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Immigrant investors seeking green cards now own mortgage on development rights for Atlantic Yards tower; more mortgages coming

Chinese millionaires are closer to owning a piece of the Atlantic Yards project.

Immigrant investors now own a $24.7 million mortgage on the 1.24-acre site for B12, the first of seven development parcels promised as collateral for a low-interest loan to developer Forest City Ratner.

More such mortgages are coming, a state official says, indicating that proceeds from the $249 million low-interest loan garnered through the EB-5 visa program are being delivered.

Forest City Ratner is thus transferring portions of a longstanding high-interest loan to the cheaper capital raised via Brooklyn Arena Infrastructure and Transportation Improvement Fund, an affiliate of the New York City Regional Center (NYCRC), a private investment pool authorized to recruit immigrant investors.

It looks like the large majority of the cheaper capital will replace that existing loan rather than be used, as Forest City officials once said, to build a new railyard.

(Map from promotional material issued in China, which claimed the value of the collateral is $542.4 million. The sites are located on the arena block as well as the southeast block, 1129, which is designated for interim surface parking. Omitted are building sites that require an expensive deck over the railyard.)

How it works

Forest City gets a low-interest loan--likely 4-5%, as the city has advertised for similar endeavors. Of the the 498 immigrant investors, the majority, from China, get no interest. Instead they get green cards. The NYCRC keeps the spread.

The justification for this alchemy? The creation of jobs, but the federal agency in charge of EB-5, the United States Citizenship and Immigration Services, won't release the economist's report it relied on.

State officials acknowledge that no new jobs would be created than originally promised. And there's no evidence that the project wouldn't go forward without this new loan--after all, Forest City has to get the arena going by September 2012 to start earning money from naming rights revenues.

This week the New York Times highlighted another questionable aspect of this and other EB-5 projects promoted in New York: the gerrymandering of high-unemployment areas to ensure that investors allocate $500,000, rather than $1 million.

Repayment in seven years

The terms of the loan, to be allocated among multiple mortgages, give Forest City a significant amount of slack. While the maturity date is the fifth anniversary, the Brooklyn Arena Infrastructure and Transportation Improvement Fund agreed to a two-year forbearance period.

That's two years longer than many other EB-5 projects, which promise a return of investors' money in five years. Were investors told this? Were they told there was a plan to repay their money? I don't know.

And I do know that potential investors were told publicly their investment was secured by not by a revenue stream--as with some other EB-5 projects--but by future development rights.

Should Forest City not pay back the loan in seven years, those immigrant investors would have to recoup their investment by selling those development rights. That could involve an unwieldy process, bringing in a new developer or reverting the rights back to the ESDC (aka Empire State Development) or its designee.

Details: 8.5% rate if default

Given the extensive descriptions of how that loan could go into default, it's seems like it's been carefully contemplated.

According to a mortgage document (below) dated 7/26/11, the $24,736,928 mortgage on Development Parcel B-12 is based on a loan agreement dated 10/5/10 and amended 5/27/11. Should the loan default, any expenses or advances paid by the lender will be paid at 8.5% per year, in case of event of default.

Other details are laid out in a Recognition Agreement (below) among Brooklyn Arena Infrastructure and Transportation Improvement Fund, AYDC Regional Development Company, and ESDC, dated 7/28 but not prepared until 11/7/11 (and not recorded on the city's ACRIS system until 12/6/11).

What's coming at B12

Attached to the Recognition Agreement is a Project Requirements Allocation Schedule (below; click to enlarge) for B12, which has a maximum of 276,390 gross square feet, no less than 154 Project Site Affordable Housing units, 277 non-exclusive arena parking spaces and 123 resident parking spaces.
The page also cites the Anticipated Allocation for Parcel B11, with nearly as much parking but no less than 60 Project Site Affordable Housing Units. The document states that  the "loan is secured  by (or will be secured by) Developer's interest in the Lease as well as multiple other Development Leases."

So, what about B11 and the other sites?

"We expect similar agreements to be signed for additional parcels in the first quarter of next year," confirmed Arana Hankin, Director, Atlantic Yards Project, for Empire State Development, the state agency overseeing the project. "To date, Forest City Ratner has only posted parcel B-12 as collateral."

A 10/5/10 Recognition Agreement involving the three parties mentioned an Exhibit E, a schedule "allocating among the Project Site included in the Lease... and the remaining balance of the Project Site... the development and construction requirements..." I asked for a copy last year but was told it had not been prepared yet.

Exhibit E, Hankin explained, is the above Project Requirements Allocation Schedule, which will be updated each time a parcel is severed.

The deal with Gramercy

Another document below, Partial Lease of Mortgaged Premises (Subordinate Loan), dated 7/26/11, by Gramercy Warehouse Funding and FCR affiliates, regards a loan agreement dated 7/3/07 and modified several times.

The lender agreed to payment of "the applicable Development Parcel Release Price" to release Forest City from the lien of the Existing Mortgage. It does not affect the Remaining Mortgaged Property, identified a leasehold estates in the rest of Block 1129, minus the B12 site, as well as the four parcels on the arena block, Parcels B1, B2, B3, and B4.

Such leasehold mortgages involve not ownership but the right to use land. Gramercy also has fee simple mortgages (right to ownership) regarding four parcels on Block 1128, east of Sixth Avenue between Dean and Pacific Streets: Lots 1, 2, 88, and 89.

How much does Forest City owe?

As I reported 1/31/11, the Gramercy mortgage was $153.9 million when the Recognition Agreement was signed in December 2009. It expires in February 2012.

At 8.5%--the sum chosen as the default rate noted above--after 1.5 years, Forest City would owe about $174 million. Subtract the $24.7 million for B12 and the bill, after 1.5 years, dips below $150 million. But after two years, at 8.5%, the tab again tops $160 million.

That suggests that some $185 million of the $249 in immigrant investor financing immigrant investors would be replacing the Gramercy loan.

(At a higher interest rate, the developer would owe more; at a lower interest rate, the developer would owe less.)

What Forest City promised

Forest City never said that most of the new funding would simply replace the Gramercy loan.

In an unskeptical 9/21/10 article, Ratner Mulls Visa Financing, the Wall Street Journal nonetheless provided this important detail, one that seemed contradicted by the project's promotion in China and the evidence that has since emerged:
[Forest City Ratner executive MaryAnne] Gilmartin said she expects much of the money raised through the program would go toward financing the construction of a new rail yard for the Long Island Rail Road to replace the one that occupied a large portion of the site. Some may also be used to help pay off land loans on the project, she said.
(Emphases added)

That's not what it looks like now.

AY Mortgage 72711

AY Lease 2 72611

AY Partial Release of mortgage 72611

AY Recognition Agreement 72811