Hawking green cards to foreign investors gets easier, as Forest City's dubious use of bridge financing now OK'd as mainstream EB-5 practice

Astoundingly, the federal government has given its OK to one of the sketchiest aspects of the EB-5 immigrant investor program, in which private companies can market green cards in exchange for purportedly job-creating investments.

I and others called attention to developer Forest City Ratner's use of the EB-5 program to raise $228 million from 456 (mostly Chinese) immigrant investors in 2010-11 for an investment connected to Atlantic Yards.

As I wrote 12/27/10 in the Huffington Post, not only were the jobs "created" solely on paper, thanks to an economist's analysis, the money really wasn't needed:

In this case, the Atlantic Yards project would go forward with or without EB-5 funding. The developer, Forest City Ratner, has signed completion guarantees for the arena and infrastructure.

That, I warned, suggested slack in a federal program that already looked like a giveaway to entrepreneurs and developers :

If this finagling--essentially endorsed by the city and state, as well as the borough of Brooklyn-- 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?

Others agreed. In a March 2012 article on EB-5, Bloomberg BusinessWeek quoted Michael Gibson, a Tampa-based investment adviser who analyzes EB-5 projects for potential investors:

When a project “substitutes EB-5 capital for more expensive bank financing or bond funding or even equity,” he said, “that isn’t really creating new economic activity. It’s margin for the developer.”

And I've since explained how they did it, using the EB-5 money to secure mortgages after paying off Gramercy Capital, which lent money for Atlantic Yards land.

But Forest City Ratner got away with it.

Now any developer can do it, thanks to new rules by the United States Citizenship and Immigration Services (USCIS), the division of the Department of Homeland Security that oversees EB-5.

The further diminishes the public policy argument for EB-5, which already seems "inefficient and open to corruption," according to Dartmouth adjunct professor John Vogel.

Evolving policies

The USCIS, which once looked askance at bridge financing, has steadily warmed up to it, likely thanks to industry lobbying. (In the world of EB-5, there's pretty much no lobbying from the public interest side.)

A writer who tracks the industry has a long post analyzing the USCIS's evolving policies. For years, the agency took a conservative approach. In a December 22, 2009 AAO [Administrative Appeals Office] Decision denying a Regional Center proposal, the USCIS stated:

While we do not suggest that this type of financing is automatically disqualifying, the application cannot be approved unless the applicant first establishes that this assumption of existing financing will improve regional productivity.

In an April 23, 2010 AAO Decision (Denial of Form I-829 for a Regional Center project in Philadelphia), the USCIS said no at the later stage in the EB-5 process, saying it might have raised "serious concerns" about "how replacing one loan with another loan would create jobs" had it been raised in the investors' initial petition for a green card.

In the December 16, 2010 USCIS Stakeholder Quarterly Engagement, the agency said no jobs were created if "the project has essentially concluded and EB-5 capital is simply going to replace debt in which the jobs are already created through non-EB-5 capital."

In the 12/21/11 AAO Decision Affirming the Termination of Victorville Development Inc., the agency terminated the regional center "because the applicant is seeking to invest capital only after the jobs in question have already been created" and "the record does not show that the applicant made a commitment to provide later-stage financing at the outset of the project."

After that Victorville decision, EB-5 News contacted some experts:

In a conversation with EB5info, Robert Divine, a noted immigration attorney and former Acting Director of USCIS, said the above statement actually "leaves hope" for business plans relying on EB-5 capital to replace a bridge loan. As long as those plans are explicit about their intention to use EB-5 capital--presumably before the actual bridge loan is made --Divine thinks USCIS will count the jobs.

Indeed, EB-5 proponents pushed back. In USCIS’s Executive Summary of the 5/1/2012 EB-5 Quarterly Stakeholder Engagement, the agency moved toward acceptance, saying:

If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation under the regulations.

USCIS revises policy, May 2013

In a 5/30/13 EB-5 Adjudications Policy Memorandum, which lays out explicit policies, the agency essentially threw up its hands and said OK to all:

Since it is the commercial enterprise that creates the jobs, the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, may utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the interim or bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise may still receive credit for the job creation under the regulations. Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing. However, even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as long as the financing to be replaced was contemplated as short-term temporary financing which would be subsequently replaced, the infusion of EB-5 financing could still result in the creation of, and credit for, new jobs. For example, the non EB-5 financing originally contemplated to replace the temporary financing may no longer be available to the commercial enterprise as a result of changes in availability of traditional financing. Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.

(Emphasis added)

I had asked, "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?"

The answer: nothing.

So that leaves the door open to get a business going with any kind of financing, as long as the proponents know they can refinance inexpensively.

Reactions of delight

Are We at the Dawn of the Golden Era of EB-5?, prominent EB-5 lawyer Ron Klasko asked 7/2/13, writing approvingly:

However, the policies set forth in the Memorandum are in most cases policies that will enable the EB-5 program – and especially the regional center EB-5 program – to flourish. Regional centers are no longer limited to sponsoring projects in any particular industry and now have a streamlined mechanism of expanding their geographical boundaries. EB-5 money can be used to replace any form of temporary lending even if EB-5 money was not contemplated at the time the temporary lending was initiated.

Attorney and advisor John Roth, observing that "the best is yet to come," wrote that the use of bridge financing can make EB-5 projects more attractive to overseas investors because the project is already in process, and "investors can take a 'free ride' on the preceding due diligence evaluation."

Roth explained how the standards have been relaxed:

The USCIS has long been concerned that “bridge financing” might just be an after-the-fact description used by an EB-5 developer for lowering his or her cost of capital by replacing previously arranged financing, with little or no effect on new job creation... The memo thus permits approvable bridge financing in circumstances where it would have previously been unacceptable to the Service when EB-5 refinancing was not anticipated when the bridge financing was secured, and also probably signals a less strict showing of “nexus” in cases where EB-5 refinancing was in fact anticipated.

(Emphasis added)

The aftermath: the use of bridge financing

Now, as in this 1/22/14 press release, 'Pre-Assembled' EB-5 Visa Project; Florida EB-5 Hotel Developer Breaks the Mold, Not the Ground, we learn that Mainsail Lodging and Development of Tampa, FL has a hotel already opened:

As such, Bridge or interim financing provides the opportunity for EB-5 project developers to take out short term financing to help construct and develop the project, then EB-5 capital as it is received may replace that short term financing yet still receive credit for creating jobs.

The savings

As the Real Deal reported 11/1/13, More NYC developers tap cheap EB-5 capital:

“It’s a very low-cost way to fill out your capital stack,” said Manhattan-based real estate lawyer Joshua Stein.
He said while mezzanine capital is risky, and therefore expensive to secure — “you might pay around 12 percent” — the interest rates for EB-5 loans are “in the low single digits.”

That's potentially hundreds of millions of dollars in savings.

The AY connection

The article noted that, while some regional centers--the government-authorized investment pools that recruit investors--are attached to specific projects, some "only exist to source capital to third parties (often developers) for a fee."

That list includes the New York City Regional Center (NYCRC), which raised the first round of Atlantic Yards funds. The owner of the center, according to one lawyer, "generally charges 5 or 6 percent of the capital collected from international sources," though in the case of the Atlantic Yards deal, I wonder. 

The investors were given little or no return, and they also had to pay a fee to the NYCRC separate from anything Forest City had to pay. In other city projects, the NYCRC charged 4-5%, according to this RFP. I bet the Atlantic Yards deal was even less.

Another developer, Durst, was reported by the Real Deal to have "rented a Florida-based regional center, called U.S. Immigration Fund LLC" for it's $80 million EB-5 capital raise.

Guess what: that's the same Florida-based regional center Forest City Ratner is now renting for its latest EB-5 project.