it wasn't making much profit on EB-5, and its defense of a sketchy fundraising partner. Part 5 concerned the brazen effort by EB-5 promoters to use an excerpt from this blog.
Developer Forest City Ratner pushes for certain news coverage (see: green roof).
And it certainly presses hard to raise cheap capital in China via the sketchy EB-5 program, in which immigrant investors who park $500,000 in a purportedly job-creating enterprise get green cards for themselves and their families.
Back home, they keep EB-5 under the radar, which is why it was so surprising--and refreshing--to see Forest City staffers grilled briefly during a 4/13/15 hearing of the Nassau Legislature about the use of EB-5 for the renovation of the Nassau Coliseum, via Forest City's Nassau Events Center affiliate.
|A promotion not known to Nassau legislators|
The legislature was considering a lease amendment to allow for $90 million of EB-5 financing, representing 180 investors.
Legislators from the minority Democratic Party unsuccessfully tried to condition the lease renewal on Forest City's commitment to a Community Benefits Agreement.
The overall spending will grow by $31.5 million, from the $229 million originally stated to $260.5 million. Thus EB-5 funding is about 34.5% of the total. Forest City will now put $130 million into the arena renovations proper, instead of $98.5 million. But they will save significantly on the financing, and the investment is aimed at generating more revenue.
Notably, Forest City officials refused to reveal how much they expect to save from the below-market financing--suggesting the savings was only 1 or 2 percentage points, when more likely it is 5 to 8 percentage points, a difference that could add up to tens of millions of dollars.
And they defended their affiliation with a sketchy EB-5 promoter by stressing how he had already successfully raised money for the Brooklyn project.
Just like a bank?
Legislator Delia DeRiggi-Whitton, as noted in the video below, put some Forest City officials on the spot.
"I just want to mention something you said before, which is that this is almost like using just another bank. Originally you said you were probably going to use Goldman Sachs," DeRiggi-Whitton said. "There’s a big difference between this type of financing and regular construction financing. For instance, do you know how much interest you’d pay a year for the regular construction financing?"
"I have a sense of that," replied Forest City Ratner's Jim Lester warily. "I prefer not to disclose our specific terms."
"You don't have to disclose your specific terms, but I'd like you just to give us an idea," the legislator replied.
Forest City's Ashley Cotton responded, "He just said he’s not comfortable giving that."
"Well, it’s safe to say it would cost a decent amount," DeRiggi-Whitton continued. "What is the percentage you pay under this type of financing you're coming for today?"
"Again, I prefer not to disclose the specifics," Lester stated.
"I’ll disclose it," DeRiggi-Whitton continued, sounding unsatisfied. "The financing that they came here for today is substantially less expensive for the builder. This is all legal--people use it all over. However, there is a huge benefit to the developer in doing this. The reason we're here is we have to agree to this type of financing; if it was just another bank, they would not be coming to us. This was not mentioned in the original agreement, it was Goldman Sachs, this is a complete 180."
"Now, do we want to hold up the Coliseum? No. We want to see it go, and we would love to see the Islanders stay," she continued. "However, you’re getting a huge—a huge, huge advantage by using this other type of financing."
How much are they saving
DeRiggi-Whitton asked Forest City to share a small percentage of their savings, suggesting it was "more than the $30 million you’re putting in." (Forest City is putting an extra $31.5 million into the Coliseum, to make it more glossy.)
So $1 million to $2 million for the community, DeRiggi-Whitton suggested, would be "a small percentage on what you’re saving."
Her baseline, and her calculations were off. Forest City is putting $31.5 million or so more than originally planned into the Coliseum, but the EB-5 loan is for $90 million. If Forest City saves 5 percentage points a year, as this academic paper--albeit a draft--suggests is typical, that's $4.5 million a year, or $31.5 million over seven years, on the overall loan. If it's 7 percentage points, that more than $44 million.)
(Here's an example of an EB-5 loan at about 3%, surely well below conventional rates. A lawyer for a Manhattan developer last December told the Wall Street Journal that the difference was 7-8 percentage points. The Times just suggested a 7-point spread. An EB-5 attorney wrote in November 2013 that lenders of mezzanine capital typically charge 12-20%, while EB-5 financing usually costs 1-2%. )
"I think there’s a little bit of misconception about the amount that we’re saving," Lester said. "It’s a short-term loan, so 5 to 7 years. Y’know, without getting into the specifics of the interest rate, I would say the savings is, y’know, 1 to 2 percent, so it’s not even close to $31 million."
"On a construction loan, you’re paying 1 to 2 percent?" DeRiggi-Whitton asked.
"1 to 2 percent savings," Lester replied. (Surely he meant 1 to 2 percentage points, which is not the same as a 1% adjustment on a loan basis. But, as noted above, the savings is typically 5 to 8 percentage points, maybe more)
"How much are you paying with this? Are you paying any interest with this type of loan?" DeRiggi-Whitton continued.
"Yes," Lester replied.
"What is it, approximately?"
Lester mumbled a bit, unwilling to answer. Cotton stepped in: "I think what Jim’s trying to say is he's not going to disclose the terms of our deal, but the savings is less than 1 to 2 percent, so it wouldn’t add up to the $30 million we’re investing."
"I think the bottom line is I don’t believe that," DeRiggi-Whitton countered. "I know this type of loan, and it’s much less interest rates…. you’re borrowing a lot of money to do this, and you're saving.. and all we’re asking is you give a very small percentage to Kevan’s district."
(She was referring to Legislator Kevan Abrahams, who's pushed for a Community Benefits Agreement to benefit the struggling community of Uniondale, gateway to the Coliseum.)
"Are you willing to give a small percentage of what you’re saving?" she asked. "Kevan, would that be fair to you?"
"Extremely fair," Abrahams responded.
Cotton closed the conversation by muddying the issue. "Again, we’ve said many times there are benefits we’re going to bring to it," she said. " Again and again and again, we’re saying that we think Uniondale is going to benefit from the work we’re doing, absolutely, we couldn’t agree more."
Forest City claims it's proposing project it already begun
"I do want to ask you a little bit about the EB-5 program," Abrahams said, and proceeded to ask how it was used to finance the Atlantic Yards EB-5 project.
Proposing? They've been working with them since last summer!
Who were the others, asked Abrahams.
"I think it was called the New York City Regional Center," Lester responded. "The first regional center that we used, they’re just sort of not making loans anymore, they made some money and they've kind of retired. Since then, they've become more common, and the interest rates have gone up."
(The rates have gone up? Maybe,, but they still save big.)
Forest City's sketchy partner
"Would the name Nicholas Mastroianni sounded familiar?" asked Abrahams.
"Yes, he's the gentleman that runs the regional center that we'll be working with," Cotton responded evenly.
"He is," Abrahams responded, with a bit of an a-ha tone.
"Yes," responded Cotton. "And we're well aware of some of the news articles about some of his background."
"There was a story in October 2014 in Fortune magazine," Abrahams said, referencing The tangled past of the hottest money-raiser in America's visa-for-sale program, which did mention--in an aside few noticed--how Mastroianni had been retained to raise money for the Nassau Coliseum.
"How could can it be possible--this legislature received notification of this proposal in March... this is a concept that has been talked about since October 14th of 2014," Abrahams asked incredulously. (Though Abrahams referenced the timing of the article, public fundraising actually began last August in China.)
"So October 14 was not very long ago," responded Lester slightly abashedly, adding that financing takes some time to launch. "We have been under way, assuming this was going to be sort of an easy approval. We actually didn’t even think it would require legislative approval."
"It does require some legislative approval," Abrahams said. "It just seems to me a little puzzling, that here we are today, when this probably should have been discussed with this legislative body back in October."
Qualms about Mastroianni
Abrahams went on to quote the article about Mastroianni's "long history of legal problems, failed ventures, and unpaid debts."
"Why would this legislative body consider going into business with somebody who has an unscrupulous past like this?" asked Abrahams incredulously.
"Our contract with Ratner is not a contract with Mr. Mastroianni," stated Norma Gonsalves, the Presiding Officer.
"It opens up this lease so Mr. Mastroianni can come on in," Abrahams responded.
(Without knowing the provisions, it is not atypical in EB-5 for those lending the funds--an investment pool associated with Mastroianni's company--to have the ability to take a property interest on behalf if the loan is not paid back.)
|Mastroianni at a presentation in China|
Meyer suggested that most of Mastroianni's previous problems related to construction, so that was not relevant here.
(More precisely, they relate to integrity. Note Mastroianni's appearance at the dog-and-pony show last August in Beijing to launch the EB-5 sales.)
"So it’s not something that I would say would have an impact here," Meyer said.
He added that the legislature was approving Forest City's ability to use an EB-5 investor, "if it was not this one, it would be another one."
Abrahams didn't buy Meyer's explanation. He noted that, in Florida, Mastroianni has been involved in a project called Harborside that has been funded via EB-5 and the subject of lawsuits. He asked if Forest City was aware of it.
The "checkered past": the end justifies the means
Cotton said that, while she did "not have it memorized...we certainly are aware of--I'll just use Josh's term--checkered past.. however, the USIF, Nick Mastroianni's regional center, is approved by the federal government.... We have worked with him successfully in this sort of work, as have other developers."
"I don’t doubt the fact that he’s approved," Abrahams said. "I just question whether this... legislative body, knowing this information… it just seems to me to be unconscionable that you would present this entity to us at this time... without disclosing it."
"We have an approved regional center, who has worked also successfully with the state of New York, ESDC, a governmental project in Brooklyn," Cotton responded. "We absolutely stand by working with them. Certainly we understand that there is a checkered past... It’s certainly not a secret. We’ve done two successful raises in Brooklyn with him already and look forward to what I hope you guys most want to see, which is, we're going to get the financing and do this project so we can deliver on the benefits and deliver on the project that you've asked us to do."
In other words, the end justifies the means. (Abrahams--perhaps because it was not in the Fortune article--did not even get into Mastroianni's deceptive fundraising tactics in China.)
"Everything that I have read, which I’m sure you have read too," Abrahams countered, "you don’t have a problem with it?"
Cotton played defense: "As our work with USIF, which we believe to be in a really good position, and the work we have done with them, there are no problems, and so that’s what’s relevant to us today, that’s what relevant to this body, the USIF--"
Abrahams interrupted: "What’s relevant to this body is understanding what happened and why this information wasn’t disclosed to this body... I know people are going to turn a blind eye and vote for it anyway… I couldn’t sleep at night knowing I voted for someone that has done these types of things, and been sued in court like this. And if Forest City is prepared to drag this legislature and this county into bed with these folks, then shame on them."
Deputy Presiding Officer Richard Nicolello, another Republican, asked Meyer to restate Mastroianni's role.
"He's a lender," Meyer said. (Not quite. He's a packager of loans and part of a deceptive promotion in China.)
"Is there any risk to the county at all?" asked Nicolello, "because of the history that Legislator Abrahams just brought up?"
"The money comes in to a special purpose entity," Meyer said, "and ultimately it would be no different than if you were going to a bank... and if there was anything that went wrong, you'd be in no different position than if you had an institutional investor."
Not necessarily. If things went wrong, then 180 Chinese immigrants might have a piece of the project. And Mastroianni, with his "checkered past," might play a role. That's different from a bank.
Abrahams and DeRiggi-Whitton sought to table the matter to get a community benefits agreement and ask due diligence questions about Mastroianni, but their motion failed. They were the only two dissenters; the lease was approved with 17 votes.