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Anatomy of a Shady Deal: an FAQ and retrospective on the effort to recruit EB-5 investors in China for the Brooklyn Arena and Infrastructure Project

After two weeks, this series (list of stories at bottom) deserves a retrospective and FAQ. Scroll down for Forest City's $100M+ savings.

This is a complicated story. Can't you summarize it briefly?

Private interests win, the public interest loses. Not unlike much of the Atlantic Yards saga.

That's too brief.

Taking advantage of a federal immigration program known as EB-5 that's supposed to trade green cards for job-creating investments, developer Forest City Ratner (FCR) would get a no-interest (or low-interest) $249 million loan and save perhaps $140 million; the New York City Regional Center (NYCRC), a federally-authorized investment pool, would earn big bucks; and 498 immigrant millionaires [most from China, 40 from South Korea] would gain green cards for themselves and their families by parking $500,000 each for at least five years.

(Update Sept. 2012: the sum raised was apparently $228 million, according to Business Week.)

But no new jobs beyond those long forecast would be created thanks to that loan the immigrant investors would give to FCR via the NYCRC. Moreover, those investors are being told their money would go to the Atlantic Yards arena, which is already funded. And the process could delay Phase 1 of Atlantic Yards by another seven years, meaning it could take 19 years for the minimum square footage on the arena block to be built.

Is this legit? Doesn't anybody examine it?

Good question. We'll get to that below.

What's the "Brooklyn Arena and Infrastructure Project"?

That's what they're calling it in China. It's a curious, $1.448 billion subset of the $4.9 billion Atlantic Yards project, said to involve the Atlantic Yards arena, associated infrastructure, and a new railyard. No official body has ever approved or segmented Atlantic Yards in that way.

(Front page of project brochure at left.)

How can investors be investing in the arena--isn't it already funded? Does it need new money to go forward?

It is funded, state officials acknowledge, so new money isn't needed. (It is, however, wanted by the developer.)

According to available evidence, including statements from Atlantic Yards point woman MaryAnne Gilmartin, it looks like Forest City would substitute new, low-cost capital for at least part of an existing $161.9 million land loan at a much higher cost. (And, in 2012, use some money for the railyard, which should cost $147 million.)

Then why are they pushing the arena and the team in China?

Basketball is the most popular sport in China, silly. So a new arena is glamorous. Hoopsters are gods.

(At left, potential investors gather at the conference registration desk for a mid-October session in Beijing, presented by the Kunpeng consultancy. On the banner, New Jersey Nets players Brook Lopez and Devin Harris flank a rendering of the arena. Photo from Kunpeng web site.)

Don't developers try to refinance whenever they can?

Sure, but in this case, the only way they can get a cheap loan from green card-seeking investors is if the loan serves to create jobs. Should they really get credit for job creation simply by refinancing?

Well, how does job creation work?

Under the EB-5 program, you don't need to count employees to calculate job creation based on investments made through regional centers. Rather, a report by an economist--which applies a multiplier to the total amount of money spent--is used to calculate the jobs.

That's plausible, right?

Yes, if not uncontroversial. The problem is the total amount of money--in this case, $1.448 billion--is used as the base for the multiplier, not simply the $249 million in new money from immigrant investors. They're claiming 7696 jobs, far more than the 4980 required--ten per investor--and far more than we'll see on the Atlantic Yards site.

Should immigrant investors get credit for job creation based on the entire $1.448 billion, which is money already committed and already spent by private investors and government entities?

That's the big, unanswered question.
It's plausible that EB-5 investors might get credit for job creation based on the whole pot of money--as long as their investment served as seed money or "last mile" funding, thus crucial to a project having enough to actually move forward.

In this case, the project would go forward with or without EB-5 funding.

Are there any rules on this?

Well, there are, but they're very, very murky. I asked the federal agency that oversees this program, the United States Citizenship and Immigration Services (USCIS), if they could clarify the rules regarding whether and how immigrant investor capital gets credit for jobs created by the total amount of capital.

I was pointed to a vague portion of the Code of Federal Regulations.

Is that a loophole?

It looks that way to me. Proponents obviously believe what they're doing is legit, based on past practices. However, if this passes muster, what's to stop any developer from refinancing with immigrant investor capital and claiming job creation based on both the new capital and previously committed capital?

But the spirit of the law regards the creation of a new commercial enterprise. This episode just might prompt the USCIS into clarifying its rules. Though regional centers have until recently faced little oversight, the USCIS recognizes there may be a need for more scrutiny.

In an October 14, 2010 quarterly presentation to stakeholders, the agency stated: "Many USCIS External Stakeholders have expressed concerns regarding the potential for fraud and misrepresentation within the EB-5 program."

(According to that presentation, members of the public may report instances of fraud or misrepresentation to the EB-5 mailbox at

NYCRC reps are telling potential investors immigration risk is eliminated--true?

Nope. That's not what the USCIS says.

Step back--why does a program like this exist in the first place? Isn't the U.S. just selling green cards?

So it seems, at least to some, but there's a logic to it. Twenty years ago, when the program emerged, countries like Canada and Australia were offering similar programs. The U.S. has to compete.

The regional center program, which allows investments into investment pools rather than directly into businesses, has gotten enormously popular lately, as domestic capital has become scarce. Of 10,000 EB-5 visas a year, 3000 are reserved for regional center-based investments, according to the trade group IIUSA.

Didn't the economics editor at Yahoo say it was a good idea to market green cards to investors?

He did. And, on a superficial level, there's a logic to it. But as we see, the program is run so loosely, at least for now, that dubious projects can move forward. Canada, by contrast, puts the money into public works.

Is this a lock for investors?

No. Their green cards are not a certainty, despite what the NYCRC is assuring them.

What about getting their money back?

That's also a question mark. There's no publicly stated plan for cash flow dedicated to repaying this loan.

Is this really senior-most debt, only 17% of the project?

Only if you think that immigrant investors get priority for repayment ahead of bond investors. The latter bought debt that was publicly rated, and for which specific arena cash flows have been identified for repayment.

What if Forest City Ratner defaults?

Then the immigrant investors would gain development rights to seven towers, appraised at $542 million.

Would they really double their money?

No way. The rights would have to be marketed to a buyer. And it takes subsidies and other investments to turn the development rights into an ongoing project. The fungible value of the collateral is pretty fuzzy--the appraisal isn't public--but it's likely much lower than the appraisal figure.

Has Congress done much oversight of this program?

Not really. A Senate hearing last year was a lovefest, with both Republicans and Democrats citing home state programs they like. The focus has been on streamlining the program to make it work better, not to look into possible abuses.

According to David North of the Center for Immigration Studies, one of the few people to look critically at EB-5, the USCIS does not keep statistics on such basic information as how many EB-5 investments are still in place after four years.

Is there any self-policing?

Not too much, it seems. The trade group Association to Invest in the USA (IIUSA) offers a list of Best Ethics Practices, including avoidance of "dishonesty, fraud, or deceit." There's evidence, at least, of dishonesty by the NYCRC and those supporting this effort.

Will Forest City Ratner really save $191 (or $140) million? Are they getting a no-interest loan? Don't they have to pay something?

Well, it's clearly a no-interest loan in that the investors won't get any interest. It's not clear whether the NYCRC is charging FCR interest, or a fee, or nothing. [Update 12/2/11: it seems likely Forest City paid a modest interest rate, perhaps 4%, but still likely saved $140 million.]

Still, my $191 million estimate was based on a conservative interest rate of 8.3%, so even a moderate interest rate charged by the NYCRC--in comparison with a more likely interest rate (such as 12%) FCR would have to pay for a non-recourse loan--might still provide savings of about $200 million. (We don't know how much FCR is paying on the Gramercy loan.)

What about that seven-year delay?

It's part of a Recognition Agreement that the Empire State Development Corporation (ESDC) signed with the NYCRC and FCR. The developer's supposed to pay back the loan in five years. They have two more years to "cure" the default.

If not, there's a complex process to market the collateral to another buyer. And that would re-set the clock on Phase 1, meaning that only after the loan is bought would the 12-year deadline kick in. That would add up to 19 years.

Isn't Phase 1 supposed to take four years and the entire project ten years?

Uh-huh. But no one believes that's going to happen. The question is whether delays in Phase 1 will make it into the legal arguments regarding the timetable in a pending case in New York Supreme Court.

So far they haven't, since the judge focused on the discrepancy between the official ten-year timetable and the 25 years allowed by the Development Agreement. But the Phase 1 gap is also significant.

That's not the first Recognition Agreement?

Right. Just last week we learned that a similar agreement was signed last December, as part of the master closing, with Gramercy Warehouse Funding, Forest City's lender for land in Phase 1.

The ESDC won't release the Recognition Agreement without a Freedom of Information Law (FOIL) request), but I'd bet that the collateral is similar, and so too is the delay.

How did you miss that part of the master closing documents?

Last January, the ESDC made the master closing documents available in response to FOIL requests in a massive set of hard copies, so anyone curious had to visit agency office and slog through literally dozens of binders.

I found the highlights in the Development Agreement, but missed the Recognition Agreement. Or maybe it wasn't there. If they'd provided the documents on disc, or online, I and others would have had more of a chance to peruse it. Maybe that was the plan.

Were these Recognition Agreements approved by the ESDC board?

No, just by staff.

So staff has been renegotiating the Atlantic Yards deal? Who's in charge?

Good question.

Why is the NYCRC pitching this project in China? Don't immigrant investors come from around the world?

That's where the money is, and the desire for green cards. It's also where marketers of EB-5 projects push the envelope on credibility.

(Update 12/24/10: As Reuters reports, the NYCRC is also seeking investors in South Korea.)

Why are the city, state, and borough playing along?

They want to see the project get done, and Forest City Ratner has apparently convinced them, or threatened them, that without cheap capital it won't move ahead.

The ESDC even used taxpayer money--presumably--to send an executive, Peter Davidson, to China and present the NYCRC's Chinese partners with proclamations and to tell potential investors how great the deal is.

Did Davidson really say this would be the largest job-creating project in the past 20 years?

Yes. But I bet he wouldn't say so under oath.

Did Brooklyn Borough President Marty Markowitz, in an appearance taped for a project video, really say the people of Brooklyn support Atlantic Yards "1000 percent" and that Forest City Ratner's "reputation is unbelievably reliable"?

He did. And to think, when he campaigned in 2001, he vowed, "Real estate money will never control me."

Are potential investors told what the role of the city, state and borough is?

Unclear. They're told that this project is "in conjunction with" city and state governments. Presumably the fine print in project documents is more precise.

Public and elected officials have enthusiastically talked about the jobs and housing.

That's part of the problem. They keep pitching the entire Atlantic Yards project. That's not what immigrant investors have in front of them.

What's the role of retired hoopsters like Darryl (Chocolate Thunder) Dawkins at investment seminars in China?

Exotic window dressing, it seems.

As I wrote, it's a magical moment of international arbitrage, as slick marketing and basketball fever aim to sell investors on their green card dreams, perhaps distracting them from due diligence.

(At left, Dawkins signs autographs at Guangzhou investor event; photo from consultancy Qioawai's promotional page.)

Is the misleading promotion unique to this project?

Apparently not. In September, Florida immigration attorney Jose Latour, who serves as one of the few EB-5 watchdogs, wrote (without reference to this or any specific project):
"Yes, we are not investment advisers, but as immigration counsel we are bound to reasonable care, and it doesn’t take Gordon Gekko to see the obvious scams and failures which characterize the majority of the Regional Center projects being shopped overseas."
Does it matter that NYCRC principal Paul Levinsohn was one of the "billboard boys" involved in getting rich from a dubious project in New Jersey?

Well, he wasn't charged with anything, but even his former boss, ex-Governor Jim McGreevey, thought it unseemly. Past practices at least hint at his willingness to push the envelope.

Does the law firm Miller, Mayer, working for the NYCRC and also representing investors recruited by the NYCRC, have a conflict of interest?

It may look like a conflict, but conflicts can be waived by clients. The question is: how much do clients actually know?

Who is the spiritual cousin of Gregg D. Hayden, the NYCRC's main pitchman in China?

Brett Yormark, the Nets' uber-marketer. Hayden, literally, is selling the Chinese an arena he doesn't--or shouldn't--have to sell. Then again, Hayden also spoke gibberish when asked about Nets majority owner Mikhail Prokhorov. They're trying hard to avoid talking about Prokhorov.

The list of articles

Part 1 of this series concerned the seven-year extension available on Phase 1 of the project should Forest City Ratner not repay the EB-5 loan. Part 2 estimated the developer could save at least $191 million. Part 3 examined the sales effort in China, with the arena front and center, even though it's already funded.

Part 4 reported on claims made in China, on video and in person, by public officials supporting the project. Part 5 concerned the value of the development rights, contrasted with those in last year's deal for the Vanderbilt Yard. Part 6 described reasons to think the development rights are overvalued.

Part 7 explained why China is such a popular target for those seeking EB-5 investors
. Part 8 provided another reason why the Nets played exhibition games in China in October. Part 9 cited the curious avoidance of Mikhail Prokhorov during the pitch in China.

Part 10 noted NYCRC's belated announcement of the project in a newsletter. Part 11
described misleading promotion in the Chinese media and by Chinese firms working with the NYCRC. Part 12 covered the proclamations that are part of the pageantry in China.

Part 13 concerned the role of the NYCRC's preferred law firm. Part 14 linked the land loan to a previous one from Gramercy Capital. Part 15 analyzed the use of weasel words and ambiguous language. Part 16 took another look at a web video pitching the project.

Also, here's a summary written last week for the Huffington Post.