Friday, January 31, 2014

Bruce Ratner on Bloomberg TV: "you can save more on a low interest rate than you can on buying a building" (thus, EB-5)

A Bloomberg TV interview two days ago was cut up into several parts, including New York City Is Growing Like Crazy: Ratner, in which the mogul touts the new high-tech firms that want to be in New York City and Brooklyn.

Then there was No Evidence Past Wage Hikes Changed Economy: Ratner, in which Ratner defended an increase in the minimum wage--"why should I subsidize Wal-Mart workers?" with federal support--and backed New York City Mayor Bill de Blasio's effort to increase taxes on the rich to pay for pre-K, noting that Mayors Rudy Giuliani and David Dinkins raised taxes more for new cops.

But the really choice excerpt was Wasn’t Easy, But Bernanke Saved the Economy: Ratner, in which the developer discussed national policy and declared interest rates "the most critical aspect of real estate."

"We look at it very  carefully and when we think it is very low, we will very often refinance something and lock it in. It's critical," Ratner declared.

We always don't go for the lowest but we go for as low as we think we can get and we'll lock it in for 10 years, five years, 15 years," he said. "It's very critical. Because you can save more on a low interest rate than you can on buying a building. It is a critical and most important aspect particular of a real estate company."

(Emphasis added)

Unmentioned, but highly relevant, was the revelation, as described here yesterday, that Ratner's firm is trying to reap $249 million in low interest financing from foreign millionaires who will sacrifice return in exchange for green cards, a very sketchy--on several levels--exploitation of a loosely run federal program known as EB-5

More from Ratner: arena hype, Greenland praise

Other excerpts from the interview were I Wouldn’t’ Change a Thing At Barclays: Ratner, in which he claimed he "couldn't be happier," given the arena's lead in sales, tickets and revenue in the country.

The Wall Street Journal's Eliot Brown commented:
In the other excerpt, Location Is Important, Price Isn’t: Ratner, the developer praises his Chinese partner, the Greenland Group, saying "they are terrific" and "They've been lovely to work with, wonderful. It's probably the top developer in China."

They're also going to benefit, incredibly, by selling green cards to their countrymen.

From City and State: Ratner rises to #43 on the Power 100 list; Lewis enters at #42

Last year, Forest City Ratner's CEO Bruce Ratner was #59 on NYC's "Power 100" list, as complied by the semi-monthly political magazine City and State.

This year Ratner, now the company's chairman, is #43, a bump up based on his history of support for Mayor Bill de Blasio, as indicated in the screenshot below. (The issue isn't online yet.)

As the screenshot indicates, the Black Institute's Bertha Lewis--who wasn't on the list last year--ranks #42, based on her closeness to de Blasio. City and State doesn't point out that she's Ratner's affordable housing ally, but that pairing will rely on some synergy.

Also note, at #24 and #23, Jonathan Rosen and Valerie Berlin of the political consulting/p.r. firm Berlin Rosen. They work not only for de Blasio but also for Ratner and Lewis, another reason I annotated de Blasio's Circle of Power last November by adding Forest City Ratner.

Thursday, January 30, 2014

Exclusive: Forest City seeking $249M in cheap financing from immigrant investors (again); Chinese government would profit by selling U.S. green cards to Chinese!

Also see coverage today regarding how Forest City Ratner spent its first round of EB-5 financing and two federal reports critical of EB-5.

Three years after they (deceptively) marketed Atlantic Yards to green card-seeking immigrant investors, thus reaping $228 million in cheap capital via the federal government's EB-5 program, Atlantic Yards promoters are back.

Their effort now is bigger and bolder, aiming to raise $249 million, saving likely well over $100 million compared to conventional financing.

"Atlantic Yards II" features similarly mendacious marketing. It hypes basketball, the already-built Barclays Center, and booming Brooklyn while remaining vague about how the investors' money might actually be used--though there are hints it would be used for the new railyard that developer Forest City Ratner is obligated to build.

It offers stale quotes from former elected officials about the entire $5 billion Atlantic Yards project, leaving the impression that investors' money would go to the overall project, rather than some vague subset said to be worth $1.235 billion, thus incorporating the $249 million sought as a neat 20%.

It claims that Atlantic Yards would create 9,739 jobs, far more than the ten jobs per investor (there would be 498 investors, at $500,000 each) required by the law.

However, that jobs figure, calculated by a paid economist, includes indirect and "induced" jobs. It has nothing to do with the actual workers on the project--all the more glaring given Forest City's embrace of cost-saving modular construction, with 150 factory workers making up 60% of those needed for the first tower.

And the immigrant investors--thanks to an EB-5 feature recently criticized by federal watchdogs--would get credit for most or all Atlantic Yards jobs, though their contribution would be relatively minor.

Also, as with many EB-5 projects, the coordinating entity, a privately owned investment pool known as a regional center, confuses potential investors by using names (NY Regional Center, U.S. Immigration Fund) and iconography that hint at a governmental role. See screenshot above left.

A new level of audacity

But this effort approaches a new level of audacity.

It sounds like something from The Onion, but it's real: the Chinese government would profit by selling U.S. green cards to Chinese immigrants.

Let me explain and qualify that shorthand.

The remaining 15 towers of the Atlantic Yards project are to be developed by a (pending) joint venture between Brooklyn developer Forest City Ratner and the Chinese government-owned Greenland Group.

(Evidence--including the identification of Mike Bloomberg in a brochure as the current mayor and a quote in the video below about the arena's one-year anniversary--suggests the marketing of this project began last fall, not long after the preliminary Greenland deal was signed 10/2/13.)

The Greenland Group, which will contribute 70% of the funds going forward, will control the joint venture. So, though Forest City executives Bruce Ratner and MaryAnne Gilmartin appear in the promotional video below, and surely offer more local knowledge and marketing expertise, they will ultimately answer to Greenland--even if the EB-5 project, for legal reasons, is controlled by the American partner.

Logo features basketball-style grain 
The joint venture (and thus the Chinese government) will profit because, compared to loans on the open market, EB-5 funding is far cheaper. The immigrant investors--most in the EB-5 program are from China--park their $500,000 for five to seven years, accepting low or no interest but happy just to get their money back.

The reason they accept so little interest? They get green cards for themselves and their families.

The developer and regional center are not actually "selling" green cards--they're part of a Rube Goldberg process in which the green card is traded for an investment promised (or proved) to be job-creating and secure.

But the effect is to sell green cards, and that's commonly understood, as in this Crain's New York Business headline last October: Developers trade U.S. residency for China's cash.

Dartmouth business professor John Vogel last February wrote in U.S. News:
One of the oddities about the EB-5 program is that the U.S. government is giving out the green cards, but the entrepreneur who puts together the investment gets the money. This scheme seems inefficient and open to corruption. If our government really believes that it is a good idea to sell green cards, maybe we should drop the pretense that this is a job creation program. It might be more efficient to have the money go directly to the U.S. Treasury and reduce the deficit by billions of dollars a year.
(Emphasis added)

So in this case, the suckers are the the U.S. government and the American people, since the benefits go mainly to the green card holders, the developers, and the middlemen.

(I didn't contact Forest City Ratner or Empire State Development for comment on this article, because the first time I wrote about EB-5, in September 2010, Forest City leaked the story to the Wall Street Journal, which published an article devoid of skepticism.)

A new level of hype

"Atlantic Yards II," as promoted on the project website, is essentially the full project as announced and approved: 6,430 residential units, 627,000 square feet of office space, 8 acres of "park" (actually, privately owed public space), a new Long Island Rail Road yard, and more.

But investors would not be putting their money into that whole project but rather some vaguely defined $1.235B "project" subset. As seen in the screenshot below, 41% of the  $1.235B "project" would be a senior loan--I'd guess that could include tax-exempt bonds--while 37% would be the developer's capital.

While the previous effort was vague and misleading in its own way,  the marketing material was limited to Chinese and Korean, as the New York City Regional Center sought investors only in those countries.

Now the U.S. Immigration Fund has put together materials in English, including a slick brochure and a video with Chinese subtitles, obviously aiming at a broader market. (Indeed, the project is also being marketed through an immigration consultancy in London.)

Surely there's a Chinese-language brochure, and I'd bet it plays up Greenland's role.

The video, as seen below, contains dramatic, urgent music and visuals of Brooklyn icons, from the arch at Grand Army Plaza to the new Barclays Center.

"Brooklyn is no longer apologizing for not being Manhattan," declares Gilmartin.

"Brooklyn has become a magic name all over the world," adds Ratner. "It's the best development opportunity in the whole country."

On screen comes the message: "At the heart of Brooklyn is Atlantic Yards. And its pulse begins with the Barclays Center." Then a quote from Vogue, and a description by Gilmartin: "It's 22 acres of large-scale mixed-use development, located above one of the most active transit centers in New York City."

After citing the arena's success, Gilmartin says, "we are now commencing the rollout of the residential portion of Atlantic Yards."

What's missing

It's notable that neither she nor Ratner mention the talismanic term they use so often with New York and Brooklyn audiences: "affordable housing."

After all, potential investors want to be reassured that the project will deliver sufficient revenues to pay them back, and "affordable housing" doesn't have that kind of ring."

Nor do they mention the use of innovative, cost-saving modular construction, perhaps because it adds a layer of uncertainty.

Indeed, as noted in the screenshot at right, from the brochure below, they're doing their best to hype high rents in Brooklyn (which don't count rent-regulated and public housing units, of course.)

The governmental fig leaf

"Any project on the scale of Atlantic Yards requires the work of the public-private partnership," declares Gilmartin. "Our project is sponsored by the state of New York and heavily supported by the city of New York and local politicians."

"Heavily supported"? Well, maybe. But that doesn't mean they're involved.

Ratner then describes the company's scope.

"Atlantic Yards creates an abundance of construction jobs," continues Gilmartin. "And in the operation of the arena, we're very proud of our track record in creating jobs, and we believe that's a big driver in what makes this project so important and in fact so successful."

None of that answers the question of how and whether Atlantic Yards would create sufficient jobs to meet the federal requirement.

After the video hypes the arena as the nation's highest-grossing venue, we hear Ratner claim, "whatever I do has to have a social value. It has to either create employment, to create homes, or create economic development."

"It has to be a partnership with the government, because a project of this size requires a lot of government approvals, requires a lot of help from the government, getting it through all of the environmental requirements, and so on," Ratner continues. "So it really is a public-private partnership."

None of that means that any governmental entity will be part of the $1.235 billion EB-5 project marketed to investors. But Chinese investors, especially, feel more confident about EB-5 projects that demonstrate governmental involvement.

Indeed, as shown in the screenshot at right, the project brochure claims that Empire State Development and the Metropolitan Transportation Authority are "Project Parties"--i.e., parties involved in the project.

That doesn't make them partners in the slightest, though I would acknowledge that Empire State Development has significantly backed the project, sending a top executive to China in 2010 and asking nothing in return.

Still, another screenshot claims that "[e]ach of the public agencies... has already invested significant capital into the Atlantic Yards Project."

That's curious syntax, since investment usually means the investor has some role in sharing profits, rather than distributing public subsidies.

The "great tradition of this city"

"We are in the strongest core market in the country," declares Gilmartin. "We believe that this city was built and created for an immigrant population. And EB-5 allows folks from all around the globe, in the great tradition of this city, to come and participate in one of the most exciting developments in our country."

Is it in "the great tradition of this city" to let rich foreigners jump the immigration line--and live wherever they want in the U.S.--because they can pay for Forest City's development? As they say, SMH.

"Investing in stability"?

"Several years back, we utilized EB-5 funds to execute other infrastructure improvements in and around the Barclays Center," Gilmartin says. "So, given the success of that first EB-5 raise, we are focused on a second raise that will allow us to continue the infrastructure development portion of the project."

Hold on.

While they may have used some EB-5 funds for infrastructure, evidence suggests the money was used significantly to retire a high-interest land loan.

Forest City may still have some loans it needs to repay.

But I'd bet a good share of this new $249 million will be going to help build the new railyard Forest City is obligated to start by next June and finish by 2016.

If so, all the Barclays and Brooklyn hype, along with the selling of green cards, is deployed to get Forest City Ratner--now, the joint venture--to pay for work it promised as part of its original bid to the MTA.

Note that, as shown in the screenshot above right from the brochure, Forest City anticipates that "upon completion and stabilization of the project, the residential components will generate substantial cash flow... which will allow them to successfully refinance and repay the senior and EB-5 loan."

Maybe, but the "project" is undefined, as is the timing for its completion, despite claims, below left, that this is "investing in stability." There's no mention of what might serve as collateral, though presumably investors could be offered a piece of future development sites, as previous investors were offered.

About Forest City

The video closes with Bruce Ratner.

"One of the most important thing about our company, if you were to ask people in New York is: they get it done. We finish things," Ratner declares. "And that's very important for EB-5. We have a real track record, and it's a very good track record. We understand that it's very important for all the people in EB-5 that we do what we say we'll do."

Cue the dramatic music, and cut to an AYII logo.

Stale quotes

The brochure, as shown in the screenshot below, contains stale quotes about the project as a whole--not the EB-5 investment--from former Gov. David Paterson, then-Mayor Bloomberg, then-Brooklyn Borough President Marty Markowitz, and Greenland Chairman Zhang Yuliang.

The question of job creation

According to the screenshot below, the economic study "utilizes the number of jobs created by construction spending only."

So somehow economist Dr. Michael Evans, who claims a 100% approval record in EB-5 project, created a report that says 9,739 jobs would be created based on construction spending.

If that's based on the $1.325 billion "project" promoted to investors, that means nearly 30,000 jobs would be created by construction spending for the remaining Atlantic Yards project, which is about $4 billion after the arena.

That's preposterous, even if indirect and induced jobs are counted.

If that jobs total is based on the entire $5 billion project, then the immigrant investors don't deserve credit for the jobs, even based on the feds' loose standards, because they're only supposed to be investing in the $1.325 billion "project" as promoted.

Gerrymandering the map

Evans' firm also helps regional centers ensure that their projects are built in a Targeted Employment Area (TEA), which means the immigrant investor can invest a minimum of $500,000 rather than $1 million. A TEA is either rural or has an unemployment rate at least 150% of the national average.

Bed-Stuy Boomerang; TEA for Atlantic Yards
Needless to say, every project is in a TEA.

Evans states:
In many cases, the area where you want to put the new building has a lower unemployment rate. We work closely with state agencies to design an area that includes your census tract but also qualifies as a TEA. 
Translation: they gerrymander the map to create such absurdities as the "Bed-Stuy Boomerang."

It links the Atlantic Yards site--in blue--to high-unemployment Bedford-Stuyvesant but does not reflect any known electoral or governmental jurisdiction,

Bottom line

Many elements of this "project" deserve scrutiny, and investigation.

From the web site

Margin for the developer: Forest City says EB-5 funds used for infrastructure; evidence suggests $228M used to retire high-interest loan

Also see coverage today regarding Forest City Ratner's new plans to raise EB-5 funds and two federal reports critical of EB-5.

In a new video, Forest City Ratner CEO MaryAnne Gilmartin tells potential new immigrant investors, who'd offer a low-interest loan in exchange for green cards for themselves and their families, "Several years back, we utilized EB-5 funds to execute other infrastructure improvements in and around the Barclays Center."

It is, at best, a partial truth, for Gilmartin to claim that the $228 million Forest City raised beginning in 2010--likely saving more than $100 million over conventional financing--was used for infrastructure.

Claimed value of collateral
Documentary evidence from the New York City Department of Finance, as well as Forest City's own statements, suggests the money was used, in large portion, to replace a high-interest land loan from Gramercy Capital.

That subverts the intent, if not the letter of the law, which justifies the green cards because each $500,000 investment is supposed to create ten jobs.

After all, as EB-5 analyst Michael Gibson told Business Week, when a project “substitutes EB-5 capital for more expensive bank financing or bond funding or even equity, that isn’t really creating new economic activity. It’s margin for the developer.”

Shifting claims

According to a document published here earlier this week, Forest City told the Empire State Development Corporation (ESDC, or ESD, the state agency overseeing the project) the immigrant investors' money--initially, $249 million--would go to critical infrastructure, given that the arena was already funded.

To the press, however, Forest City was more coy. Officials told the Wall Street Journal and the New York Times that the funds would go for infrastructure (the new railyard) and also to replace that high-interest land loan.

Representatives of the New York City Regional Center (NYCRC), the private firm engaged to market the investment, told potential investors at public events and on webcasts in China that the money would go to an arena.

Just look at one promotional poster (right) for an event aimed to recruit investors.

However, as I reported, the arena was already funded, and the marketing effort raised questions about fraud.

Forest City in March 2012 told Business Week the new money would fund the project's new subway entrance, parking facilities, water and sewer line upgrades and other work.

However, evidence suggests, as I reported, that the money is also going to substitute for an existing high-interest land loan.

For four of the five mortgages within the $228 million, city records indicate that an existing mortgage from Gramercy Capital--which specializes in high-interest financing--was "satisfied" around the time a new mortgage was signed with the "Brooklyn Arena Infrastructure and Transportation Improvement Fund," representing the immigrant investors.

Looking more closely

Let's look more closely at each of the development sites used as collateral for the loan given by the "Brooklyn Arena Infrastructure and Transportation Improvement Fund," the entity set up by the NYCRC.

Six of the seven development sites listed in the graphic at right, which was part of marketing materials in China, were used as collateral.

In other words, if the immigrant investors don't get their money back, they would then own development rights at those sites.

(They couldn't use any of the sites they didn't yet control, including the six parcels that would be built over the railyard north of Pacific Street.)

On Block 1129, the southeast block currently used as interim surface parking, there are four development sites. (Here's the block and lot map.)

Parcel B-11

The site for the B-11 tower, as indicated on the screenshot below, has a $26.9 million mortgage. The document was created 2/28/12. Four days before, on 2/24/12, the Gramercy mortgage was satisfied. This, like the other Gramercy mortgages, links to a mortgage pool once valued at $117 million.

But Forest City owed Gramercy $153.9 million in December 2009. It's not clear how much Forest City owed Gramercy when it got the $228 million. But it does seem clear the money helped clear the Gramercy debt.
$26.9M for Parcel B-11, Block 1129
Parcel B-12

The site for the B-12 tower, as indicated on the screenshot below, has a $24.7 million mortgage. That document was created 7/27/11. On 2/24/12, the Gramercy mortgage was declared satisfied. Note the sequence, linking back to the previously mentioned mortgage pool.

$24.7M, for Parcel B-12 on Block 1129
Parcels B-13/14

The site for the B-13 and B-14 towers, as indicated on the screenshot below, has a $48 million mortgage. That document was created 2/28/12. Again, on 2/24/12, the Gramercy mortgage was declared satisfied. This also links back to the previously mentioned mortgage pool.
$47.995M, for Parcels B-13/14 on Block 1129
Parcel B-1

The site for the B-1 office tower, over the arena plaza,, as indicated on the screenshot below, has a $68 million mortgage. That document was created 2/28/12. Again, on 2/24/12, the Gramercy mortgage was declared satisfied. This also links back to the previously mentioned mortgage pool.
$68M, for Parcel B-1 on Blocks 1118/1119
Parcel B-4

The site for the B-4 residential tower, at the northeast corner of the arena block, as indicated on the screenshot below, has a $60.3 million mortgage. That document was created 4/23/12. 

This does not link to the satisfaction of a Gramercy mortgage, though it links back to the previously mentioned mortgage pool. So perhaps this sum of money was indeed used for infrastructure.
$60.3M, for Parcel B44 on Block 1119

Adding up a mystery

The rounded-off sums--$26.9M+$24.7M+$48M+$68M+$60.3M--add up to just about $228 million.

It's not clear why Forest City did not raise the $249 million originally sought. But since they raised less money, the didn't have to use the B-3 site as collateral.

The EB-5 backlash: federal audits cite potential fraud, national security threats, bogus job creation, recommend elimination of regional center program, increased minimum investment

Also see coverage today regarding how Forest City Ratner spent its first round of EB-5 financing and its plans for a new round.

From industry org. IIUSA
The federal government's immigrant investor program (known as EB-5) has faced a recent backlash, with two highly critical governmental reports on a program that typically has organized supporters while few skeptics look at the public interest.

For example, the Department of Homeland Security's Inspector General said the federal agency overseeing EB-5 is "limited in its ability to prevent fraud or national security threats." Nor can it "demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens as intended by Congress."

That's harsh criticism for a program that's a hot topic in development finance, with aggressive supporters enjoying the benefit of marketing something they don't own--green cards--and turning it into cheap financing, money they say is often unavailable due to to a tight lending market.

They do that as long as they can get a paid economist to produce a report claiming immigrant investor's $500,000 payment will create 10 jobs, even indirect or "induced" jobs.

The investors, most from China, willingly forego interest on the money--they're supposed to ultimately get their $500,000 back--as long as they get green cards for themselves and their families. Forest City Ratner's Atlantic Yards project has been among the most prominent examples.

Regional centers key

The vehicle is a government-approved private entity known as a regional center that can pool investors' money and reap fees and profits while doing so.

The gold rush is such that Crain's New York Business last year wrote about how individual developers were setting up regional centers to attract cheap capital, as noted in the screenshot below.

from Crain's NY Business, 10/25/13
Though they've generated relatively little publicity, the two federal reports raise huge questions about the EB-5 program.

Those conclusions dovetail with my own examination of Forest City Ratner's use of EB-5 funds to raise $228 million, and the developer's new effort--as part of a planned joint venture with the Chinese government-owned Greenland Group--to raise $249 million.

The ICE warning: seven areas of program vulnerability

In mid-December, Sen. Charles Grassley (R-IA) released an internal memo from Homeland Security Investigations (HSI), the investigative arm of U.S. Immigration and Customs Enforcement. The latter is an agency within the Department of Homeland Security, which also houses United States Citizenship and Immigration Services (USCIS), which oversees the EB-5 program.

The investigation, it turns out, was prompted by a review in which someone in the EB-5 world--investor or employee--was indicted for his role in exporting electronics to Iran.

According to the HSI memo, ICE identified seven areas of program vulnerability with EB-5, including the potential for espionage, terrorists, and money laundering, as well as investment fraud in multiple variations.

HSI advised that more information be collected on the regional centers, the investors, and the source of the investor’s funds.

Policy changes

But it also proposed huge policy changes, including doubling the minimum investment amount from $500,00 to $1,000,000, which would make the program much more of a hurdle for both investors and the developers/entrepreneurs who hope to benefit from cheap capital.

In another blow, HSI recommended that the program be limited to only active investors involved in managing and directing a business--again, a huge change, given that the program allows investors to live anywhere in the country.

HSI also recommended that "induced jobs"--resulting from workers' spending in the local economy--be eliminated from the job creation calculations.

HSI noted that such suggestions were not included in the technical assistance USCIS provided in June 2012 when the EB-5 program was reauthorized for three years--a sign that the agency may be in some way "captured" by beneficiaries.

Getting rid of regional centers

And the largest change of all: “The principal change proposed by HSI was that the Regional Center Model be allowed to sunset, as HSI maintains there are no safeguards that can be put in place that will ensure the integrity of the RC model.”

The regional centers get a significant fee from each investor for packaging the deal, and then keep the spread between the low or no interest paid to the investor and the below-market interest for the developers. They obviously want to keep the cash cow going.

From the report:
In the absence of the elimination of the RC Model, HSI proposed raising the minimum investment amount to $2,000,000 or $1,000,000 for Targeted Employment Areas, as the minimum investment amounts had not changed since the inception of the RC Model in 1992. Raising the required investment amount would make fraud more inconvenient and provide a more legitimate basis to meet the job creation goals of the program.
Fraud in job creation

It's fairly obvious that the job creation numbers for Atlantic Yards used in the EB-5 process are bogus, if legal.

HSI seems equally skeptical. According to the report:
HSI conducted research using job creation statistics used by large corporations and the U.S. government stimulus package, and has reason to believe that the RCs are greatly exaggerating their indirect and induced job creation figures. By not having to provide evidence of jobs directly created, the RC inherently creates an opportunity for fraud, where the business goal can be initiating projects that give the appearance of creating job growth, with the sole intent to meet USCIS criteria rather than produce jobs.
The OIG report

The Department of Homeland Security in December released an evaluation of EB-5 by its Office of Inspector General. It raised major concerns:
• The laws and regulations governing the program do not give USCIS the authority to deny or terminate a regional center’s participation... based on fraud or national security concerns;
• The program extends beyond current USCIS mission to secure America’s promise as a nation of immigrants; and
• USCIS is unable to demonstrate the benefits of foreign investment into the U.S. economy.
The operation of the regional center program is poorly overseen, with different interpretations by USCIS officials regarding federal policy. And "when external parties inquired about program activities"--such as project proponents--USCIS did not always document their decisions and responses.

Thus, "USCIS is limited in its ability to prevent fraud or national security threats that could harm the U.S.; and it cannot demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens as intended by Congress."

A mission too broad?

From OIG report
Though EB-5 is as much an economic development or investment program as an immigration one, USCIS, according to the audit, is limited in its expertise.

"Because agencies other than USCIS have missions that USCIS could leverage to its advantage for the EB-5 program," the report says, "USCIS needs to improve coordination and rely on the expertise at these agencies during the adjudication process."

Questionable job creation

As the report notes, federal law "allows foreign investors to take credit for jobs created by U.S. investors." According to the report:
In one case we reviewed, an EB-5 project received 82 percent of its funding from U.S. investors through a regional center. The regional center was able to claim 100 percent of the projected job growth from the project to apply toward its foreign investors even though the foreign investment was limited to 18 percent of the total investment in the project. Every foreign investor was able to fulfill the job creation requirement even though the project was primarily funded with U.S. capital. When we questioned USCIS about this practice, the officials explained that the EB-5 project would not exist if not for the foreign investment.
That, of course, is questionable, especially when, as with Atlantic Yards, the money is being used to substitute for a high-interest loan. The EB-5 money is thus developer margin.

I'd add that, with Atlantic Yards, the law allowed foreign investors to take credit for jobs created by New York City and state taxpayers.

Atlantic Yards site in blue, high unemployment area
in red. Graphic by Abby Weissman
Though USCIS allows the creation of new commercial enterprises that collected EB-5 capital to make loans to other job-creating entities, the agency cannot oversee such additional job-creating entities and therefore can't verify job creation.

Gerrymandering the map

The OIG report confirms reporting by me and others of how state government agree to gerrymander the map--I call it the "Bed-Stuy Boomerang," regarding Atlantic Yards--to create a zone of "high unemployment."

That allows a $500,000 investment instead of the original $1 million. According to the report:
Another example is the designation of high-unemployment areas by state governments. The regulations provide for state governments to designate high-unemployment areas for determining whether the EB-5 regional center project qualifies for the lower foreign investment of $500,000. However, the regulations do not instruct the states on how to make the designation. Because of how the regulations are written, USCIS adjudicators said that they must accept what the state designates as a high-unemployment area without validation even when it appears as if these designations are areas of low unemployment.
Reasons to push for influence

The report suggests evidence that "internal and external parties may have influenced the adjudication of EB-5 regional center applications and petitions." There's strong reasons to lobby:
• The estimated job creation and economic improvements to local economies are convincing and important reasons for lawmakers and citizens to have an interest in advocating the EB-5 program.
• USCIS documents show that regional centers generally obtain between $25,000 and $50,000 in unregulated fees from foreign investors, and as such, we believe that may contribute to them losing sight of the integrity of the EB-5 program in the interest of making money.

The OIG recommends that USCIS:
  • update and clarify federal regulations to push for greater authority to investigate national security and fraud, and to assess job creation
  • work with the Departments of Commerce and Labor and the Securities and Exchange Commission to use their expertise to evaluate EB-5 applications and petitions
  • conduct comprehensive reviews to determine how EB-5 funds have actually stimulated growth in the U.S. economy 
  • establish quality assurance steps to promote program integrity 
The report notes that USCIS agreed with three of the four recommendations, and was in the process of  hiring new economists, among other things. Still, OIG reported that  "five USCIS economists expressed concern that their expertise was not being used in the adjudication process because they did not perform any substantive analysis of economic plans or predictions."

USCIS said it does not believe it's in a position to quantify the impact of the EB-5 program on the. economy, or assess the program's impact. OIG disagreed.

The industry response

In response, the Association to Invest in the USA, a trade group of EB-5 businesses, issued a statement saying:
many of the reforms the OIG identifies as necessary are already underway, and other criticisms of USCIS’ administration of the Program are effectively refuted in a statement by USCIS included at the end of the OIG report.
...For example, recognizing the complexity of the EB-5 Program, USCIS has created a new Immigrant Investor Program Office staffed by trained economists, experts in business and immigration law, as well as fraud and national security specialists – now led by a former director of the Treasury department’s Financial Crimes Enforcement Network. USCIS plans for all EB-5 related adjudications to be relocated to this office over the next six months.
Defending gerrymandering?

Maybe, but it's tough to defend USCIS, for example, on the gerrymandering issue. As long as the federal agency defers to states, as noted in the excerpt below, and the states have an interest in gerrymandering to get favored projects a low-interest loan, such bizarre map-making will continue. 

 Department of Homeland Security, OIG report on EB-5, Dec. 2013

Wednesday, January 29, 2014

So, what exactly has the NYPD traffic division done around the arena? The trail remains murky

As reported 10/30/13, NYPD Traffic Enforcement District Manager Donald Powe told the 78th Precinct Community Council meeting that the division would "devote a few patrol cars" to the streets around the Barclays Center where illegal idling and parking problems had been recorded. It was a rather belated response to complaints.

For how long? "It'll be ongoing," he replied.

At the 12/4/13 meeting of the Atlantic Yards Quality of Life Committee, North Slope resident Steve Ettlinger noted the numerous apparent violations cited on Atlantic Yards Watch and asked about Powe.

“We invited him,” said 78th Precinct Deputy Inspector Michael Ameri.

Ettlinger, who along with others said he'd been unable to find contact information for Powe, said he believed there were several tactics--including foot patrols and different hours--that would help with enforcement.

“They are civilian members” of the department, Ameri said. “I'll reach out to a supervisor.”

Following up

I later followed up with Ameri.

He had Community Affairs Officer Jerry Galante get back to me. Galante said he had some monthly statistics from the traffic division.

I said I sought specifics about the impact of the announced devotion of new resources. Galante said he'd check. I was later told I'd have to file a Freedom of Information Law request.

I was also told someone from that division--though not Powe--was supposed to come to the monthly meeting of the 78th Precinct Community Council, last night.

That didn't happen, as the responsible person didn't make it.

I asked last night about any follow-up of the impact of additional patrols. Ameri--who was otherwise basking in much praise for his work maintaining a bike lane and ticketing drivers who don't yield to pedestrians--said he'd check.

I'm not blaming the 78th--they don't control a unit of the Transportation Bureau, nor do they control the dissemination of NYPD statistics. But I don't think that NYPD as a whole has been particularly forthcoming.

At the 78th, an award serves as reminder that Ratner's malls, not AY footprint, are crime center

For those with long memories, the Cop of the Month award announced last night at the 78th Precinct Community Council meeting in Prospect Heights provoked some knowing chuckles.

For the 78th and its commander, Deputy Inspector Michael Ameri, it was good news. Since the busy Atlantic Terminal and Atlantic Center malls were added to the precinct in September 2012 as part of a reconfiguration that also added the Barclays Center, major crimes at the malls were down 25% last year.

Still, said Ameri, "I have some issues, some crime, some after-school problems." So the dedicated mall unit--Officers Bash, Butler, Prince, and Sears--together managed 200 arrests, earning them the month's award.

Ameri later told me the malls--which, I'd note--are operated by Atlantic Yards developer Forest City Ratner--accounted for some 500 arrests last year, mostly minor crimes.

That was congruent with March 2009 statement by Captain Vanessa Kight, 88th Precinct Executive Officer, that "A large percentage of our crime--particularly grand larceny and petit larceny--occurs in the malls."

And the reason that provokes knowing chuckles is that it reconfirms criticisms of the Empire State Development Corporation's Blight Study, which blamed high crime in what was then Sector E of the 88th Precinct on the Atlantic Yards footprint. I first wrote in July 2006 and followed up several times.

(ESDC graphic adapted by Lumi Rolley of NoLandGrab.)
Drilling down

Remember, the AY footprint contains sectors from three separate precincts, and the only sector where a rise in crime had been seen--the source of the Blight Study's sweeping conclusions--was Sector 88E, shown at right. The footprint blocks are those below Atlantic Avenue.

The Blight Study tried to assess whether the malls, in the western end of Sector 88E above Atlantic Avenue and thus the footprint (outlined in gray in graphic), contribute to crime:
The Atlantic Center and Atlantic Terminal shopping centers are located immediately north of the project site, also within the boundaries of Sector 88E. In an effort to determine whether a large proportion of crimes reported for Sector 88E might have occurred on the Atlantic Center/Atlantic Terminal premises rather than on the project site, crime data were obtained from the security staff at the shopping centers.
Based on this data, which reflects incidents occurring within the Atlantic Center and Atlantic Terminal shopping and parking areas as well as on the surrounding sidewalks, it is unlikely that a large proportion of crimes in sector 88E occurred on the Atlantic Center or Atlantic Terminal premises. For example, while there were 39 robberies in sector 88E in 2005, the shopping center security records indicate that no robberies occurred that year at Atlantic Center or Atlantic Terminal. Similarly, while there were 115 grand larceny crimes reported for sector 88E in 2005, the shopping center security force recorded only one incident of larceny that same year. Although crimes catalogued by the Atlantic Center and Atlantic Terminal security staff are not necessarily the same as those catalogued by the NYPD, the relatively low number of crimes reported at the shopping centers indicates that the high crime rate in sector 88E is more likely a result of crimes occurring on the project site than in Atlantic Center or Atlantic Terminal.

(Emphases added)

The state's evidence was so weak that Supreme Court Justice Joan Madden, in her January 2008 dismissal of the case challenging the Atlantic Yards environmental review, punted on even addressing the crime issue.

Yet Forest City's Jim Stuckey, then president of the Atlantic Yards Development Group, straightfacedly told WNYC talk show host Brian Lehrer in July 2006, ""The crime in these [AY footprint] areas is substantially higher than areas around it."

And the authors of the state-issued Blight Study relied on mall security staff rather than police statistics.

Tuesday, January 28, 2014

Revealed: how New York State helped Forest City Ratner get low-interest loan from Chinese investors, asked for nothing in return

The request by elected officials and community groups to tie approval of Forest City Ratner's planned joint venture with the Chinese government-owned Greenland Group--to sell 70% of the remaining 15 towers--to a new timetable should be seen in full context.

New York State seems far less interested in preserving the public interest than doing Forest City Rather's bidding. In a telling example, the Empire State Development Corporation (ESDC, or ESD) sent a top official to China in 2010 to help Forest City Raise cheap capital, asking for nothing in return.

According to documents I acquired, ESDC sent then-Executive Director Peter Davidson for a week to help Forest City raise $228 million from potential immigrant investors. That saved more than $100 million on conventional financing, by my calculation.

Under the federal government's EB-5 program, investors get green cards for themselves and their families if they invest in a purportedly job-creating enterprise.

Governmental involvement or endorsements--as represented by Davidson's presence--is key to convincing potential investors to choose one project over many competing ones.

Forest City also offered a misleading explanation for how the funds would be used, suggesting they would go to critical infrastructure rather than replacing a high-interest loan used to purchase land for the project.

Helping Forest City save

Forest City Ratner got a below-market loan to help replace that loan and (perhaps) pay for infrastructure. ESDC spent about $4,400 on Davidson's travel, plus the value of his time--and the goodwill/reputation of the state agency.

Davidson at left with  Hu Weihang of the Kunpeng
immigration consultancy; photo from firm's web site
Davidson was clearly valuable to the effort, mouthing misleading platitudes about Atlantic Yards and bestowing boilerplate certificates on Chinese immigration brokers (as in the photo at left). Those certificates were requested by the private firm managing the investment project.

However, ESD, documents suggest, didn't ask for anything in return, such as additional performance guarantees or a tighter timetable.

That suggests that the agency has no interest in tying the Greenland deal to a revised timetable. While Atlantic Yards was long promised to take ten years, the state relaxed deadlines in 2009 to 25 years.

While the Greenland deal has been touted as a way to speed construction, Forest City and allies like Bertha Lewis don't want to be forced to commit to a new timetable.

Working from the top down

The documents, acquired in June 2012 response to a Freedom of Information Law request I filed nearly 21 months earlier, suggest that, when Forest City made contact with the office of then-Gov. David Paterson, Davidson's role was set in place.

So much for Ratner's claim, in an August 2012 interview (video) with the Wall Street Journal, that "When you work with government, it's heavily on a staff level. It's really more about working on a staff level. On that level, we work in a very unpolitical way. We work just on the merits."

A misleading story

The documents show Forest City has made shifting claims about the intended use of the funds from the immigrant investors, who get green cards for themselves and their families if they invest $500,000 in a purportedly job-creating enterprise.

According to one document recently unearthed, Forest City told the ESDC that the money--initially, $249 million--would go to critical infrastructure, given that the arena was already funded.

To the press, however, Forest City was more coy. It told the Wall Street Journal and the New York Times that the funds would go for infrastructure (the new railyard) and also to replace a higher-interest loan used to purchase land.

Representatives of the New York City Regional Center (NYCRC), the private firm engaged to market the investment, told potential investors at public events and on webcasts in China that the money would go to an arena.

Just look at one promotional poster (right) for an event aimed to recruit investors.

However, as I reported, the arena was already funded. That's surely worthy of investigation for fraud.

Still, it's likely that contractual documents signed by the investors were more fuzzy regarding the arena. After all, they were buying into something vaguely titled "Brooklyn Arena Infrastructure and Transportation Improvement Fund." That string of words might suggest "Brooklyn Arena" as an entity, but more likely as a modifier.

Forest City more recently said the money is funding the new subway entrance, parking facilities, municipal water and sewer line upgrades and other work, according to Business Week.

However, evidence suggests, as I reported, that the money is also going to substitute for an existing high-interest land loan.

For each component of the $228 million, such as the $48 million used to secure the sites for B13 and B14 on the southeast block of the project site, city records indicate that an existing mortgage from Gramercy Capital--which specializes in high-interest financing--after a new mortgage was signed with the "Brooklyn Arena Infrastructure and Transportation Improvement Fund," representing the immigrant investors. See graphic at right, and right-click to enlarge.

Showing how a land loan was replaced
Such practices subvert the mission of the EB-5 program. As EB-5 analyst Michael Gibson told Business Week, when a project “substitutes EB-5 capital for more expensive bank financing or bond funding or even equity, that isn’t really creating new economic activity. It’s margin for the developer.”

That margin for the developer came with help from the government.

The process begins

As I reported, the process began on 2/17/10, when the New York City Economic Development Corporation (NYC EDC) proposed that Forest City Ratner meet with the NYCRC, the private investment pool authorized to recruit investors, to discuss a collaboration. The city agency knew that Forest City Ratner needed to raise more money to move the project forward and still achieve the margins it sought.

Neither the city nor state government was a formal partner with the NYCRC in the project, though that's what Chinese investors were told.

Though the project brochure, at left, used the city and state seals to suggest government involvement--as well as the NBA logo--each government entity had made previously-funded subsidy commitments.

In a 7/27/10 email, Forest City Executive VP MaryAnne Gilmartin broached the issue with Davidson: "Called Bruce [Ratner] on another matter. Bruce raised the Regional Center and the China Trip in October. Governor seemed interested. Wanted you to have a heads up."

The fundraising trip was to be coordinated with a trip by the Nets, as stated in an 8/4/10 NBA press release, Nets Selected to Play in NBA China Games 2010:
EAST RUTHERFORD, N.J.—NETS Basketball has been selected to play in NBA China Games 2010, in which it will participate in two preseason games against Chinese icon Yao Ming and the Houston Rockets in Beijing and Guangzhou this October.
The rationale: "critical infrastructure"

A 9/8/10 message from Gilmartin to Davidson explained the rationale for the fund-raising, calling it "critically important":
As I indicated to you and [Atlantic Yards Project Director] Arana [Hankin], our efforts through the Regional Center will assist us in raising critical financing proceeds for the Atlantic Yards Project. As Bruce discussed with the Governor, with the Barclay's [sic] Center financing secured and construction of the arena well underway, we have been focusing intensely on the capital needs for the critical infrastructure surrounding the arena which will allow for the development of the subsequent towers, including 2,250 units of affordable housing. In the current climate, conventional financing is simply not available so we are pursuing funds under the EB-5 program, which I have summarized in the attached memo.
(Emphasis added)

That's a bit of a dodge. "Conventional financing" is never available for infrastructure. It's available for investments that have a return.

How to fund infrastructure

By contrast, infrastructure is typically funded through other means, including bonds, the overage from other project elements, equity, or direct subsidies.

It's more complicated in this case: Forest City's low price for the Vanderblit Yard development rights--$100 million, later amended to $20 million down, with the rest paid off over 22 years--was predicated in part on its infrastructure investment (that new railyard), given that the rights were appraised at $214.5 million.

From the ESD's 2009 Modified General Project Plan
Indeed, there was an infrastructure gap, beyond the subsidies and tax-exempt bonds.

At one point it might have been filled by bonds issued by the Brooklyn Arena Local Development Corporation, but that plan was scotched.

A state spokeswoman said in December 2009, "any additional funding required will be made available by Forest City Ratner Companies."

Forest City apparently found that solution in China, with New York State's help.

The ambitious EB-5 plan

Gilmartin's letter explained the EB-5 connection:
As I have mentioned to you, Regional Centers exist around the U.S. and very often government officials (local municipalities and state representatives) are actively involved in the efforts. Our financing effort in China will be the largest attempted capital raise by any regional center in the national program. Toward this end, it's critical that we stand out among our competitors because the Chinese investors do have investment options from which to choose. And given the unprecedented nature of our effort, we won't know how successful we will be until we've completed our seminars in October. To ensure the highest likelihood of success, we respectfully ask that ESDC send a high level representative to join the Regional Center marketing effort from October 10th-17th. As you will note when I send the schedule of events and seminars, the week will be chock full of work for ESDC.
(Emphases added)

EB-5 background

The document explained the background on EB-5, and listed seven seminars planned to kick off the week the Nets were to be in China. Government presence is increasingly important, the memo stated, because:
  • Chinese investors have greater confidence in projects with government involvement. 
  • The NYCRC will be competing for investors with other regional center who are likely to bring government officials. We are likely to bring high level officials from the City and the State as well as Borough President Markowitz. 
  • The NYCRC will also be competing with investment opportunities in other countries, including Canada, the UK and Australia. 
The memo also noted that collateral marketing materials would include a promotional video on the arena "in which we would like to have [NBA] Commissioner [David] Stern speak."

Commissioner Stern, perhaps prudently, did not appear in the video. However, project promoters did manage to use the NBA logo in their marketing material.

No other high-level officials attended, though Markowitz and Mayor Mike Bloomberg appeared in a video, the latter offering boilerplate praise for Atlantic Yards, unrelated to the investment at hand.

Markowitz offered effusive praise for Forest City--The most important thing: they make a promise, they keep it"--and claimed Brooklyn was "1000 percent behind Atlantic Yards."

Following up

Two days after Gilmartin's message to Davidson, it was all in place.

In a 9/10/10 message, ESDC's Hankin wrote to Gilmartin:
Thanks for following up so quickly with the information that Peter had requested. [Secretary to the Governor] Larry [Schwartz] has approved Peter's travel to China, as has [ESD CEO] Dennis Mullen. We all understand the importance of having a State government official accompany the group. I wish you lots of success in China.
Gilmartin responded seven minutes later:
Terrific news.
Thanks for buttoning it up so expeditiously. We appreciate the effort.
China here we come!
The schedule

A schedule indicated eight seminars, including five at which Davidson was expected to appear, and for four which Markowitz was TBD [to be determined].

At each event was an "NBA legend," Otis Birdsong or Darryl Dawkins. They were selling basketball to the Chinese, not infrastructure.

NYCRC thanks and duties

Before the trip, NYCRC Principal Paul Levinsohn wrote to Davidson 9/21/10:
Please know how pleased we are that you will be joining us for our "project launch" in China the week of October 11th. Showing government support of an EB-5 project is critical and having someone of your stature present will provide a significant boost to our collective efforts.
Levinsohn also instructed Davidson on some key protocols, buttering up Chinese immigration firms with puffy proclamations:
Per our discussion, we need the Proclamations using the attached language to the immigration firms below. Each firm would receive their own Proclamation. You will present the Proclamation to the Head of the firm at each seminar.
Official proclamations

The message then listed the names of six immigration firms. The message was misleadingly vague:
The $249 million of EB-5 investment capital is vital to the initial stages of one of the most important public/private development initiatives in New York City today and one of the largest job-creating projects in over a decade...
Click to enlarge
Not only will the Atlantic Yards Project provide a state-of-the-art, multi-purpose sports arena needed to bring a professional sports team back to Brooklyn. It will also provide critical infrastructure work necessary to allow the construction and operation of the arena and, over the course of the next decade, the construction of thousands of affordable and market-rate housing units.
This is a historic project that will continue to energize the borough of Brooklyn. While a new hometown team will give all of us something to cheer for, it's the jobs and housing that will have the greatest last impact on the borough and the people of Brooklyn. The Atlantic Yards development is not just about constructing buildings, it is about building a stronger future for this great City and State. This is why the State of New York has already spent $100 million of capital to prepare for this development.
None of that offered any indication that the immigrant investors would get their green cards or get their money back.

What happened

The itinerary began with an arrival at the PNY Center on 10/10/10, a bus to Newark airport, and a flight to Beijing.

The trip involved a "Champagne Welcome for Nets Travel Party" and a "tailor to measure for suits." The visit included two Nets games, various tours, and a departure, in the evening on 10/16/10, arriving the next morning.

Davidson and Forest City got fairly chummy. For example, at one point, Gilmartin wrote: "Bruce and I would love to have you join us for some site [sic] seeing while we are in China."

Davidson assented on a trip to the Great Wall, and then reciprocally invited Gilmartin and Ratner to a site "being worked on by the World Monuments Fund, whose board I am on."

A 10/16/10 email from Gilmartin to Davidson with the heading "davidson takes china," attached a photo of Davidson speaking in China.

What they said

In an NYCRC project video presented in China to potential investors, the narrator states, "The New York City Regional Center is pleased to offer EB-5 investors another secure, job-creating project in conjunction with the government of both the state of New York and the city of New York."

The words "in conjunction with" could have left the impression that the city and state were part of the EB-5 offering. They weren't. They were part of the over all "job-creating project."

Davidson, at an event for prospective investors in Beijing, was at times vague in his remarks, but claimed Atlantic Yards would "be the largest job-creating project in New York City in the last 20 years.”

“The government of New York State and the governor of New York State knows what a major decision it is you are about to take, and that is why I am here tonight,” he stated.

“So I'd like to make three points about this project. The first is that the Atlantic Yards project is a very important development project for our government,” Davidson said. He added some boilerplate, and declared that “the Atlantic Yards project is one of the most important projects we have had over the last ten years.”

That may well be, but that ignores the issues faced by the prospective investors: would this project create the jobs needed to justify their green cards? Would they get their money back?

“The second point I'd like to make is that the government has invested millions of dollars in this project,” Davidson said, providing numbers that had been repeated several times to the audience.

The key issue, of course, is the definition of "project." The government has invested in the arena, and infrastructure. The NYCRC and FCR were trying to attach funding for a refinanced land loan and infrastructure to an already funded arena and infrastructure project.

Davidson helped them make their case.

Davidson noted that the city of New York had, as of then, contributed $131 million and the state of New York has contributed $100 million. “In addition, and very importantly,” he said, “the state has helped with the issuance of over $500 million in bonds to fund the construction.” (Well, the state-authorized Brooklyn Arena Local Development Corporation issued bonds that will be privately repaid.)

Job creation
ESDC proclamation from promotional video

“The third point is that this project and your participation will definitely create jobs,” Davidson declared. “The Atlantic Yards project will create thousands of jobs, both in construction and in permanent jobs that follow construction. And as a result, there will be billions of dollars generated in taxes that will be paid to the city of New York and the state of New York.”

Whether there will be billions of dollars of taxes is questionable, but Davidson's answer dodged the issue of job creation.

The "project" as pitched to investors includes the arena, infrastructure, and railyard. So the investors would have nothing to do with what Davidson described as "permanent jobs that follow construction."

Not included in this "project" as pitched to the investors, would be construction of housing, office, or retail structures. Nor would billions of dollars be generated in taxes from this "project."

Then Davidson, perhaps feeling expansive, asserted, “This project will be the largest job-creating project in New York City in the last 20 years." (Go to 4:40 of the audio.) “And one of the largest development projects of any type in New York City.”

That first claim is untrue. Also, the investors were never told they'd be putting money into the full "Atlantic Yards" project.

But the smoke and mirrors worked.