Unlike with the first EB-5 loan, ESD didn't require current creditors to hire an advisory professional. Nor did ESD retain an option to acquire the asset.

In November 2023, the creditors in charge of two loans--from immigrant investors under the EB-5 investor visa program--to Atlantic Yards/Pacific Park developer Greenland USA, with about $286 million outstanding, began foreclosure proceedings.

Since then, the project has been stalled, because the creditors--and it's a complicated transaction (see flowchart below and my article here)--have to form a joint venture to develop the six railyard development sites offered as collateral.

That joint venture has to qualify as a "permitted developer," involving a developer or construction manager with ten years of experience on large projects or--a possible loophole--an entity acceptable to Empire State Development (ESD), the state authority that oversees/shepherds the project.

Beyond that, any such joint venture--and Hudson Yards developer Related Companies was interested, until it wasn't--must negotiate with ESD and, perhaps, New York City, on the potential contours of and subsidies for the project, thus making it more economically viable.

That today is likely pending with a joint venture involving Cirrus Real Estate Partners, EB-5 investment packager U.S. Immigration Fund (USIF), Fortress Investment Group, and, who knows, perhaps others.

A passive state agency?

It's notable, however, that this process has lingered 18 months with little public role for ESD. 

What governs ESD's role are consent letters, one for the 2014 EB-5 loan of $249 million and one for the 2015 EB-5 loan of $100 million, involving the Atlantic Yards Development Company, owned by original developer Forest City Ratner and later Greenland.

(A partial repayment means about $286 million remains unpaid of the initial $349 million.)

They don't say much about what would happen if things go wrong.

Without limiting any other requirements set forth in the Project Documents, in the event
the membership interests in Owner are transferred to Lender, or any other party, as a result of a foreclosure pursuant to the Equity Pledge... such transfer shall comprise an Event of Default...  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... or has engaged a Permitted Developer, and (y) is not a Prohibited Person

In other words, ESD seems OK with a foreclosure process as long is it results in a transfer to an appropriate party. It doesn't specify the process as much as it once might have done.

The previous deal was different

Curiously enough, the first EB-5 loan for Atlantic Yards, organized in 2010 by a different middleman, the New York City Regional Center, involved a Recognition Agreement that envisioned a greater potential role for ESD.

Among other things, it required the Mortgagee (lender/creditor) to retain a restructuring advisory professional acceptable to ESD and it also gave ESD the opportunity to purchase the debt, at fair market value, after two years.

There's no parallel document today, though presumably the creditors would want professional assistance.

"ESD is not a party to any recognition agreements with respect to the referenced loans," I was told. "The EB-5 consents are the governing documents with respect to the relationship between the EB-5 lender, developer and ESD."

Why were no Recognition Agreements required in these cases? I didn't get an answer. 

Could it be that someone decided they weren't necessary? Or had ESD lost institutional memory and didn't even know about them? Unclear.

The process

For the first EB-5 loan, the July 2011 Recognition Agreement states that, "upon any event specified in the definition of Specially Serviced Loan--including the developer's failure to repay the loan--the Mortgagee (creditor) should inform ESD and, within 90 days, hire "one or more of the restructuring advisory organizations" identified in the document.

"If requested by ESDC, Mortgagee shall keep ESDC reasonably apprised of the status of discussions and actions taken by Mortgagee (and recommended by the Advisory Professionals)," the document states.

If the Mortgagee can't resolve the situation within two years, it should market the asset to a "third party that is not an Affiliate of Mortgagee, which independently satisfies the definition of 'Lending Institution' set forth in the Lease and otherwise satisfies all other requirements, if any, set forth in the Lease or any other applicable Project Document."

(A Lending Institution, according to the lease, could include a bank, an insurance company, a money management firm, and other entities, with net assets of at least $100 million.)

What then?

Under those guidelines, at least after two years, an affiliate of the creditor could not be involved, as it apparently is today. (See flowchart up top.) That said, it hasn't yet taken two years, so maybe a transaction involving an affiliate would be OK during that initial window?

After two years, ESD or its designee would have had the right to purchase the asset for its current fair market value, which would be established via an appraisal.

However, that option would not be exercisable if there were a foreclosure proceeding, as long as the Mortgagee "uses good faith and diligent efforts in pursuing such foreclosure proceeding to conclusion."

Today, is the USIF using such good faith and diligent efforts? Well, it got Related involved and then, apparently, Cirrus Real Estate. However, it's been more than 18 months.

If ESD determined a lack of good faith and diligent efforts, a purchase option for ESD or its designee could proceed. Again, that option is absent today. But if the current logjam is resolved in less than two years, the issue would be moot.

Still, the contrast raises a question: why didn't ESD retain more control over a potentially stalled project?

Prohibited Person

The Representations and Warranties in the Recognition Agreement include:

(d) No Prohibited Person. Neither Mortgagee nor any of its Principals nor, to Mortgagee's knowledge, any Person that has a direct interest in the Certified Mortgage is a Prohibited Person or Federal Prohibited Person.

That's interesting.

As I've written, Nicholas Mastroianni II, the founder and principal of the USIF, may qualify as a Prohibited Person.

His criminal record includes an arrest on felony drug charges, and felons are barred as "prohibited persons." It’s unclear whether his “no contest” plea was to a reduced charge.

Either way, had a similar Recognition Agreement been part of the USIF-brokered EB-5 loans, the USIF would've had to confirm to ESD whether a Prohibited Person was involved. 

Instead, the Consent Letters included no such requirement. 

They do state that, if the ownership of the collateral is transferred, the transferee could not be a Prohibited Person. But they didn't require the Mortgagee, as with the earlier loan, to affirm that no Prohibited Person was involved or affiliated.

"We're still looking at it,” ESD lawyer Matthew Acocella said at a meeting last November, regarding the issue of a prohibited person.

“But based on the information we've gotten and based on the structure of the [joint venture], we don't see any bar to proceeding with this joint venture as the permitted developer with Related [Companies] and USIF.”

Related's gone now. Will ESD make the same argument? If so, it should share the documentation it has.