Another questionable EB-5 transaction: immigrant investors in Atlantic Yards advised by middleman USIF to move their funds to a (purportedly) less risky investment
Not just Nassau Coliseum immigrant investors (as I reported last week) have been advised by the manager of their investment—an affiliate of the “regional center” that orchestrated the loan—to move their funds to the same purportedly safer project.
The 200 investors from China who in 2014 put $100 million into Atlantic Yards, in the third round of fundraising for that project under the federal EB-5 program, received similar advice in October. They've been encouraged to move $50 million to a project in Manhattan called 1568 Broadway.
The 200 investors from China who in 2014 put $100 million into Atlantic Yards, in the third round of fundraising for that project under the federal EB-5 program, received similar advice in October. They've been encouraged to move $50 million to a project in Manhattan called 1568 Broadway.
Why? Because—according to the machine translation of a document in Chinese I saw—the Atlantic Yards investment is risky.
It's unclear how many investors have agreed. And it’s unclear, as I’ll explain below, how this even works in the first place. (That said, the parties involved have lawyers.) I couldn't get responses from any of those involved, including the U.S. Immigration Fund, Atlantic Yards/Pacific Park developer Greenland USA, or 1568 Broadway.
The background
Under the EB-5 program, borrowers—usually real-estate developers—get below-market financing from those investors, who care more about getting green cards for themselves and their families than earning much of a return. They may sign contracts without fully understanding the terms, and the risks.
The policy justification for EB-5 is that each $500,000 investment (increased last year to $900,000) should create ten jobs, but the job-creation math is enormously generous, and the EB-5 loan, as experts say, often serves as profit enhancement, not crucial seed funding.
Along with the borrowers gaining below-market interest, the winners are typically those privately-operated regional centers, which earn fees on each application as well as most of the interest paid by the borrower on the interest-only loan.
In 2010, the New York City Regional Center raised $228 million from EB-5 investors, mostly in China. It was one of the first, and most prominent, fund-raising efforts, as the real-estate industry soon took up EB-5 in earnest. I collected my coverage under "Anatomy of a Shady Deal."
In 2014, the U.S. Immigration Fund raised $249 million in what was dubbed “Atlantic Yards II,” and $100 million in what was dubbed “Atlantic Yards III.” USIF is the country’s busiest regional center, led by Nicholas Mastroianni II, whose rise in the EB-5 business was hardly slowed by a tough 2014 article in Fortune on his tangled past, involving unpaid debts and lawsuits.
With Atlantic Yards III, the project developer agreed to pay 4.5% interest, perhaps one-third of the going rate for a risky mezzanine loan, while the investors got a measly .25%, $1,250 a year, diminished by a required $1,000 annual service fee, even as they paid tax on “phantom interest” paid by the borrower but not distributed to them.
Since then, the numbers have changed. In a 12/21/18 press release, USIF announced a mezzanine loan of $494 million—implying 988 investors, at $500,000 each—to the 1568 Broadway project.
How much EB-5 money is in 1568 Broadway now? In the document shared with Atlantic Yards investors, USIF identified the initial mezzanine loan to 1568 Broadway as $350 million, not $494 million. That implies some adjustment and/or other transactions--but I didn't get a response to my question about that.
The benefit to USIF of the proposed arrangement is unspecified, but we have a clue.
The $100 million Atlantic Yards III loan is supposed to mature no later than May 1, 2021, with the possibility of two one-year extensions, to May 1, 2023, with an extension fee of 0.25% for each extension.
(By contrast, the $249 million Atlantic Yards II is supposed to mature Dec. 31, 2020, also with two one-year extensions with the same extension fees, to Dec. 31, 2022.)
The new document says that renovation work--again, machine translation, see below--at 1568 Broadway is expected to be completed by the end of 2021.
That seems a stretch or, perhaps selective phrasing.
It's unclear how many investors have agreed. And it’s unclear, as I’ll explain below, how this even works in the first place. (That said, the parties involved have lawyers.) I couldn't get responses from any of those involved, including the U.S. Immigration Fund, Atlantic Yards/Pacific Park developer Greenland USA, or 1568 Broadway.
The background
Under the EB-5 program, borrowers—usually real-estate developers—get below-market financing from those investors, who care more about getting green cards for themselves and their families than earning much of a return. They may sign contracts without fully understanding the terms, and the risks.
Also, investor advocate Zoe Ma has argued in court regarding other USIF projects that investors are actively misled, with key documents withheld—or never provided—before they commit to a investment.
Ma (aka Xuejen Makhsous) has regularly accused USIF—and its frequent partner, China-based migration agency Qiaowai—of fraud, with claims in two federal lawsuits unresolved. Journalists from Reuters and the New York Times in 2017 also highlighted blatantly dishonest marketing, prompting a Senator's call for a federal investigation, though it's unclear if anything proceeded.
Ma (aka Xuejen Makhsous) has regularly accused USIF—and its frequent partner, China-based migration agency Qiaowai—of fraud, with claims in two federal lawsuits unresolved. Journalists from Reuters and the New York Times in 2017 also highlighted blatantly dishonest marketing, prompting a Senator's call for a federal investigation, though it's unclear if anything proceeded.
Ma, who represents the interest of EB-5 investors in one lawsuit and has done so in past lawsuit, laments the lack of oversight from federal agencies like the Securities and Exchange Commission.
The policy justification for EB-5 is that each $500,000 investment (increased last year to $900,000) should create ten jobs, but the job-creation math is enormously generous, and the EB-5 loan, as experts say, often serves as profit enhancement, not crucial seed funding.
Along with the borrowers gaining below-market interest, the winners are typically those privately-operated regional centers, which earn fees on each application as well as most of the interest paid by the borrower on the interest-only loan.
Atlantic Yards and EB-5
Developers of Atlantic Yards/Pacific Park pursued three rounds of EB-5 fundraising, through two different middlemen.
In 2010, the New York City Regional Center raised $228 million from EB-5 investors, mostly in China. It was one of the first, and most prominent, fund-raising efforts, as the real-estate industry soon took up EB-5 in earnest. I collected my coverage under "Anatomy of a Shady Deal."
In 2014, the U.S. Immigration Fund raised $249 million in what was dubbed “Atlantic Yards II,” and $100 million in what was dubbed “Atlantic Yards III.” USIF is the country’s busiest regional center, led by Nicholas Mastroianni II, whose rise in the EB-5 business was hardly slowed by a tough 2014 article in Fortune on his tangled past, involving unpaid debts and lawsuits.
With Atlantic Yards III, the project developer agreed to pay 4.5% interest, perhaps one-third of the going rate for a risky mezzanine loan, while the investors got a measly .25%, $1,250 a year, diminished by a required $1,000 annual service fee, even as they paid tax on “phantom interest” paid by the borrower but not distributed to them.
The rest of the interest went to the Manager, an affiliate of USIF, the country’s busiest regional center. It's possible some of the annual interest was redistributed to Qioawai—a practice Ma has called kickbacks in a lawsuit regarding another USIF project.
In that case, she noted that investors, who’d relied on Qiaowai for advice, wouldn’t have done so had they known the full arrangement, which, she's argued, redistributed a portion to migration agents who recruited the investors.
The reinvestment
Investors in Atlantic Yards III in October received a document in Chinese asking them to consent to a reinvestment of $50 million, given the risks in the local commercial real estate market. It's unclear if this is a shift of half the $100 million loan, or a discount of 50 cents on the dollar.
Investors in Atlantic Yards III in October received a document in Chinese asking them to consent to a reinvestment of $50 million, given the risks in the local commercial real estate market. It's unclear if this is a shift of half the $100 million loan, or a discount of 50 cents on the dollar.
It’s unclear how this would work, since, as far as I know, they money hasn’t been repaid, the typical spur for "redeployment," as I explained last week.
One hint may come from lawyer Douglas Litowitz, who has battled regional centers on behalf of EB-5 investors, charging in a 5/25/19 article that Most EB-5 Companies are Ponzi Schemes, though he more precisely suggests they use similar tactics. One example:
The first deceptive tactic is to move money amongst their funds to create the illusion that all the funds are still alive and viable. The money is easy to move around because the same entity is typically the general partner for all of the funds.
I don't know if that template applies in this case, since it's unclear if the same entity is the general partner, and Litowitz was addressing neither this specific case nor the principals involved. But his article certainly points in a direction for inquiry.
The reinvestment would go to 1568 Broadway (aka TSX Broadway), which involves demolishing the former Doubletree Hotel in Times Square for a newer hotel, part of a 46-story tower, renovating the Palace Theater onsite, building “experiential retail” and leasing valuable signage. It was described as a $2.5 billion project when demolition began in November 2019.
Unsurprisingly, 1568 Broadway is a project for which USIF has previously raised funds and is still recruiting investors—and, presumably, earning fees and interest.
Lawyers for an unrelated group of EB-5 investors who resisted what they called a coercive move of their funds to1568 Broadway charged a conflict of interest, in July 2018 noting that, “USIF and Mastroianni-controlled affiliates are already participating in the [1568 Broadway] deal as a lender higher in the capital structure” than the EB-5 investors.
Ma told Bisnow in March 2019 that the 1568 project structure disadvantaged the immigrant investors’ mezzanine loan. "[It's] a scheme to rob Chinese EB-5 investors," she said.
What's going into 1568 Broadway?
Unsurprisingly, 1568 Broadway is a project for which USIF has previously raised funds and is still recruiting investors—and, presumably, earning fees and interest.
Lawyers for an unrelated group of EB-5 investors who resisted what they called a coercive move of their funds to1568 Broadway charged a conflict of interest, in July 2018 noting that, “USIF and Mastroianni-controlled affiliates are already participating in the [1568 Broadway] deal as a lender higher in the capital structure” than the EB-5 investors.
Ma told Bisnow in March 2019 that the 1568 project structure disadvantaged the immigrant investors’ mezzanine loan. "[It's] a scheme to rob Chinese EB-5 investors," she said.
What's going into 1568 Broadway?
The role of EB-5 funds in this 1568 Broadway project seems to be growing, as I wrote last week. While the USIF web site says it’s recruiting 600 investors for that project, that statement may be out of date. After all, in July 2016, the Real Deal reported that Maefield Development, a main developer of the project, sought $300 million from 600 EB-5 investors, via USIF.
Since then, the numbers have changed. In a 12/21/18 press release, USIF announced a mezzanine loan of $494 million—implying 988 investors, at $500,000 each—to the 1568 Broadway project.
The implies multiple transactions. Early in 2019, a document shared with Atlantic Yards investors, who'd been asked to redeploy $63 million repaid from the $249 million EB-5 loan, stated that $494.5 million in mezzanine loans included both EB-5 capital--presumably the initial investors--and redeployed capital.
How much EB-5 money is in 1568 Broadway now? In the document shared with Atlantic Yards investors, USIF identified the initial mezzanine loan to 1568 Broadway as $350 million, not $494 million. That implies some adjustment and/or other transactions--but I didn't get a response to my question about that.
In January 2019, New York Real Estate Journal reported that the 1568 Broadway project was “fully capitalized,” according to L&L Holding Company, Maefield, and Fortress Investment Group, which cited an equity investment from UBS, and a construction loan from Goldman Sachs. Apparently, more money was needed.
Terms of the deal
The shift from Atlantic Yards III to 1568 Broadway was described as time-sensitive. Investors would get a 3% return, at least on paper, subject to certain service charges and with .9% of that total kept in reserve. That’s a significant boost than their microscopic .25% return.
The shift from Atlantic Yards III to 1568 Broadway was described as time-sensitive. Investors would get a 3% return, at least on paper, subject to certain service charges and with .9% of that total kept in reserve. That’s a significant boost than their microscopic .25% return.
The benefit to USIF of the proposed arrangement is unspecified, but we have a clue.
In a 2018 lawsuit filed by investors in another EB-5 project who said they were being coerced into moving their money to 1568 Broadway, an attorney criticized “Disproportionate Return to the Manager and Abnormally High Management Fees,” noting that the Manager would earn 9% annual interest, while the investors got 3%.
Risks prompting the move?
Risks prompting the move?
It’s unclear what factors led to the assessment that the Atlantic Yards loan was risky--it could, of course, be a self-interested marketing effort by USIF--but there are reasons for concern. The project is taking longer than once expected, and the residential real estate market has gotten tougher, especially given the pandemic.
There's also the question of security. The prospectus for Atlantic Yards III noted that security for the $100 million loan involved the rights to develop the buildings known as B9 and B10, which would be the last two towers, at the northeast block of the project site.
There's also the question of security. The prospectus for Atlantic Yards III noted that security for the $100 million loan involved the rights to develop the buildings known as B9 and B10, which would be the last two towers, at the northeast block of the project site.
That value would not be easy to unlock. Construction of those towers requires significant upfront commitment: the developer would have to pay the Metropolitan Transportation Authority for development rights over the Vanderbilt Yard and also build an expensive deck over the railyard, between Carlton and Vanderbilt avenues and Pacific Street and Atlantic Avenue.
So, even if those sites are buildable, it would take several years to get them started, much less deliver revenue to pay back the loan.
So, even if those sites are buildable, it would take several years to get them started, much less deliver revenue to pay back the loan.
Risks of the deal
Still, the 1568 Broadway project also involves significant number of risks, as disclosed in the document sent to EB-5 investors. It cites conflicts of interests, cost overruns, and questions surrounding both the hotel industry and tourism, given the coronavirus. It states that a third-party feasibility report would be provided on request.
The document acknowledges that the interest rate exceeds the return, and the Manager will keep various fees.
Timetable questions
Repayment is due at the end of 2022, but can be extended by two one-year periods, to the end of 2024. By moving their money to a project that promises repayment by 2024, the investors would be repaid later than if the Atlantic Yards schedule is met.
Still, the 1568 Broadway project also involves significant number of risks, as disclosed in the document sent to EB-5 investors. It cites conflicts of interests, cost overruns, and questions surrounding both the hotel industry and tourism, given the coronavirus. It states that a third-party feasibility report would be provided on request.
The document acknowledges that the interest rate exceeds the return, and the Manager will keep various fees.
Timetable questions
Repayment is due at the end of 2022, but can be extended by two one-year periods, to the end of 2024. By moving their money to a project that promises repayment by 2024, the investors would be repaid later than if the Atlantic Yards schedule is met.
(By contrast, the $249 million Atlantic Yards II is supposed to mature Dec. 31, 2020, also with two one-year extensions with the same extension fees, to Dec. 31, 2022.)
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| From the document |
The new document says that renovation work--again, machine translation, see below--at 1568 Broadway is expected to be completed by the end of 2021.
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| Machine translation of the above text |
YIMBY reported last April that TSX Broadway will deliver the dedicated commercial spaces to tenants by 2021, while the entirety of the project is expected to be completed sometime in 2022.
The letter to Nassau Coliseum investors stated differently: “Despite the impact of the COVID-19 pandemic on construction projects in New York City, the [1568] Project remains reasonably on time to be completed by the third quarter of 2022, which is likely to be significantly after the effects of the pandemic are felt on the economy.”
As I wrote, that’s questionable as well, since pre-pandemic tourism levels, as the New York Times reported 12/1/20, aren’t expected to return until 2024.
As I wrote, that’s questionable as well, since pre-pandemic tourism levels, as the New York Times reported 12/1/20, aren’t expected to return until 2024.
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