Bad shorthand: "the lender" in EB-5 funding isn't the (middleman) regional center, but the immigrant investors. Also, Related's questionable EB-5 record.

As the foreclosure auction of rights to six Atlantic Yards/Pacific Park railyard sites remains pending, it's worth trying to untangle the parties, and to recognize that common public shorthand about "the lender" is misleading and wrong.

The EB-5 Immigrant Investor Program, in which immigrants investing in a purportedly job-creating enterprise in exchange for green cards for themselves and their families, isn't like banking at all. The "lender" doesn't face the kind of regulation banks face. 

It isn't even like private lending in the real-estate industry. 

Rather, the "lender" regularly cited is the manager of a fund created not from his own company's assets, but from the immigrant investors.

Better to call Nicholas Mastroianni II "the guy in control of the lender."

Drilling down

Greenland USA, initially with partner Forest City Ratner, raised $249 million and $100 million in two tranches. After a partial repayment, it owes about $286 million. 

For the first EB-5 loan organized by the U.S. Immigration Fund (USIF), a private company (or "regional center") that recruits investors, Empire State Development (ESD), the state authority that oversees/shepherds the project, required various parties to sign a letter consenting to various conditions.

Those included the borrower, AY Phase II Mezzanine, and the Owner (of collateral), AY Phase II Development Company, both affiliates of developer Greenland USA.

The other party was AYB Funding 100, the lender, but the controlling entity was AYB Funding 100 GP, its manager, with the signatory executed by NYC 400 Investments, its manager Mastroianni. 

In other words, the control is in the hands of someone with a sketchy record who put up no money and, thanks to advantageous contractual language, has no obligation to act in the best interest of the investors. 

Consider the language, at right, from the Offering Memorandum for that loan, $249 million:

Fiduciary Duties Limitation. To the fullest extent permitted by law, to the extent that, at law or in equity, the Manager owes any fiduciary duty to the Company pursuant to this Agreement, such duty is hereby eliminated pursuant to Section 18-1101(c) of the INA Act, it being the express intent of the Manager that no Manager shall owe any fiduciary duties of any nature whatsoever to the Company; provided, however, that, notwithstanding any provision hereof, such Manager shall be subject to the implied contractual covenant of good faith and fair dealing.

That offers a considerable loophole. 

It's also bad drafting, since I'm pretty sure it's Section 18-1101(c) of the Delaware Limited Liability Company Act.

Indeed, that's is cited in the Offering Memorandum for the second loan, $100 million, in excerpt above right, indicating "Exculpation and Indemnification of the Manager and its Designees."

Consider additional language, at right, from that second Offering Memorandum:

The Manager will control the Company [AYB Funding 200, the lender], subject to certain rights granted to the Members. As a result, the Manager will have the power to approve transactions and agreements between the Company and the Manager, the USIF New York Regional Center and their affiliates. Such transactions and agreements may involve actual or potential conflicts of interest due to the financial relationships between the parties and the common ownership of the Manager and the USIF New York Regional Center.

Common shorthand

My coverage in June  of a meeting of the advisory Atlantic Yards Community Development Corporation (AY CDC), offered the first hint that the six railyard development sites (B5-B10), encompassing nearly 3.5 million square, may have interest from a developer. 

(Later, The Real Deal suggested that developer was Related Companies, responsible for the Time Warner Center and Hudson Yards and thus with experience decking railyards.)

ESD "is being presented with a plan for a new developer to be brought in," said AY CDC President Anna Pycior, who serves as ESD's Senior VP, Community Relations. "Negotiations are ongoing. The parties are talking with the lender about bringing in new development partners."

Who's the lender?

The "lenders" are two special-purpose entities, AYB Funding 100 and AYB Funding 200, created and managed by the USIF, which is the biggest company raising EB-5 funds by recruiting visa-seeking investors, mostly from China, with pomp and promises.

At an AY CDC meeting in January, ESD attorney Richard Dorado more accurately described the USIF as "the EB-5 aggregator."

At an AY CDC meeting in March, AY CDC Director Gib Veconi followed up on my reporting regarding the USIF's questionable behavior by citing "the lender," prompting a reply from Joel Kolkmann, ESD's Senior Vice President, Real Estate referring to "the lender."

Similarly, in statements by public officials and the press regarding the Nassau Coliseum EB-5 loans, Mastroianni was referred to as "the lender." 

Yes, he acts on behalf of the lender, but that's because his company wrote the contracts.

Who gets paid back?

Why is that "lender" shorthand misleading?

Consider: if and when Greenland USA, or a new investor, pays back the loan, it wouldn't repay the manager. It would repay back the investors, who each pooled $500,000 of their money with the USIF-created entities.

So the USIF, led by the questionable Mastroianni, is controlling the negotiations as manager, but it didn't put up the money for the loan. The interests of the USIF (fees) and the actual investors (getting repaid) aren't necessarily in sync.

Indeed, it's unclear how Fortress Investment Group, a past USIF partner, got a piece of the debt, as the Real Deal reported. Did Fortress pay a fee--at a discount to value?--that was distributed to investors?

What's a regional center?

A regional center isn't akin to a bank or even a finance company like Madison International Realty, which previously made loans to Atlantic Yards.

It's "an economic unit, public or private, in the United States, involved with promoting economic growth," according to the federal agency overseeing investor visas.

The EB-5 trade group Invest in the USA (IIUSA) says a regional center "facilitates investment in job-creating economic development projects by pooling capital raised under the EB-5 immigrant investor program."

The USIF states, on the FAQ page:

USIF organizes and manages new commercial businesses that foreign investors can invest in, for the purpose of obtaining a U.S. Visa under the EB-5 program. USIF owns regional centers that manage the EB-5 process through foreign agents, immigration attorneys and the U.S. Citizenship & Immigration Services (USCIS). The process includes business plans and reporting as well as preparation of the securities offering documents that meet USCIS requirements.

However, because the contracts with investors, known as private placement memorandums (PPMs) leave the manager--an affiliate of the USIF--in control, that means Mastroianni can effectively act as "lender" and make decisions that may not reflect the best interest of the investors.

Loan risks

The IIUSA notes that EB-5 investments are made through private placements of securities, and neither an investment return nor a return of the investment principal can be guaranteed.

Given those risks, you'd think interest rates would be far higher than standard. 

Instead, they're much lower, because the investors, who stand to gain green cards for themselves and their family members thanks to a purportedly "job-creating" investment, don't care about return. (They do want their money back.)

Given such low interest rates compared with conventional financing options, no wonder a finance broker likened EB-5 to "legalized crack cocaine."

How a loan works

As explained by EB5AN (EB-5 Affiliate Network), a regional center will manage the investor’s funds and "provide a development project and new commercial enterprise (NCE) for the funds to be invested in."

The NCE is a special purpose fund, in this case AYB Funding 100 and 200, that will disburse the loan. (Today, the minimum per investor is $800,000, though it was $500,000 during the Atlantic Yards fundraising.

"The funds are then placed into escrow until they are released to the borrower—which is the job-creating entity (JCE)–in other words, the EB-5 project," according to EB5AN.

The regional center, NCE, and JCE "agree on the terms of the loan" like maturity date and interest rate, according to EB5AN. 

The problem, unmentioned, is the commonality of interest when the regional center and NCE have the same managers.

According to EB5AN, while regional centers "are experienced in preparing business plans, economic impact reports," and other required documents, "loan agreements are often overlooked."

Or, perhaps, they're negotiated in the regional center's interest.

The equity model

EB5AN also describes an EB-5 investment structured as equity in the project, either direct or indirect. In those cases. there's no set repayment date, though there's typically a target.

Consider the example of Hudson Yards. Developer Related Companies--which may take over the remaining parcels in Atlantic Yards/Pacific Park--raised more money via EB-5 than any other project, nearly $1.6 billion (though other sources differ), compared with $577 million with Atlantic Yards. (The first $228 million of the latter was repaid.)

While Related's EB-5 website is defunct, it is viewable via the Internet Archive. It notes, "Related operates its own EB-5 regional centers offering subscribers direct access to the project developer." 

So Related's own regional center raised money from thousands of immigrant investors, mainly from China, to invest in Related. But it was a different model. As Bloomberg reported Aug. 28, 2020:

At Hudson Yards, roughly 2,000 EB-5 investors poured US$1 billion into the Manhattan project through a series of deals, according to a demand for arbitration filed recently by Chicago lawyer Doug Litowitz. The investors were unsophisticated about U.S. real estate, according to Litowitz, and were told by the Chinese firm that helped Related raise money that they would be repaid following approval of their work visas, known as green cards.

But the funding was structured as a preferred equity investment, not a loan, and there was no fixed timetable for returning the money

So when the pandemic hit, Related claimed declining revenues meant no repayment.

Where do things stand now? Related didn't answer my queries. Litowitz told me he thinks there are at least 2,600 investors (so, $1.3 billion), but doesn't know the total.

"Related made a big show of fully repaying about five investors in a giant press release that went all the way to China," Litowitz stated in response to my query, "but in reality they have not repaid the 2600 more than a nominal amount."

More circularity

As Litowitz, who represents aggrieved investors, wrote Dec, 1, 2018, The EB-5 Program is Legally Defective and has Become a Scam:

Greed is a powerful motivator. When you give a developer hundreds of millions of dollars of foreign money from nameless and faceless people who cannot monitor the investment, and the developers know that the money doesn’t have to be returned for a decade or more, there is too great a temptation to waste the money or abuse the investors. And when the developer itself is put in charge of the EB-5 Fund, the developer is effectively both the borrower and the lender, so it has no incentive to act on behalf of the lenders who are Chinese investors.

(Emphases added) 

As noted, with Related, it wasn't quite a loan, but effectively it served as the entity providing the new funds.

Either way, Related would not be repaying the regional center--itself!--but the individual investors. They're still complaining that they haven't been repaid.

Litowitz added:

Breach of Fiduciary Duties... the Chinese investors put their money into an EB-5 fund that is controlled by the developer who then instructs the Fund to loan money to the developer’s construction company. The Chinese are funding the developer’s left hand which then lends money to his right hand. This is an inescapable, fatal conflict of interest: no developer will effectively lend money to itself and then declare itself in default.

However, relegating complaints to arbitration limits relief.