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Atlantic Yards/Pacific Park graphic: what's built/what's coming + FAQ (pinned post)

Years after misleading marketing for "Atlantic Yards II" EB-5 investment, controversy recurs: charges of fraud, countercharges of defamation (plus misleading information about project progress)

It's not surprising that the EB-5 investments, in which immigrant investors and their families get green cards in exchange for a $500,000 investment that purportedly creates ten jobs, might wind up in controversy.

After all, such investments were too often marketed in China with misleading information, enthusiastic U.S. government (and ex-government) officials unwisely vouching for projects, and distracting sideshows--to quote Fortune, "more like pitching vacation timeshares than any normal form of deal finance."

When EB-5 works as planned, the provision of a scarce government resource--entry to the United States--fuels profits and benefits down the line: the investors accept little or no interest but gain green cards for themselves and their families; real estate developers get low-interest loans; middlemen investment packagers (known as regional centers), lawyers, and migration agents all cream off fees and/or interest.

Even as planned, EB-5 can be sketchy, as I've long argued, such as the dubiousness of job-creation calculations, or the gerrymandering that creates artificial zones of high unemployment, thus enabling investors to put down $500,000 rather than $1 million.

But it doesn't always work as planned, and not just because there's a huge backlog of Chinese investors who are angry, not unreasonably, that their once-purported five-year investment might stretch a decade longer and their path to the U.S. is in question.

"Atlantic Yards II" controversy

The controversies include but are hardly limited to "Atlantic Yards II," the second round of EB-5 financing for the project, which raised $249 million in 2014, via the U.S. Immigration Fund (USIF), the country's most prolific regional center. (The head of USIF, Nicholas Mastroianni II, was the subject of a tough 2014 profile in Fortune, noting his "tangled past." I critiqued the misleading marketing here.) USIF has raised $2.9 billion overall, mostly for real estate projects seeking low-interest financing.

USIF has organized two of the three EB-5 fundraising rounds for Atlantic Yards, as well as for Nassau Coliseum and many other projects. (Atlantic Yards III raised $100 million; the promoters got a slap on the wrist from the U.S. State Department, which--after I called attention to it--asked them to stop claiming that a top State Department official supported the project.)

The disputes have grown far more serious. Without more definitive information and adjudication, it's difficult to valuate dramatic charges of fraud, and counter-charges of defamation, involving the USIF and representatives of  EB-5 investors, some of them involved in Atlantic Yards II.

But I can say: the USIF hasn't always been straight with the Atlantic Yards II investors. For example, in a recent message to them (at bottom), USIF stated that "new development sponsors [involved in Pacific Park] are anticipating starting construction on these parcels in the first quarter of 2019."

See the screenshot at right, which has a READ MORE hyperlink. That hyperlink, to a 9/26/18 Bisnow report, immediately contradicted the claim, since the article stated that only one of the three parcels (developed by The Brodsky Organization, parcel B15) would start in the first quarter, adding that "TF Cornerstone will take over construction on the buildings at 615 and 595 Dean St.... which won't start for another 12 to 18 months."

Indeed, those two buildings won't launch until 2020, the Commercial Observer reported last month.

More importantly, as detailed below, an investor update implied that two buildings were on the way toward completion, rather than never having launched, thus suggesting that the project was farther along than reality.

The controversy, outlined

A bitter series of lawsuits, including and beyond Atlantic Yards, involve, variously, USIF and lawyer Douglas Litowitz and investor advocate Zoe Ma. I describe them partially below, but here's some other coverage:
The background

EB-5 began to take off after 2008, when real estate developers and middlemen discovered the opportunity for cheap financing and eager investors. Since then, heavy marketing of EB-5 investments in China has led to a visa backlog, one that became apparent only around 2014-15. "Until May 2015, the supply of visas was adequate to meet the demand," according to a 2018 paper from immigration lawyers.

Because of the annual cap of some 10,000 EB-5 visas was being reached, that imposed a per-country quota on EB-5 investors of 7% of the total, severely impacting investors from China, the source of the most investors. (Also, the cap applies to all people gaining visas under EB-5, including family members, rather than 10,000 separate investments; a class-action lawsuit aims to get the U.S. government to count only investors, which would likely triple the number of visas.)

From Klasko Law
An investor beginning the EB-5 process files a document called I-526, which takes at least 16 months to approve, according to the flowchart at right from Klasko Law. The wait time for Chinese investors (as the Real Deal reported last November) is now at least 14 years, while EB-5 loans are typically for five years, often with a two-year extension.

Eventually, as the flowchart indicates, they will get conditional permanent residence status--a green card valid for two years. Such a conditional permanent resident must file an I-829 application to remove the conditions 90 days before the conditional card expires.

The immigrant investors forego all (or nearly all) interest because their goal is a green card. But they expect their money back in five to seven years.

The problem is that investors who seek to become lawful permanent residents (by filing I-829) must keep their capital "at risk" in a so-called new commercial enterprise until they've been in the U.S. for two years. According to a 2017 update from  Klasko Law, that period "could reach or exceed 12 years, taking into account the estimated 10 year waiting period to commence conditional residence status plus the 2 year period of conditional resident status."

That's not necessarily the case for Atlantic Yards II investors, who began the process in 2014. According to the document below, 491 of 498 investors already have their I-526 petitions approved, with 80+ families getting conditional green cards. Some could begin the I-829 filing early this year, "with majority of investors facing visa availability backlog."

If the capital is no longer at risk because of an early payback, investors seemingly must redeploy their funds into another at-risk investment, something not necessarily contemplated in the investment pitch they faced or the documents they were shown, since the delays were not at that point evident. Moreover, the rules and standards regarding redeployment remain in dispute.

United States Citizenship and Immigration Services, the agency of the U.S. Department of Homeland Security that oversees EB-5, "has not given clear guidance as to what constitutes adequate redeployment," said Michael Gibson, who operates, a Registered Investment Advisory firm, and a source for news and information about EB-5.

The Atlantic Yards II redeployment 

With Atlantic Yards II, the precipitating act was the sale of the B15 development lease by Greenland Forest City Partners to The Brodsky Organization. Because "Brodsky chose not to assume the EB-5 debt on the property," the Real Deal reported last month, Greenland asked USIF "to release its lien against the property."

From USIF's message to investors (bottom), as disclosed in a lawsuit:
Consistent with the terms of the Loan Agreement, the borrower requested that the lien the Company held on parcel B15 be released in order to enable the borrower to sell the parcel and to also insure that significant infrastructure improvements (e.g., a school and park) are built in a timely manner.
In considering the borrower’s request to release the lien on parcel B15, the Company conducted due diligence to determine whether the sale of B15 would cause the borrower to be out of compliance with the terms of the Loan Agreement, including the important loan to value ratio of 80% (the “LTV Ratio”).... The appraisal (a copy of which will be provided to you) confirmed that the proposed sale of B15 would require that the borrower partially repay the EB-5 loan, in an amount equal to the appraised value of the released parcels, equal to $63,160,000.
(Emphasis added)

Note that the B15 parcel will contain a school, but no open space or "park." (Also note that, according to ACRIS, as far as I could tell, Brodsky paid $55,830,000, which suggests it paid less than the appraisal.)

Update: I'm going on the plan from landscape architect Thomas Balsley, who ignored B15 in his renderings, right.

Because a loan is being repaid, the 498 investors in Atlantic Yards II were given three basic options, to be decided by March 22:
  • those who've already filed their I-829 petition, or are close, can get the proportionate share of their money back, or about $126,827.31, a little more of 25% of their investment (presumably they'll get back the rest, when the loan's paid off), without redeployment
  • those who want to exit the EB-5 process and give up on green cards, such as those with children who will "age out" because of visa delays, can get the proportional share of their money back too, with the remainder of the their money paid back when the developer pays back the principal, by December 31, 2022 (a five-year loan, with a two-year extension)
  • those who want to stay in the process but haven't filed I-829 have been given redeployment options by USIF, such as a "blended investment" model, two projects in Manhattan, or a Miami Beach hotel
The lawsuit

Not everyone trusts the latter pathway.

In a lawsuit filed in state Supreme Court in Manhattan last month, one Atlantic Yards II investor, invoking others similarly situated, requested a temporary restraining order (TRO) enjoining USIF from "redeploying and diverting" the repayment without engaging a registered investment adviser and independent legal counsel for the EB-5 investor's fund, and stopping USIF from requesting that the plaintiff and others participate in the redeployment. The case is Guiling Guo vs. AYB Funding 100 LLC.

Summarized as "breach of fiduciary duty, breach of operating agreement, and securities frauds," Guo filed a blistering list of charges in an affidavit (also at bottom), including that:
  • the plaintiff never got the the full risk disclosure regarding the original investment or the Confidential Private Placement Memorandum
  • the plaintiff was never given updates on the construction progress
  • the plaintiff was never told that the developer (Greenland Forest City) never obtained financing for B15
Alleged is significant malpractice:
  • In concert with their Chinese marketing/migration agents, Defendants provided only signature pages of the Subscription Agreement and Operating Agreement, not the complete documents
  • Mastroianni countersigned the Subscription Agreement and Operating Agreement and doctored executed subscription agreements and operating agreements with papers containing Plaintiff’s signatures.
  • the plaintiff was not given the opportunity to be advised by a registered investment adviser in US or in China.
The lawsuit also alleges that the change in the permitted business activity of the EB-5 fund, AYB Funding 100 (an affiliate of USIF), would violate securities laws.

No evaluation of claims, sent to arbitration

The judge denied the TRO and ordered arbitration, agreeing with the defense argument that the claims were "all the subject of agreements that mandated arbitration and therefore not properly before the Court."

So it's unlikely this court will evaluate the serious allegations, which portray investors as not equipped from the start to fairly evaluate a potentially risky investment. (One allegation is that EB-5 packagers must register as "investment advisers" under Securities and Exchange Commission rules; Gibson said that issue remains unclear, as it would be an agency interpretation.)

Asked about the charges, USIF attorney Richard Haddad stated, "While I will have no comment on the specific allegations by Guiling Guo, I can say the following: I read the allegations. So did the Court. The motion for a TRO was DENIED. In ALL CAPITAL LETTERS. I think that says it all."

That's clearly a procedural victory for the defense, but that doesn't mean the charges were evaluated. (Nor does the typeface seem definitive.)

Haddad has since since filed a motion for sanctions on the plaintiff's counsel, Janet Esagoff, saying she has failed to withdraw this and another case despite agreeing to go to arbitration.

Part of a larger dispute

In a separate lawsuit filed last October, USIF sued attorney Litowitz and translator/paralegal Ma (aka Xuejun Makhsous)--once allies in challenging EB-5 and the USIF, now estranged--for fraud and defamation as they recruited disgruntled investors, and suggested the two were motivated by money problems.
Mastroianni told the Real Deal that Ma was an “ambulance chaser” who was--in the publication's paraphrase--"duping investors into paying her legal fees." Ma has helped organize the Atlantic Yards II lawsuit.

She's also filed pro se a separate RICO (Racketeer Influenced and Corrupt Organizations Act) claim against USIF and Qiaowai, a leading China-based migration agency. (Various reports, including this blog, have questioned Qiaowai.) Mastroianni told the Real Deal that Ma’s claims were “far-fetched and completely baseless.”

"I'm going to show the world how Chinese investors are duped," Ma said in an interview regarding the Atlantic Yards II lawsuit. "They signed the [original] documents blindfolded. The very first question I asked: 'Do you read English documents?' They said no. They had no idea what they were signing."

Ma said the Securities and Exchange Commission should get involved. (In legal papers in a separate case, Litowitz wrote that he and Ma "work in conjunction with federal and state agencies on both the civil and criminal side, including the SEC and other agencies.")

Some EB-5 investors are "trying to kill themselves," Ma said, speaking in general of the group. "They were in the hospital when they realized they were conned." Some sold their houses or borrowed money to make their EB-5 investments. (Here's the plea from the son of investors who expects to be separated from his parents because he will "age out.")

"I don't expect the court to fix EB-5," she said. "I just want the court to bring EB-5 investment back to their rightful owners--the Chinese investors--not [be a] piggy bank for EB-5 fund managers."

Gibson, regarding the general issue of the visa backlog, said, "I put the blame on the immigration attorneys… as they had the fiduciary and legal responsibility to care for their clients." While the Chinese migration agents didn't warn the investors, "they have no fiduciary duty to protect the investors, the immigration attorneys definitely do."

Misleading information regarding Atlantic Yards progress

Again, it's difficult to evaluate Atlantic Yards II charges without an oversight entity stepping in. But I can say that, not only did the regional center provide misleading information to EB-5 investors as the project launched, as noted below, it's also done so more recently, suggesting the Atlantic Yards project, now called Pacific Park, was farther along toward completion than reality.

Consider the screenshot below, taken from the redeployment message at bottom. Put aside that the investors earn just .25% in interest. Look at "Your Current Position in the Capital Stack," which suggests that there's a Senior Loan, worth $542.3 million, to support the "Atlantic Yards II" project.

However, the "project," for the purpose of job creation calculations, was supposed to include construction of four towers--B3, B11, B12, and B15--as well as the permanent railyard and the platform above the railyard, according to a chart below from the PPM, or private placement memorandum.

But B12, B15, and the platform have not been built. It's hardly clear that a "Senior Loan" of $542.3 million was made.

A similar graphic (below) regarding the capital stack, titled "Project Financial Update," was included in a Q3 2018 update produced for investors by USIF.

It indicates, with ring-shaped graphics, that nearly all of the EB-5 loan was disbursed to the project, and most of the expected developer equity was contributed. (That developer equity perhaps refers to land purchases and spending on two towers and infrastructure.) The chart says nothing about the "Senior Loan."
Misleading on B12 and B15

The slide below, from the Q3 2018 report to investors, purports to describe "Leasing/Sales Status" of three of the towers that were supposed to be built with the $249 million in EB-5 money. It describes, plausibly, that sales for 227 units in the 550 Vanderbilt Avenue (B11) condominium building had closed.

However, it also states, regarding B12, "Condo sales have not yet begun," implying that such sales were potentially in the relatively near future. However, that tower, while announced in 2015, never got started; moreover, the developer had already given up on the plan to build condos (or even 100% market-rate rental buildings), given changes in the 421-a tax break.
Similarly, it says, of 664 Pacific Street, the 300 market-rate rental units were "Not yet available for lease," and "Leasing to commence upon first TCO," or temporary certificate of occupancy. That again implied that such transactions were potentially in the relatively near future.

But they were not available for lease because the building, while announced in 2015, never got started. (It's starting now, with 30% affordable units.)

The reason the two towers weren't built is that, in November 2016, Forest City Realty Trust/Forest City Ratner, though owning only 30% of Greenland Forest City Partners, announced a unilateral pause in new construction. That was surely known to USIF by the time of the Q3 2018 report to investors.

Past coverage of USIF

I wrote in January 2014 about the "Atlantic Yards II" fundraising effort, which featured dubious marketing not unlike the first round (which was via the unaffiliated New York City Regional Center), offering stale quotes from former elected officials about the entire $5 billion Atlantic Yards project

A web site presented "Atlantic Yards II" as if it were the entire project, with 6,430 apartments. That all suggested that investors' money would go to the overall project, rather than some vague subset said to be worth $1.235 billion, thus incorporating the $249 million sought as a neat 20%.

(Now, given the questions about the "Senior Loan," it's doubtful that the investors' $249 million represented a mere 20% of the recent spending.)

A brochure said that the developer anticipated that "upon completion and stabilization of the project, the residential components will generate substantial cash flow... which will allow them to successfully refinance and repay the senior and EB-5 loan."

Today, that strategy provokes questions, since only four buildings--two "100% affordable," one 50% affordable, one condo--have been built, and surely have their construction loans to pay off first.

While the official line is that EB-5 investments create jobs, as I've written, in 2017 for City & State, Mastroianni, at a little-noticed November 2016 panel in Shanghai for EB-5 insiders, undermined that claim.

"Projects that don't typically need the capital are the projects that we look to lend money on," he said, on video. "If a project can't be developed without the EB-5 capital, it's not a project that you should be looking to invest in, because you've got a desperate situation."

Also, as I wrote in December 2016, I came across some glaring deception on the page of the New Jersey Regional Center, another arm of the USIF, which was raising money for Trump Bay Street, the Trump-branded (but not developed) tower in Jersey City.  The marketing materials claimed that Jersey City was the state's capital (actually, it's Trenton) and that it was known "as Manhattan's Back Garden."

A web of connections

A few connections: former Empire State Development Corporation Chairman Charles Gargano works for USIF. Not only did Forest City Ratner pay Park Strategies, former Sen. Alfonse D'Amato's lobbying firm, to lobby on EB-5 issues, so did USIF.

And Trump lawyer Michael Cohen, as the Wall Street Journal reported last May, helped a law and lobbying firm gain as a client USIF, at that point framed as having ties to Kushner Cos., the family company of White House adviser Jared Kushner.

Guo case, redeployment message, U.S. Immigration Fund by Norman Oder on Scribd