Another look at the huge benefits from the EB-5 program: perhaps (updated) $128 million to Forest City Ratner, and $36 million to NYCRC

Update 9/25/12: the total loan, it has since been reported, was $228 million, which is 8.43% less than $249 million. Thus, an 8.43% cut on $140 million would mean a decline of $11.8 million, leading to a total of $128 million.

So, how much if Forest City Ratner saving on its $249 million low-interest loan from immigrant investors under the EB-5 program? And what are the earnings of is the New York City Regional Center (NYCRC), the private investment pool that was marketing the project--green cards in exchange for $500,000 in purportedly job-creating investments?

I have to revise some of my reporting from last year, when I calculated a gain of some $191 million to Forest City, based on the difference between the interest rate the developer might have to pay on the open market and the no-interest being offered to Chinese investors.

I also have to revise my calculations regarding benefits to the NYCRC, which I calculated would earn $38,000 per client in fees, or nearly $19 million.

Earning money on the interest

Rather, the NYCRC may be keeping very little of those fees, since it has to share fees with affiliates. It earns its money on the spread between the interest rate on loan offered to Forest City and the return received by the 498 investors.

Forest City likely will pay 4% to 5%, as with other NYCRC projects promoted by the city, while the majority of the investors, from China, will get no interest, and the 40 or so Korean investors will get .25%.

So it's a win for Forest City and the NYCRC: they both make money. I think Forest City's benefit is still more than $100 million, while NYCRC may earn some $50 million (see bottom).

It's a win for the immigrants: they get green cards for themselves and their family, with the cost being the foregone interest on the investment they get back. (Of course there is a risk, and not every EB-5 investor gets a green card.)

What about the public benefit? The investments are supposed to create jobs, but in some case--as I've shown with the Atlantic Yards investment--they don't create new jobs, and the immigrant investors get credit--apparently legal, though logically questionable--for the jobs created by the entire $1.448 billion in the "Brooklyn Arena and Infrastructure Project."

New sources

Insights come from a purportedly confidential NYCRC offering memorandum ( for the $60 million Brooklyn Navy Yard project, posted on a Chinese web site and dated 10/2/09, and an offering memorandum for the NYCRC's $65 million Steiner Studios project, posted on a Russian web site and dated 5/1/10.

The offering memorandum for the Brooklyn Arena and Infrastructure Project has not surfaced, but I assume it shares similarities with the other two, though it's surely not a direct copy.

For each of the initial two projects, each investor had to pay $530,000, which includes a $30,000 fee to the NYCRC, presumably a portion of which went to affiliate agents in China and elsewhere. For the Brooklyn Arena project, the fee was $38,000.

Interest rates

The NYCRC apparently earns money not merely via the fees, but by a spread between the interest rate delivered to the investors and the interest rate charged to the borrower.

As noted in the RFPs for current city projects, the interest rates for city-sponsored project is 4%-5%, likely less than half the rate available on the open market.

The Navy Yard loan was advanced at 3%--likely a low interest rate because it was the NYCRC's first project. The Steiner Studios loan was at 4.45%. Likely the Brooklyn Arena loan is closer to the latter.

The distribution

The Brooklyn Navy Yard memorandum states:

Subject to any adjustment required as determined by the Manager for the expenses, liabilities and other obligations of the Company, the Company will make distributions of the net cash proceeds realized from the interest payments from Investments (the “Interest Income”) to the Members promptly after the end of each calendar quarter to the extent available, as follows: eighty percent (80%) among all Members in proportion to their respective Membership Units owned as of the distribution date and twenty percent
(20%) to the Manager.

For Steiner Studios, the distribution was 50% to the Member, and 50% to the Manager.

But the adjustments, including a management fee, cut down significantly on any potential interest.

Management fee

The Navy Yard memorandum states:

The Company will pay the Manager an annual management fee in the amount equal to the product of $7,000 and the number of Membership Units outstanding (the “Management Fee”).

That works out to 1.4%.

For the Steiner Studios project, the management fee is be 2.2% of the Investment Portion ($500,000) of each Membership Unit, or $11,000 a year.

Steiner disclosure: no income

This was in the Steiner memorandum but not the initial Navy Yard one:

Additionally, during the initial term of the Loan, after payment of the Management Fee, the Manager’s portion of Interest Income and certain expenses, it is likely that there will not be any or any significant interest income to Members.

Surely this clause, or a variant much like it, appeared in the Offering Memorandum for the Brooklyn Arena project.

How much does Forest City save?

Consider, for example, that Forest City would save more than $140 million if it paid no interest while the regular financing rate is 6.5% (but it's not), as reported last year.

What if it's paying 4.5% interest? Well, the typical interest rate available for non-recourse financing was 12%. That's a 7.5% spread, and thus leaves some wiggle room.

If Forest City is saving 6.5%, it's likely saving some $140 million. If the spread is smaller, the savings likely are still more than $100 million.

How much does NYCRC earn?

Let's say NYCRC earns 4% a year on an investment of $249 million. That's some $10 million a year, or $50 million over five years.

(Update: On $228 million, that would be closer to $36 million.)

Nice work if you can get it.

Job creation

Both memoranda assure potential investors that an economist has calculated that the project would create sufficient jobs to pass muster, but at the same time warns that the economist's report has not otherwise been verified.

The Navy Yard memorandum states:

The Manager, through Company, has partnered with BNYDC to fund a key phase of the Navy Yard’s redevelopment plans. The Company expects to provide a Loan of up to $60 million to BNYDC to facilitate (i) the refurbishment and expansion of a 215,000 square foot industrial building for green manufacturing (the “Green Manufacturing Center”); (ii) the construction of a new 89,000 square foot industrial building (the “Sands Building”); and (iii) a broad range of related infrastructure improvements throughout the Navy Yard. The Loan is expected to be combined with approximately $81 million funding from the New York City, New York State, and the U.S. federal government for an aggregate project budget of up to approximately $141 million.

The Manager has engaged Dr. Michael K. Evans, Chairman of Evans, Carroll & Associates, an economist who specializes in EB-5 immigration analysis and economic impact studies of development projects and new construction, to conduct a job creation analysis of the Project. According to the report, the Project is expected to create in excess of 1,300 jobs. Neither the Company nor the Manager has undertaken any independent investigation to confirm the accuracy of such report.

The Steiner memorandum states:

The Company expects to provide a Loan of up to $65 million to the Borrower, 25 WA Associates, LLC, an affiliate of Steiner Studios, to facilitate (i) the renovation of the Building, a 235,000 sq. ft., seven-story building located adjacent to Steiner Studios’ current facility that will convert the Building into new film, television and commercial production facilities; (ii) the construction of five new film, television and commercial soundstages; and (iii) the construction of a 110,000 sq. ft. parking facility to accommodate increased car traffic into Steiner Studios (items (i)-(iii), the “Approved Improvements”). The Loan will be combined with $10 million of funding from the City of New York in connection with electrical substation upgrades, $3 million from the BNYDC, and $2 million from the United States Economic Development Administration to perform environmental remediation and interior demolition of the Building, for an aggregate Project budget of up to $80 million. In addition, pursuant to the requirements of the Loan Agreement, the Borrower shall be required at all times to contribute not less than 10% of the Qualified Investment portion of the Project’s cost (inclusive of interest service on the Loan and operational costs). As noted, the City of New York has pledged up to $10 million to the Navy Yard to upgrade an electrical substation adjacent to Steiner Studios that will provide increased electrical output needed for expansion of the film, television and commercial studios. 

...The Manager has engaged Dr. Michael K. Evans, Chairman of Evans, Carroll & Associates, an economist who specializes in EB-5 immigration analysis and economic impact studies of development projects and new construction, to conduct a job creation analysis of the Project. According to the report, the Project is expected to create 1,648 EB-5 eligible jobs from the construction and operation of the expanded Steiner Studios. Neither the Company nor the Manager has undertaken any independent investigation to confirm the accuracy of such report.