Is the EB-5 loan middleman a Prohibited Person? If so, should Empire State Development have been dealing with him?

The key dealmaker in the future of Atlantic Yards/Pacific Park, who brokered the two EB-5 investor visa loans that led to the foreclosure of developer Greenland USA's rights to develop six platform sites, raises some big questions.

I'm not sure that Empire State Development (ESD), the state authority that oversees/shepherds the project, has considered them, at least not publicly.

The middleman

In 2014 and 2015, ESD consented to two loans, from AYB Funding 100 and AYB Funding 200, affiliates of the U.S. Immigration Fund (USIF), a "regional center" or loan aggregator, and borrowers (AY Phase II Mezzanine and AY Phase III Mezzanine), affiliates of Greenland USA, the project sponsor and master developer.

Those loans totaled $349 million. With only partial repayment, the remaining $286 million debt is in foreclosure, with the collateral--the rights to build six towers over the Vanderbilt Yard--pending transfer to a new developer. That is said to be Related Companies. 

The negotiations presumably involve the USIF, Related, Greenland (?), and ESD.

We may learn more tomorrow at a meeting of the Atlantic Yards Community Development Corporation (AY CDC)--at least if the discussion is not confined to an Executive Session, which I think is dubious.

If it does proceed to an Executive Session, that implies it involves "the proposed acquisition, sale or lease of real property... held by such public body, but only when publicity would substantially affect the value thereof."

But the AY CDC doesn't hold property. Its parent ESD does, but I'm not sure it does (yet) in this case. 

If it does, that raises a key question about whether it should even be dealing with a Prohibited Person, a category I believe applies to USIF head Nicholas Mastroianni II.

What's a Prohibited Person

A Prohibited Person, according to the Atlantic Yards Development Agreement, means, in part:

Any Person (A) who has been convicted in a criminal proceeding for a felony or (B) who, directly or indirectly controls, is controlled by, or is under common control with a Person who has been convicted in a criminal proceeding for a felony 

A Person can be a company, as well. So that seems to apply to Mastroianni. As Fortune magazine reported in October 2014, The tangled past of the hottest money-raiser in America's visa-for-sale program:

Between 1985 and 1993, court records show, Rhode Island police arrested Mastroianni four times for felony possession of a controlled substance. He pleaded no contest four times, and received a suspended sentence and probation each time. (“It happened,” Mastroianni says through a spokesperson. “It’s the past, life goes on and people move on.”)

(Emphases added) 

[Updated] He was charged with a felony and pleaded no contest, but it's not clear if he pled to a reduced charge. If he pleaded no contest to a felony (rather than a reduced charge), it's still a conviction.

Note that ESD can waive enforcement. As I argued in 2015, when Barclays admitted a felony, it should've lost naming rights to the Brooklyn arena.

The loan agreement

Various project documents prohibit dealings with a Prohibited Person. From the first EB-5 Consent Agreement with a USIF affiliate:

in the event the membership interests in Owner are transferred to Lender, or any other party, as a result of a foreclosure... such transfer shall comprise an Event of Default under the Interim Lease except to the extent such Transferee, prior to succeeding to the ownership of Owner, provides written evidence to ESD that such Transferee (x) is a Permitted Developer (as defined in the Interim Lease) or has engaged a Permitted Developer, and (y) is not a Prohibited Person, which evidence in each case is acceptable to ESD in its sole discretion 

According to the Atlantic Yards Development Agreement, no transfers from the developer shall be permitted without ESD's consent, nor can it be to a Prohibited Person.

However, it's unclear whether a foreclosure means a USIF affiliate actually gains ownership interests, and at one point during the transfer.

A Prohibited Vendor?

Perhaps more on point, the USIF may have been a Prohibited Vendor, according to the Development Agreement:

14.1 Prohibited Vendors. Neither BALLC, AYDC, Interim Developer or their respective Affiliates nor any Person under contract with BALLC, AYDC, Interim Developer or their respective Affiliates in connection with the Project shall contract with, or except as otherwise set forth herein, permit the performance of any work or service by a Prohibited Person or any Person who shall become a Prohibited Person on any portion of the Project Site, so long as such portion of the Project Site is owned by ESDC. The determination of whether a Person is a Prohibited Person as of a specific date shall be made by ESDC in accordance with the State Funding Agreement and the Project Leases (as applicable).

Note the poor drafting of the sentence: "shall contract with, or except as otherwise set forth herein, permit..." Obviously, the comma should have come after the word "or."

Even with that presumed clarification, the sentence remains ambiguous. Does the important qualifier, "so long as such portion of the Project Site is owned by ESDC" apply only to "performance of any work or service" or does it also include "contract with"? I suspect both.

If that provision is limited to contractors involved with only portions of the project site owned by ESDC, what's the rationale? Perhaps because, once a property has been turned over to new developer ownership, it's their problem.

But what if the property is owned by another arm of the state, the Metropolitan Transportation Authority, which still holds rights to the railyard?

Isn't USIF part of the transaction under discussion? Remember, a justification for Executive Session at the meeting tomorrow is "the proposed acquisition, sale or lease of real property... held by such public body."

If so, that should bar a Prohibited Person.

Bonus from Fortune

The Fortune article cited orchestrated testimonial letters, including one from Michael Villella, finance director for the town of Jupiter, FL, who more candidly told the publication, “Do I think he’s the most forthright guy in the world? No. But did he do a good job here? Yes.” 

He said Mastroianni would renege on paying if "he didn’t like the work product he got."