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With changes to Nassau Coliseum lease pending, new leaseholder—middleman for loan—advises EB-5 investors to move their money for safer return. That suggests more $ for middleman, raises questions about legitimacy.

At a 4/13/15 hearing of the Nassau Legislature, when asked if Nassau County faced any risk from approving EB-5 financing for Nassau Coliseum renovations from immigrant investors via the controversial firm U.S. Immigration Fund, Josh Meyer, an attorney for the county, said, “ultimately it would be no different than if you were going to a bank.” Not at all, it turns out.

The Nassau Coliseum saga has gotten more complex—and raised more troubling questions—since Mikhail Prokhorov’s Nassau Events Center in June walked away from the lease to the county-owned building, seemingly leaving the immigrant investors who funded the arena renovation as key players.

From letter to Nassau Coliseum investors
In reality, documents suggest they’re pawns, since the middleman who orchestrated the $100 million loan, earning fees and keeping nearly all the interest, is in charge. 

It seems akin to a mortgage default that leaves the mortgage broker, not the mortgage issuer, in charge.

As amendments to the Coliseum lease await a vote by the Nassau Legislature, that new leaseholder has told the 200 immigrant investors—who funded an entity called Nassau Coliseum Funding 100—that they shouldn’t expect their debt to be repaid for years.

Rather, they were advised to move their money to a purportedly safer and more remunerative project in Times Square, based in part on a rosy valuation estimate made before the pandemic upended tourism.

It’s unclear how such financial machinations would work, given that federal rules permit moving an EB-5 investment—a process known as redeployment—only after the loan is repaid. (Few questions were raised in Newsday's exclusive, published yesterday, headlined Coliseum leaseholder urges investors to move money to another project.)

Impact on Coliseum?

Moreover, this sets up a potential outcome in which the middleman “regional center” that organized the original loan earns new profits from that transferred investment, and--I speculate--has little commitment to the Coliseum, to which the New York Islanders and other events are expected to return. 

Mastroianni, in a statement to Newsday, said otherwise: "This letter is a regular communication to our investors. The possible actions outlined in the letter have no impact on the operations of the Coliseum or the long-term success of the Nassau Hub development." 

That, to me, is bluffing: it obscures the financial machinations involved, the incentives for Mastroianni, and the possibility that those investors might resist.

Note that I couldn't get answers from either Nassau County or the U.S. Immigration Fund (USIF), the Florida-based, privately-owned investment promoter that orchestrated the original loan. Newsday couldn't get any comment from Nassau County, either, which referred comment to Mastroianni.

But the 12/1/20 letter (bottom) from the USIF encouraging investors to move their money raises questions, as did an advocate for EB-5 investors, who considers the deal unfair to them.

I’m not sure that the letter was sent to County officials (before I--or, perhaps, Newsday--did so), much less the legislators who will have to approve lease amendments at a session next month. It certainly hasn’t been discussed publicly, so it deserves scrutiny.

Who gains, under EB-5?

The machinations reflect the organization of, incentives behind, and income possibilities from investor visas under the EB-5 program, in which borrowers—usually real-estate developers—get cheap financing from immigrant investors.

Those investors, mainly from China, 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, or the risk.

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 Qioawai—of fraud, with claims in two federal lawsuits unresolved. She laments the lack of oversight from federal agencies like the Securities and Exchange Commission.

Nassau Coliseum EB-5 promotion in China
Note that regional centers like the USIF are often deceptively named, implying government involvement, and projects are often marketed misleadingly, such as by hyping hockey at the Nassau Coliseum, which as of then was losing its National Hockey League team, the New York Islanders, to Brooklyn.

Occasional tough news coverage—such as when Alexandra Harney of Reuters in May 2017 caught Qiaowai making improper promises to investors and the New York Times, via Javier Hernandez and Jesse Drucker, found similarly—trigger calls for investigation, but with little result.

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.

The Nassau Coliseum deal

For example, the EB-5 investment into Nassau Coliseum via USIF went into two buckets, a $75 million Building Loan, at 4.65% per year, perhaps one-third of the going rate for a risky mezzanine loan, and a $25 million Project Loan, at 5.19%. 

The security, according to the project’s Offering Memorandum: mortgages on the Coliseum Ground Lease and a security interest in rights to develop around the Coliseum, a project known as the Nassau Hub.

The immigrant investors got a measly .25% in interest, 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, led by Nicholas Mastroianni II, whose rise in the EB-5 business was hardly slowed by Peter Elkind's tough 2014 article in Fortune on his tangled past, involving unpaid debts and lawsuits. 

(Newsday's article references none of that, though it does observe that USIF "has had ties to influential politicians" such as Rudy Giuliani, Jared Kushner, George Pataki, U.S. Sen. Alfonse D’Amato. That means business relationships.)

Investors into Nassau Coliseum 100 also had to put up a $50,000 administrative fee, or 10% of their $500,000 investment. That might be worth it if the investors get their visas and their money back, but that’s not necessarily a sure thing.

Some part of the investors’ administrative fees would go back to brokers like Qiaowai as fees “for obtaining subscriptions and for documentation services,” a disclosure stated. None of the capital contribution would go to those brokers.

Beyond that, it’s possible some of the annual interest was redistributed to Qiaowai—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.

A remarkable switch

Regarding the Coliseum, evidence suggests a remarkable sequence, in which a new limited liability company, Nassau Live Center, LLC, has taken over the lease, though it’s unclear whether its principals made any investment.

In an 8/20/20 press release, Nassau County Executive Laura Curran announced Nassau Live as the County’s new tenant, saying it had replaced Prokhorov’s Nassau Events Center.

“Nassau Live is an affiliate of Coliseum lender US Immigration Fund,” the press release said. While Nassau Live may indeed be an affiliate, the phrasing was misleading, because the USIF was not the lender, but the orchestrator for that loan. Still, Mastroianni was soon referred to in Newsday articles as the lender.

Newsday, in an 8/21/20 article about the new tenant, described what seemed to be a routine sequence. “Under the terms of the Coliseum lease, the lender — Mastroianni in this instance — steps in when the leaseholder defaults.” 

But that distorts the specifics and reflects that, contra County attorney Meyer’s 2015 statement, it’s not the same as going to a bank.

How was the lease transferred?

The lease terms seem obscured in the county’s August press release: “The transfer of the Lease from [Prokhorov’s] NEC to USIF’s designee, Nassau Live, is as of right by operation of the Lease and is on the same terms as those contained in NEC’s original 2013 lease with the County.”

That suggests that the investors were subordinate to USIF, the agent and manager for the loan, in designating the new leaseholder. If so, that may reflect contractual provisions that left the manager, a USIF affiliate, controlling Nassau Coliseum Funding 100, the entity (aka the Company) making the loan. 

The Offering Memorandum stated, “The Manager has the exclusive management and control of all aspects of the business of the Company."

However, the document also stated, “The leasehold mortgage would entitle the Company, upon a default by the Developer under the Loan, to obtain the rights of the Developer under the Coliseum Ground Lease,” 

That raises a question as to how Nassau Live Center, controlled by USIF, has taken over as borrower of the EB-5 loan and become the new leaseholder.

(The original July 18 2014 Offering Memorandum was incorporated into an updated October 9, 2015 Offering Memorandum expanding the overall investment from $90 million to $100 million, from 200 investors.)

One hint was, as is typical in EB-5 deals, acknowledgement of significant conflicts of interest that could disserve the investors:
Transactions between the Company and the Manager, the Regional Center, and the Developer, and their managers, members, directors, officers, or employees, may involve actual or potential conflicts of interest due to the financial relationships between the parties and the common ownership of the Company, the Manager, and the Regional Center.”
Who’s in control?

Newsday, in an 11/20/20 article published after a second county press release, wrote that “Mastroianni was next in line to take control of the lease because he had orchestrated the loan for the Coliseum’s 2015 renovation.” Yesterday's article stated similarly that Mastroianni took over the lease because his company orchestrated the loan.

If so, that obscured the oddity of the middleman’s clout, leaving questions about the sequence.

The new letter to investors indicates that leaseholder Nassau Live Center, controlled by USIF, has taken over as borrower of the extant $100 million EB-5 loan, leaving the Coliseum’s future performance to generate revenue to repay investors.

(In previous coverage and tweets, I mistakenly interpreted “affiliate,” the term used in the first county press release, to mean a company created by USIF but owned and/or controlled by the immigrant investors. I couldn't imagine that the middleman could become the leaseholder, but I was apparently wrong. That said, the Offering Memorandum suggests the investors should control the lease.)

Nassau County’s August press release noted that, even as rent payments were suspended, the deal “recovers payment of over $2.2 million in past due rent owed to the County.” That money—which also included utilities—came from the investors organized into the Company, Nassau Coliseum Funding 100. The source of the funds is unclear, perhaps reserves kept by that entity.

The value of the Nassau Hub

It seems unlikely that the Coliseum would soon deliver much revenue to Nassau Live--the arena may reopen next year--but the Coliseum lease provides entree into an ongoing plan to develop the area around the Coliseum, called the Nassau Hub, which is led by developer RXR and formerly involved Prokhorov’s Nassau Events Center as a junior partner.

The value of that share is unclear, but likely not insubstantial. Still, the letter to investors offered no indication that the Nassau Hub would have value to them, or whether such value was factored into the statement that “the borrower will have no ability to pay off the Loan.”

A spokesman for RXR told Newsday that the company was "very fortunate" Mastroianni stepped in, stating, "As we continue to move forward on a new dynamic live, work, play community in the heart of Nassau County, we have no concerns about a routine letter to investors and its impact on the development of the Nassau Hub." 

As described here, that "routine letter" obscures a lot.

Lease modifications coming

Nassau County, in its 11/20/20 press release, announced it was filing amendments to modify the Coliseum lease and also adjust the deadlines in the 2019 Hub plan.

The amendment would abate rent for six months after when “NYS Pause” occupancy restrictions are lifted on the Coliseum, not to extend past 2022. It also continues tenant responsibility for utilities, security and other maintenance of the arena and “ensures that the Coliseum can host” the Islanders and Nets, if permitted.

But “can host” does not necessarily mean “must host” for long. What if Nassau Live, with little or no revenue forecast and having seen the debt transferred to another project, walks away after the near term?

I asked a county press officer: Is Nassau Live obligated to continue operating the Coliseum? What incentive do they have, and are there penalties if they decide to walk away? I didn’t get an answer. But surely there is short-term incentive to operate before getting value from the Hub.

Investors told their Nassau investment at risk

In the recent letter, Nassau Coliseum Funding 100 investors were told their investment was in bad shape. Despite the suspension of rent, “the Coliseum generates little to no revenue, and it continues to lose substantial sums of money each month,” the letter said.

“Nassau Live Center (the new borrower of the EB-5 Loan and tenant under the Ground Lease for the property) has and will continue to suffer significant operating losses due to the pandemic, and the borrower has no ability to fund the payments of interest under the Loan,” the letter continued.

That raises a question as to why—and how long—Nassau Live Center would continue operating after the loan was moved. Again, one factor might be whether Nassau Live can extract value from its stake in the Nassau Hub plan.

The letter warned investors that the newly installed borrower likely won’t be able to pay off the loan by 10/31/23, the end of the last possible extension. “As a result, the term of the EB-5 Loan will need to be extended well into 2025 or later.”

A new opportunity in Times Square

According to the letter, “we wanted to present you with an opportunity to maintain your investment in the Company and (1) continue to have your investment be a part of the EB-5 Loan to the Nassau Coliseum project or (2) have your investment of $500,000 redirected into another project which the Manager believes is materially safer at this point.”

From TSX Broadway web site, which
 highlights various project components
That project is known as 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. 

Terms were not specified in the letter to Coliseum investors, though it’s possible that other documents would offer more details.

Might the money for Coliseum investors come in some complicated transaction with the 1568 developer? I sent several questions to that development team, but didn't get a response.

Fairness questions

Other questions may be raised about the fairness of the proposal. In an unrelated 2018 lawsuit, lawyers for EB-5 investors who resisted what they called a coercive move of their funds to 1568 Broadway charged a conflict of interest, 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, who’s filed federal whistleblower claims as well as suing USIF, told Bisnow in March 2019 that the 1568 project structure disadvantaged the immigrant investors’ loan. "[It's] a scheme to rob Chinese EB-5 investors," she said.

Defending a New York lawsuit in which USIF charged her and an attorney with fraud and defamation, Ma stated she’s “witnessed first hand how unsophisticated Chinese investors were induced into investing with unscrupulous EB-5 managers by their misrepresentation and false claims.” (The case was dismissed because of lack of jurisdiction.)

Now serving as an informal, pro bono advisor to some investors, Ma said she warned them that “1568 is a money black hole, that they would not see a dime.” Her rationale: EB-5 funds have been regularly invested into that project, even as TSX Broadway had been announced as fully funded.

1568 Broadway: more EB-5 investors, big questions
From U.S. Immigration Fund

The role of EB-5 funds in this 1568 Broadway project seems to be growing. 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 initial investors--and redeployed capital.

How much EB-5 money is in 1568 Broadway now? In a recent document shared with Atlantic Yards investors, USIF identified the mezzanine loan to 1568 Broadway as $350 million, not $494 million. That implies some change--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.

Appraisal value

The letter to Coliseum investors claims, “An independent appraisal of the 1568 Project shows a value on stabilization of approximately $4 Billion.”

Unmentioned: a $4.2 billion appraisal dates back to 2018, the Real Deal reported 6/6/18 and as shown in the screenshot below, from a 6/21/18 investor update that surfaced in court. That estimate relies on pre-pandemic assumptions, including project stabilization by 2023, surely an optimistic timetable.

Investor update, June 2018

“That’s a misrepresentation, given the pandemic,” Ma observed. “He [Mastroianni, of USIF] doesn’t provide an evaluation of the project after the pandemic.” Indeed, the Real Deal reported 10/29/20 that Business at city hotels down a stunning 90%, citing sales tax revenue.

The letter to Coliseum investors includes another optimistic assumption: “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.”

That’s questionable, since pre-pandemic tourism levels, as the New York Times reported 12/1/20, aren’t expected to return until 2024.

Indeed, in a recent document shared with Atlantic Yards EB-5 investors who also have been invited to shift their investment to 1568 Broadway, USIF acknowledged that the completion time was uncertain and that the coronavirus may hurt the hotel business. (I'll have separate coverage of that issue.)

A skewed deal?

The "routine letter" suggests a good deal for the Coliseum investors. “Lending the money to the 1568 will enable the Companies to increase the rate of return to the investors by 1200%,” it states. No details were specified, and the full terms—including whether the interest paid disproportionately favors Mastroianni's entities—are unclear.

But there are clues. A 1200% increase reflects a jump in interest from the previously announced .25% to 3%. With that seemingly similar proposal regarding a shift of Atlantic Yards EB-5 funds into 1568 Broadway, interest payments to investors are capped at 3%, with nearly one-third of that held in reserve, while the borrower pays an unspecified but higher interest rate.

How much might that be? 

In a 2018 lawsuit filed by investors in another EB-5 project who charged they were being coerced into moving their money to 1568 Broadway, an attorney criticized “Disproportionate Return to the Manager and Abnormally High Management Fees,” stating that USIF would earn 9% annual interest, while the investors got 3%. See screenshot.

Times Square project better than alternatives?

The 1568 Broadway redeployment loan is supposed to mature at the end of 2022, but can be extended until the end of 2024, according to the letter.

Coliseum investors were also told they could alternatively choose “a blended portfolio investment” identified by the manager, which “provides an increased return (1.5%-3.0%)”—“increased,” presumably, over the current Coliseum figure—but that could last until the end of 2025.

The projects were not specified, but that suggests a one-year delay compared to the 1568 Broadway investment term. Both terms would end sooner than the "well into 2025 or later" estimate for the Coliseum loan.

“To reiterate, you may choose to keep your investment in the Nassau Coliseum Project or authorize us to redeploy your investment into the 1568 Project [or the blended portfolio investment],” the letter states, advising that “based on the information available to us today, the 1568 Project will likely be repaid prior to the repayment of the Nassau Coliseum Loan.”

If the letter proves convincing to investors, that could set up a scenario in which the owner of the Coliseum lease has little or no debt—and less, if any, incentive to continue, at least past the resolution of the Nassau Hub.

Redeployment issues

It’s unclear how moving the Coliseum investment passes legal muster, though I acknowledge that these companies have well-paid lawyers designed to vet a complicated transaction.

Typically, redeployment takes place—as stated in the U.S. Citizenship & Immigration Services Policy Manual--once “the job creation requirement has been met”—after the initial loan is spent—“and the investment capital is returned or otherwise available.” 

The practice of redeployment reflects that fact that wait times for permanent residency, especially for Chinese investors, may exceed the typical seven-year period of a loan, and the investors’ funds must remain “at risk” during that waiting period.

TSX Broadway highlighted
That happened, for example, last year when $63 million of an Atlantic Yards EB-5 loan was paid off early, and USIF recommended 1568 Broadway (aka TSX Broadway) as one of the options for redeployment, as highlighted in the screenshot at right.

In the case of the Coliseum, however, there’s no announcement yet that the loan has been paid off, thus providing money to move. 

Update 12/14/20: I note this 5/25/19 article by lawyer Douglas Litowitz, who has battled regional centers on behalf of EB-5 investors, charging 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. But it certainly points in a direction for inquiry.

Independent advice?

Redeployment of EB-5 funds, as some industry experts wrote in 2017, can “raise issues of possible conflict of interest, breach of securities law and/or violation of fiduciary duty to investors.”

To avoid that, the experts recommended, among other things, “Engagement of an independent Registered Investment Advisor (RIA) to assess reinvestment options and communicate advantages and disadvantages to investors.”

There’s no indication of that in the four-page USIF letter; however, in a separate (but not dissimilar) redeployment proposal, Atlantic Yards investors were told that a third-party feasibility report would be provided on request.

Bottom line

Some of this analysis is speculative, based on partial information and without responses from the involved parties, and recognizing that even Newsday couldn't learn much.

But there should be enough red flags to provoke responsible government officials, including Nassau County Legislators, to ask some tough questions.