The controversial Atlantic Yards megaproject in Brooklyn, involving a basketball arena for the relocating New Jersey Nets plus 16 planned towers, has already gotten a boost from Russian billionaire Mikhail Prokhorov, who last year bought 80% of the team and 45% of the arena, known as the Barclays Center.
But the next astounding step for Brooklyn developer Forest City Ratner (FCR)--which has already benefited from eminent domain, significant subsidies, a naming rights giveaway, and tax breaks--involves raising a $249 million interest-free loan from 498 Chinese millionaires seeking green cards.
The effort tests the spirit, and perhaps the letter, of an obscure federal immigration program known as EB-5, which trades immigration benefits for purportedly job-creating investments--as little as $500,000 per family.
In October, I wrote here about the emerging plan to use the program. Now, as suggested in the ongoing Anatomy of a Shady Deal series on my Atlantic Yards Report blog, it seems the benefit would tilt significantly to the developer rather than to the public or even the investors.
Basketball front and center
The "Brooklyn Arena and Infrastructure Project" presented to investors (as in the cover of the brochure, pictured) involves a fundamental dodge: the under-construction basketball arena, portrayed as the cornerstone of the "project," is already funded, state officials acknowledge.
(The "project" also involves already-funded infrastructure and a yet-to-be built railyard. It does not include any of the towers.)
However, in the ongoing road show in China, the country most popular for marketing EB-5 projects (and, not coincidentally, where basketball's the most popular sport), the Brooklyn project is flogged by autograph-signing retired hoopsters like ex-Net Darryl (Chocolate Thunder) Dawkins. The pitch seems aimed to distract investors from due diligence.
The money at stake is huge. Forest City Ratner, with real estate loans either unavailable or quite expensive, could save $191 million over seven years, according to a conservative estimate. The New York City Regional Center (NYCRC), a private investment pool federally-authorized to solicit investors, could earn nearly $19 million in fees before expenses.
The NYCRC, FCR's partner, assures investors that the "Brooklyn Arena and Infrastructure Project"--a $1.448 billion subset of the $4.9 billion Atlantic Yards project--would easily generate the required 4,980 jobs, ten per investor.
However, from a common-sense perspective, the $249 million solicited--which would top off that $1.448 billion--may not create any new jobs. The Empire State Development Corporation (ESDC), the state agency that shepherds and oversees Atlantic Yards, acknowledges that no jobs would be created beyond those already forecast.
Rather than use the investors' dollars as seed money or matching funds, as in some other EB-5 projects, it seems that Forest City Ratner would in large part simply trade higher-cost financing for a no-interest loan. Its parent, the New York Stock Exchange-listed Forest City Enterprises, has more than $453 million in cash and credit capacity, according to an earnings release issued today, but understandably seeks cheap capital.
Is this legit?
Should such tactics--essentially endorsed by New York officials helping with project promotion--pass muster, they invite an absurd process: any developer might save hundreds of millions of dollars, substituting cheaper capital for existing capital, claiming it creates jobs because it's tied to a project with existing, committed investment.
That would help monopolize a limited federal resource--some 3,000 immigrant investor visas are reserved for regional centers--while skirting the job-creation goals of the program.
Will the Brooklyn project pass muster under federal law? That's unclear, though proponents tout a preliminary approval. Rather than count actual workers, regional centers can submit an economist's report that tallies jobs by applying a multiplier to the total sum of money invested.
The question in the Brooklyn case--one that the federal United States Citizenship and Immigration Services (USCIS) has not answered, despite my repeated questions--is why investors should get credit for job creation based on not only their investment but the money already in place for the arena.
(Photo by Tom Spender at a Beijing session in October for prospective investors.)
The NYCRC assures investors their investment, coupled with the existing funding for the "project," would produce 7,696 jobs.
Federal law is fuzzy, but the rationale for the EB-5 program involves immigrants "engaging in a new commercial enterprise... which will benefit the United States economy," terms that indicates its prospective nature. The arena and associated infrastructure were already funded before the NYCRC and FCR considered marketing to immigrant investors.
Still, it's no wonder that regional centers, which compete to attract potential investors more on the certainty of green cards than the promise of financial return, have become an increasingly popular alternative for developers and others desperate for cheap capital.
While in December 2008 there were only 32 such regional centers in the United States, the number neared 50 by June 2009. As of October 2010, according to a USCIS presentation, there were 114 approved regional centers, with 83 additional regional center proposals pending.
No immigration risk?
It is clear that the NYCRC has overstated the certainty of the Brooklyn project's progress. All of the immigration risk has been eliminated, the NYCRC's Gregg Hayden claimed in a webcast produced in China (which I excerpted).
I queried the USCIS with a generic question that quoted Hayden's language. USCIS spokeswoman Luz Irazabal responded: "When we approve a regional center, or we approve an amendment to it... it does not mean that the petitions that are going to be filed have been pre-approved... Requests for immigration benefits (I-526, I-829, etc.) are either approved or denied. At times, USCIS may request additional evidence before making a determination."
The USCIS has begun to look more closely at regional centers. It for the first time terminated a regional center, the Victorville Regional Center, CA, as the Victorville Daily Press reported 10/27/10.
According to the Notice of Intent to Terminate, the regional center ran afoul of guidelines that require that its promotional activities "accurately reflect current facts regarding the scope, nature, terms and conditions of capital investment opportunities available for EB-5 capital investments affiliated with the regional center."
In that case, defunct projects were presented as viable for immigrant investors. By contrast, the Brooklyn "project" marketed by the regional center isn't defunct. However, it arguably does not "accurately reflect current facts," given that there's no need for arena funding to create jobs.
Is government on board?
The NYCRC has tried, in both rhetoric and documents, to portray the "Brooklyn Arena and Infrastructure Project" as not only funded by governmental contributions, but backed directly by those governments.
Actually, the city and state subsidies were committed and spent well before the regional center project surfaced. The only city relationship involves a finder's fee to the New York City Economic Development Corporation should the loan go forward.
As for the state, the only formal relationship is the ESDC's recognition of the investors' first mortgage on development rights to seven future towers, offered as collateral.
The question of collateral
In other words, should Forest City Ratner after seven years choose to default on the loan, the immigrant investors, via the NYCRC, would see the loan marketed, with the buyer gaining rights to develop those seven towers.
The investors are told those development rights are worth $542 million--a sum that presumably suggests stable backing for an investment of $249 million, and a reason for Forest City Ratner to pay back the loan.
The $542 million figure was determined by a veteran local real estate firm whose valuation report has not been made public. However, the sum invites doubt; for example, one of the seven sites is slated for an office tower, but there's no current market for such a tower.
Still, the collateral represents another opportunity for project proponents to exaggerate. The $249 million "is only 17%, the safest, most secure portion of the [$1.448 billion] capital structure," the NYCRC's Hayden claimed in a webcast.
However, no rating for the EB-5 debt has been publicly announced. Nor is it apparently secured by any specific cash flows, as with the tax-free arena bonds.
Public officials go astray
Meanwhile, public officials in person and on tape have provided misleading support. Brooklyn Borough President Marty Markowitz, who backed out of an NYCRC-funded trip to China, nevertheless boosted the project in a video shown to prospective investors.
"I can assure you that their reputation is unbelievably reliable," he declared of Forest City Ratner, according to an audio recording of an investor session in Beijing. "The most important thing: they make a promise, they keep it." Somehow Markowitz forget that the developer once promised starchitect Frank Gehry and 10,000 office jobs for Atlantic Yards, both long gone.
Markowitz even declared, with even more schmaltz than usual, "All I can say, Brooklyn is 1000 percent, 1000 percent behind Atlantic Yards, and we invite Chinese investors to join with us." However, Markowitz, who prides himself on authenticity, well knows that Brooklynites clash on Atlantic Yards--so much so it inspired a recent play.
The only public official to make the trip, Empire State Development Corporation Executive Director Peter Davidson told a Beijing audience, incredibly, that Atlantic Yards "will be the largest job-creating project in New York City in the last 20 years."
Had Davidson had made such a claim in New York, he would have been laughed off the stage. First, the number of projected Atlantic Yards jobs has been lagging. Also, if job claims are to be based on projections, the Hudson Yards project in Manhattan would produce many more jobs over a shorter period of time.
(Above, Davidson, right, and the NYCRC's Hayden. Photo by Tom Spender.)
Moreover, Davidson, like New York Mayor Mike Bloomberg (who appeared on video), praised the overall Atlantic Yards project rather than the "Brooklyn Arena and Infrastructure Project" at hand, thus overstating the potential for job creation and distracting listeners from due diligence.
Scrutiny increases, China targeted
Though regional centers have until recently faced little oversight, the USCIS recognizes there may be a need for more scrutiny.
In an October 14, 2010 quarterly presentation (screenshot at left), the agency stated: "Many USCIS External Stakeholders have expressed concerns regarding the potential for fraud and misrepresentation within the EB-5 program."
Indeed, even before details of the Brooklyn project surfaced, Florida immigration attorney Jose Latour, on his blog Immigration Insider, slammed regional centers for failing to deliver on two separate objectives: generating a sufficient number of jobs, thus guaranteeing investors green cards, and generating sufficient revenue to ensure that the investors would get their money back.
He has not commented on the NYCRC or its projects. However, Latour has suggested that only in China do potential investors seem susceptible to unrealistic EB-5 programs.
And that may be the case with the "Brooklyn Arena and Infrastructure Project."