Forest City Ratner seeks Chinese millionaires for capital bailout, with green cards as bait; job-creation math is dubious, but nobody's talking
“At the end of the day, it’s all about the cost of the capital. And if we can do it at a reasonable, affordable cost, we’ll do so. I think the opportunity exists to bring partners into some of our development projects."--Forest City Enterprises Executive VP Bob O’Brien, 9/13/10 conference call with investment analysts
Though some think the Atlantic Yards saga is over, it's simply hit a new phase. The most audacious quest for government assistance--after direct subsidies, tax breaks, eminent domain, and the giveaway of arena naming rights--awaits.
Just as Forest City Ratner found a sports-loving Russian billionaire to buy 80% of the Nets and 45% of the arena as part of his plan to make a splash in America, now the developer has targeted another group of foreigners whose motives go beyond economics.
Thanks to a little-known provision in immigration law known as EB-5, the developer--with green cards as the carrot--seeks 498 Chinese millionaires, to supply $249 million in low-cost financing for the project.
(For what exactly? While the graphic below cites the arena, or "Nets stadium," the Wall Street Journal last night reported that it could finance the rail yard, or pay off part of a land loan.)
In exchange for creating ten direct or indirect jobs or retaining ten direct ones--a formulation that offers enormous wiggle room--the investors would get permanent residency for themselves and their families, a chance to live anywhere in America, and an opportunity to get kids educated in the American system.
Thus the New York City Regional Center (NYCRC), a government-authorized private investment vehicle, is planning an eight-city roadshow through China, beginning October 11, as noted on this blog (graphic at right) that tracks EB-5 news. And, according to the Journal, Bruce Ratner will be on the trip.
(NYCRC is the source of graphics above and below left.)
Can they get away with it?
It looks like they might get away with it, thanks to the EB-5 visa program, which, beyond its philosophical flaws--more on that below--allows regional centers to demonstrate job-creation via economic models.
Thus, the NYCRC would have to:
1) suggest the project in the next few years could generate or save at least 4980 direct or indirect jobs
2) argue that, without this new investment of $249 million, those 4980 jobs would be lost.
It's likely the NYCRC, with the help of Forest City Ratner, will submit documents backing both claims.
Both, however, are ridiculous, as I'll detail below.
Forest City Ratner was supposed to pay for the new railyard thanks to its below-appraisal purchase in 2005 of railyard development rights , a purchase accomplished with the gentle competition of only one other bid, which came after FCR was anointed the property by the Metropolitan Transportation Authority and the city and state leaders who control the MTA board.
(Contrast that with the Hudson Yards project, where multiple developers began from the same starting place.)
Then, when the real estate market went south, Forest City Ratner in June 2009 renegotiated the deal with the MTA, allowing for a smaller cash payment upfront ($20 million rather than $100 million), an opportunity to pay off the rest at a gentle 6.5% interest rate, and a smaller replacement railyard, saving perhaps $100 million.
Now the developer's simply trying to save more--likely tens of millions of dollars on the reduced cost of $249 million in financing.
Biggest regional center project?
Some 115 regional centers around the country--the number has exploded in the past couple of years--solicit investors and manage the investment process, taking a piece of action. (One real-estate company has ten such centers.) Some put money directly into projects; others, like the NYCRC, offer low-interest loans.
The $249 million-plus Atlantic Yards investment might be the single largest regional center project investment.
Florida’s Sun-Sentinel newspaper reported 9/1/10 that a $250 million cancer center in Brooklyn would be the largest, but that regional center has not yet been authorized.
No one's talking (to me)
I tried to get information on how the Atlantic Yards EB-5 investment might be used and how the jobs would be calculated. I couldn't get answers.
The Empire State Development Corporation and the New York City Economic Development Corporation said I should contact Forest City Ratner and the NYCRC.
Neither responded to queries.
(The Journal reported that the city, after seeing the Brooklyn Navy Yard use EB-5 financing, urged Forest City Ratner to do the same. How did the Journal article come about? I wonder whether, after I started asking about this program last Friday, the developer and government agencies decided to get an innocuous article out first in a business publication. See NLG's Anatomy of a Scoop.)
Will famously voluble Brooklyn Borough President Marty Markowitz head for China to chat up investors, in the same way that Idaho Gov. Butch Otter visited China in August? A Markowitz spokesman offered "no comment" to several questions about the project.
I did get some responses from the U.S. Citizenship and Immigration Services (USCIS), which I'll discuss below. However, the agency can't provide--or require the NYCRC to provide--details on the job-creating and job-saving properties of the expected investments.
Regional centers, which are private companies overseeing projects that trade on scarce and valuable public commodities, seem insulated from public oversight. Though the immigration petitions are examined by USCIS, the regional centers are not subject to Freedom of Information Law queries, for example.
The overall EB-5 visa program, overseen by the USCIS, has become increasingly popular nationwide as economic development agencies seek new capital, The Washington Post reported 1/9/10 that the number of foreigners (notably those from China and South Korea) pursuing the program tripled in the last year.
But it is highly questionable.
American supporters of the program, a bipartisan group, piously promote it as a job-creation and economic development effort, which was the legislative intent. (EB stands for "employment-based.")
The investors, however, pragmatically acknowledge they’re buying green cards. As a Beijing man told the 10/10/09 South China Morning Post, “It is time for me to buy a good future for my son."
And for developers like Forest City Ratner (and parent Forest City Enterprises), the investments reduce risk and increase revenues.
Surveying some projects seeking EB-5 funding, a critic of the program, David North of the Center for Immigration Studies (CIS) wrote in January, “Nobody will notice that the moneys will really be used primarily to prop up depressed real estate markets, rather than to actually create jobs for the unemployed.” (More on the CIS below.)
Need for transparency
The NYCRC doesn't make it easy to learn about this project. Unlike some other regional centers--such as the one run by the state of Vermont, the only state to run a regional center--the NYCRC’s web site does not publicly list all its projects.
Atlantic Yards goes unmentioned. The only way to learn about NYCRC projects other than already-announced projects at the Brooklyn Navy Yard is to sign up as an investor.
(The New York City Regional Center is based in the same Lower Manhattan office building, three floors away, as the office of Managing Principal George Olsen, a real estate lawyer. )
Ten jobs per investor?
The investors must commit a $500,000, not necessarily a big lift for the large slice of Chinese new rich, who might be parking that money in low-interest investments like bonds. (Graphic from NYCRC video.)
In exchange, each investment must create or retain ten "permanent full-time" jobs.
However, even under the generous rules of the EB-5 program, the math regarding Atlantic Yards is highly questionable.
Yes, the EB-5 program does not require that the jobs be created directly in the project that draws the investment, but can be classified as indirect and induced jobs.
Yes, the EB-5 program counts construction jobs that last two years.
However, for $249 million, the 498 investors would have to create 4980 full-time jobs.
At the same ratio, it would seem like the $1 billion arena would have to create 20,000 jobs and the entire $5 billion project would have to create 100,000 jobs.
Such astronomical numbers have never been claimed by project proponents. However, there's a loophole.
Can an EB-5 investment serve as “last mile” financing and thus be credited for all the jobs associated with the project it only fractionally supports?
The response was yes. "EB-5 investment can be used to retain or create jobs," the USCIS told me. "In those cases, they would have to show evidence that at least 10 full-time jobs would be saved by that investment."
However, based on the "last-mile" logic of the EB-5 program, the project up until now has failed to create jobs, absent the foreign investment.
A December 2009 press release from Forest City Ratner stated that “Master Closing on the Project Means Barclays Center, Thousands of Jobs, Affordable Housing and the Nets Coming to Brooklyn.”
In other words, the investment and government support already in place was going to create the jobs.
With the NYCRC’s first EB-5 project, the Steiner Studios expansion at the Brooklyn Navy Yard, EB-5 investors make up $65 million (72.22%) of a $90 million project (albeit with additional city support).
The project is supposed to create 1648 jobs; EB-5 investors must create 1200 jobs, or 72.81%.
In other words, the numbers seem roughly commensurate to the investment.
How many jobs created?
Even if the EB-5 investment were credited for all the job--which is nuts--I don't see how the numbers could work.
Empire State Development Corporation spokeswoman Elizabeth Mitchell offered an unofficial comment, though one that must have been vetted by someone at the agency or even Forest City Ratner.
“ESDC is not involved in project eligibility to the EB-5 Regional Center Investment Program, and we don't speak to the merits of the program, but it's seen as likely that the Atlantic Yards project will meet the eligibility requirements for the program, including the creation of jobs,” she said. “ESDC does not have the specific job creation criteria, but we believe the criteria will be satisfied. The ESDC job creation numbers have not changed -- they remain upwards of 17,000 union construction jobs and up to 8,000 permanent jobs, as has been stated previously and widely reported on.”
But 17000 construction jobs is 1700 jobs a year over 10 years, or 850 jobs over 20 years. The ESDC’s 2009 economic analysis suggested that “construction of the project will generate 12,568 new direct job years and 21,976 total job years (direct, indirect, and induced).”
That’s 22,000 job-years over ten years, or 2200 jobs a year, under a best-case scenario. EB-5 investments are supposed to create jobs that last at least two years.
So that's 2200 jobs--according to an analysis that not only included indirect jobs but induced ones.
To reach 4980 jobs, they'd still need 2780 jobs to be created or retained.
According to the ESDC's 2009 analysis:
(iv) Operations at the Arena and mixed-use development will support an annual average of 4,538 new jobs in New York City (direct, indirect, and induced) and an annual average of 5,065 jobs (direct, indirect, and induced) in New York State, (inclusive of New York City);But would that be 2780 jobs by 2012? No way. That number depends significantly on office jobs and all the towers being built, which would take a minimum of ten years and, more likely, 25 years.
After all, those job projections depend on factors that, however projected on a page, are essentially fantasies:
- a ten-year buildout
- a buildout of the project in full
- an unrealistic number of office jobs.
The NYCRC pitch
Like many regional centers, the NYCRC offers text, graphics, and video to make investors feel at home.
According to the video, which is also subtitled in Chinese, Korean, Spanish, and Russian, “The New York City Regional Center offers investors the opportunity to become permanent U.S. residents... by investing in large, sophisticated real estate projects right here in NYC that create jobs for U.S. workers."
“Our goal,” declares the NYCRC’s Paul Levinsohn, “is really quite simple: to offer stable job-creating real estate investments that will enable you and your family to obtain a permanent green card.”
In other words, the NYCRC’s audience is the investor.
NYCRC staffers offer several reasons investors should choose them including, notably, mentions of government involvement:
- “We invest in real estate projects overseen by top-tier companies and New York City government agencies.”
- “ Our investments are made in conjunction with New York City, New York State, and federal government agencies.”
- “Our real estate projects have defined exit strategies and are specifically selected to create a significant number of jobs. Many of our projects are situated on government owned property.”
(Screenshots at right and below come from the version of the NYCRC video with Chinese supertitles.)
Investments are held in a conditional escrow, and if the the petition not approved, the investment plus interest earned will be returned,
The pitch includes mention that New York has 113 colleges and universities, with more than 50,000 international students.
The only local official to appear in a speaking role? The effervescent Markowitz, who declares, “New York City, and of course Brooklyn, is the melting pot of America.”
The EB-5 program began as a response to successful efforts by Canada and other countries to lure wealthy individuals.
According to a 9/29/91 Washington Post article (“An Investment in American Citizenship; Immigration Program Invites Millionaires to Buy Their Way In”), a Senate Committee Report stated that the EB-5 provision was “intended to provide new employment for U.S. workers and to infuse new capital in the country, not to provide immigrant visas to wealthy individuals. . . .”
Not everyone was on board. While a commission chaired by the Rev. Theodore M. Hesburgh, former president of Notre Dame University recommended changes in immigration law, Hesburgh dissented from the invitation to immigrant investors. "It smacked of being able to buy citizenship," Hesburgh told the 2/20/2000 Baltimore Sun:
At a Senate Judiciary Committee hearing in July 2009, Stephen Yale-Loehr, Adjunct Professor, Cornell University Law School and Executive Director of the regional center trade group The Association To Invest In the USA (IIUSA), gave some history:
Congress created the fifth employment-based preference (EB-5) immigrant visa category in 1990 for immigrants seeking to enter to engage in a commercial enterprise that will benefit the U.S. economy and create at least 10 full-time jobs. The basic amount required to invest is $1 million, although that amount is reduced to $500,000 if the investment is made in a "targeted employment area," meaning a high unemployment or rural part of the United States. Of the approximately 10,000 numbers available for this preference each year, 3,000 are reserved for entrepreneurs who invest in targeted employment areas.Those are known as TEAs, and Brooklyn of course qualifies.
The program had some rocky years. In the first decade of the program, as the Sun reported, “former INS officials and their associates... have pocketed millions in fees from wealthy foreigners” but flim-flammed both the investors and the companies seeking capital.
But the program has stabilized, in part because of the Regional Center program, which allows 3000 visas a year through separate annual allocation and now attracts 90% of all EB-5 investors.
How it works
The NYCRC offers a graphic flow chart explaining how the program works for investors (left; click to enlarge).
In July 2009 testimony, Robert Kruska, Deputy Chief of Service Center Operations, U.S. Citizenship and Immigration Services, explained how the Regional Centers and immigration process work:
Under a pilot immigration program first enacted in 1992 and regularly reauthorized since then, some EB-5 visas are set aside for investors in Regional Centers designated by USCIS based on proposals for promoting economic growth. Regional Center Pilot Program investors may establish eligibility by showing indirect rather than direct creation of the necessary jobs. In addition, once a Regional Center is approved, the individual investor still files the necessary petition, but the process is simplified because the business and investment plans have already been reviewed.Bipartisan boosting of program
Immigrant investors who wish to participate in the EB-5 Program must invest the required minimum amount of capital (either $500K or $1 million) into a new commercial enterprise or troubled business in the U.S. These foreign investors must establish that the investment capital derives from a lawful source, and that the money is both fully invested and at risk in order to qualify. The immigrant investor must file a Form I-526, Immigrant Petition for Alien Entrepreneur. If approved, the alien is granted conditional permanent residence.
Approximately 2 years later, the immigrant investor files a Form I-829, Petition by Entrepreneur to Remove Conditions. At the time of the I-829 adjudication, the investor must demonstrate that the investment business plan was followed, the money remained fully invested in the business, and that at least 10 full-time jobs were created for U.S. workers as a result of the investment.
The Regional Center Program was re-authorized last year for three years after a remarkable example of bipartisan comity.
Senators like Pat Leahy (D-VT) and Jefferson Sessions (R-AL), who clash over such things as judicial appointments, both found reasons to salute the program at that Senate Judiciary Committee hearing, titled “Promoting Job Creation and Foreign Investment in the United States: An Assessment of the EB-5 Regional Center Program.”
It's no coincidence that both states have managed to attract foreign investment via the EB-5 program.
The hearing's goal was to streamline the process, not to examine the underlying premise of the program or assess whether jobs are really created. Leahy’s statement began enthusiastically:
This program has been responsible for the investment of hundreds of millions of dollars, and the creation of tens of thousands of jobs in American communities since 1993. The program has paved the way for ski resort expansion in Vermont, dairy operations in Iowa, energy development in Oklahoma and Texas, and the manufacture of hurricane-resistant housing in Alabama. These are just a few examples of projects financed by foreign investment through the Regional Center program, and all indications are that interest in the program is growing.Not associated with immigration concerns
“We can all acknowledge that the issue of immigration is a difficult one,” Leahy declared. “But I view the Regional Center program as less about immigration than about job creation and capital investment in American communities.”
“I believe that this EB-5 program should be part of our immigration mix,” added Sessions. He acknowledged that some immigrants do take American’s jobs. “This program appears to be a program that creates jobs.”
Sen Al Franken (D-MN) seconded that. “This is a win-win program,” he said. “I am pleased it combats the old and false sterotype that immigrants take away jobs.”
In the current depressed economy, EB-5 money is filling the gap in the traditional levels of equity to debt. For example, the CARc regional center is poised to prime over $1 billion of real estate investment to transition fallow portions of the real estate market in the District of Columbia. These projects will not only produce thousands of indirect jobs, but also a similar number of careers in our economy. All this occurs at no expense to the U.S. taxpayer.Immigration vs. economics
Those testifying mainly endorsed the notion that the program is less about immigration than economics.
“Congress and the immigration agencies really should view the EB-5 program as an economic stimulus tool, not primarily as an immigration program,” Yale-Loehr said at the hearing.
However, Ron Drinkard, Director, Alabama Center for Foreign Investment (ACFI) was asked what attracts investors. “First and foremost, the green card,” Drinkard replied candidly. “Second, the return of their investment. Thirdly, any return on that investment.”
“Some people have said this program amounts to the selling of a national birthright, or it could allow people to abuse the system," Sessions mused, asking if there had been any governmental monies used for spying or other intelligence interests.
Kruska responded, “We’ve heard those complaints, but haven’t been able to verify that being an issue.”
But he didn’t answer the first question, which is a larger policy question, not an implementation one.
In an interview with NECN News, Kevin Dorn, Vermont’s Commerce Secretary, asserted, “Clearly having that green card out there connected to is a powerful incentive to take even more of a risk.”
“Essentially, this is somebody buying their green card?” his interlocutor asked.
“It has been characterized that way,” responded Dorn. “It’s really not. it’s somebody investing in the United States in a important job-creating activity in the United States for which they expect a return and for which they also get a green card.”
Well, remember that Beijing man interviewed in the 10/10/09 South China Morning Post, who said, “It is time for me to buy a good future for my son." It didn't sound like job-creation was at the top of his list.
The newspaper reported that the Beijing-based Maslink Group was holding forums on EB-5. "More and more Chinese people want to get a green card so they can send their kids to the schools in the US. They don't really care about the return on their investment," Maslink’s Lu Sun told the newspaper.
The NYCRC's Olsen told China Daily, in a 9/14/10 article [corrected 10/19/10] headlined Foreign Investors Loan Money for Green Cards, that it’s wrong to say the investors are buying green cards: "These investors are putting hard-earned money at risk in a way that benefits everyone.”
Others suggest reason to be cautious. As the Washington Post reported in January:
That immigrant investors are more focused on obtaining visas than maximizing profits -- combined with the government's limited capacity for oversight -- has caused even some avid proponents of the EB-5 program to worry that a profusion of fraudulent or ill-advised ventures might soon flourish alongside legitimate ones.Who benefits?
Analyst David North, a former Assistant to the U.S. Secretary of Labor and an immigration policy researcher now at the Center for Immigration Studies, observed 1/13/10 that, even though the minimum investment is $500,000, it's hardly burdensome.
Rather, the family would draw from existing investments. North calculated that the transfer would cost the investor about $20,000 a year for three years in foregone interest. Add to that agents and legal fees ($50,000), government fees ($2,835) and medical exams ($665), and he calculates the cost at $113,500, or $22,700 per visa in a five-person family.
In May, North wrote Charging More for Immigration: Closing Financial Loopholes in the U.S. Migration Process, observing a contradiction:
The USCIS still refers to it as an “employment-based” visa, but it has now become a way to award investors who put up half a million dollars for about three years in a government-approved investment, one that can be completely passive in nature.He called it “arguably... a bargain for an opportunity to fully and legally participate in American life” and suggested that each investor buy a $50,000 U.S. bond for each visa issued.
The bond would be repaid in full in 10 years time, and it would carry a special, half-the-Treasury rate, This would mean over 10 years, an additional foregone interest of $10,000 per visa.
(For the 498 investors sought for Atlantic Yards, that would mean a modest $5 million for the federal government.)
About the CIS
According to its web site, "The Center for Immigration Studies is an independent, non-partisan, non-profit, research organization.
Monitors of the right, however, point out that the think tank supports “the more activist work of the anti-immigrant Federation for American Immigration Reform (FAIR)” but “has achieved credibility with the media and in think tank circles because of its lack of the kind of strident anti-immigrant rhetoric associated with many restrictionist groups, its willingness to invite pro-immigrant voices to its forums, and the scholarly format of its reports.”
Whatever its politics, in this case, North’s analysis strikes me as reasonable.
At the July 2009 hearing, Yale-Loehr offered the industry’s recommendations:
- the Regional Center Pilot Program should be made permanent
- USCIS should process cases faster
- USCIS should provide greater certainty on issues like job creation methodology
- the program should be better promoted, to compete with Canada, the UK and Australia
Maybe, maybe not. But it would be good to understand it better.
Job-creation expanded to construction jobs
In hearing testimony, Michael T. Dougherty, the former USCIS Ombudsman, explained changes announced 6/17/09 that surely benefit the Atlantic Yards applicants.
direct and indirect construction jobs that are created by the petitioner’s investment and that are expected to last at least 2 years, inclusive of when the petitioner’s I-829 is filed, may now count as permanent jobs.Questions of methodology
Regarding the use of economic models to projects jobs created and retained, USCIS explained, in a response to a report from Doherty, that it agrees that
EB-5 adjudicators should not re-adjudicate the indirect job creation methodology for Regional Center cases absent clear error or evidence of fraud. USCIS will, however, continue to review the I-829 petitions to ensure that all measurable variables and assumptions that underlie the indirect job creation methodology have, in fact, been met. For example, an investor may make a proposal to create a shopping center that would be leased to various businesses. At the I-526 stage, the investor may claim that this proposal would result in the hiring of a certain number of employees by the tenant-businesses and that a certain number of indirect jobs would be created as well. USCIS must ensure that the tenant jobs have substantially been filled to support the indirect job count. This is not re-adjudicating the job creation methodology, merely, verification of an assertion previously made during the I-526 stage. In the alternative, if the job creation was based on total expenditure of capital to create the shopping center, USCIS must make sure that the full amount has, in fact, been invested in the job creating enterprise to support the job count.Counting jobs
According to Evans, Carroll & Associates, the Boca Raton, FL-based economists working for the NYCRC:
How does USCIS determine that the job count estimates are accurate?Projects run the gamut
Two years after the business has started, USCIS requires an actual count of the number of people in direct jobs. These are full-time jobs, based on a 35-hour week. It is important to note there is no point in overstating the number of direct jobs in the proposal, because if it is false, USCIS has the option of terminating the project. That is why careful, conservative estimates are required at this stage.
USCIS does not count the indirect and induced jobs. They read the report carefully and if the explanation and the multipliers seem reasonable, they are approved, subject to the direct job count two years later. However, to be approved, the reports must include the industry detail, and a credible explanation of the indirect jobs. They should also include tables for the increases in output and labor income by industry.
Some regional center projects are clearly green card pitches. The Orlando Sentinel, in a 1/28/09 report put it baldly: Want a green card? Pay $1M for stake in Orlando-area condo hotel.
The Lake Buena Vista Regional Center pitch is blatant, noting that the job requirements have already been fulfilled:
On a video, a huckster-ish narrator asks, “Interested in permanent U.S. residency and a green card?... Your investment entitles you to 1.5 condo hotel units, and preserves ten jobs in the process.”
It preserves ten jobs. That sounds a bit like Forest City Ratner’s 2004 claim that Atlantic Yards would create and retain (as opposed to “create or retain”) 10,000 permanent jobs and 15,000 construction jobs.
Some nonprofit organizations, however, have benefited. The Washington Post reported in January:
Perhaps the greatest potential beneficiaries are nonprofit agencies such as the District's Anacostia Economic Development Corp., which was approved as a regional center in June. Over the next three years, the group hopes to raise $50 million from immigrant investors to develop real estate projects and small businesses in wards 7 and 8 -- a princely sum compared with the $2 million in private capital it raised for its last major building project in Anacostia.In such a case, the foreign money would indeed bring the job, rather than fill a gap that a developer would rather not fill another way.