Foreign investors who backed real estate projects in return for U.S. visas are emerging as losers in the pandemic-driven commercial property crisis.
In Manhattan, Chinese investors who helped fund Related Cos.’ Hudson Yards have called for arbitration to pressure the developer into returning their money. On Long Island, a separate group assumed the lease to the Nassau Coliseum, after billionaire Mikhail Prokhorov’s Onexim Sports and Entertainment decided to walk away from the project.
The investors, who backed development deals through the U.S. Citizenship and Immigration Services’ EB-5 program, aren’t the only ones getting hammered by the Covid-19 pandemic, which has kept mall-goers, hotel guests and office workers home, pushing commercial-property owners into delinquency. But EB-5 investors, who cared more about coming to the U.S. than financial returns, have less leverage than most.
“Cash is king during Covid, and developers are reluctant to let go of any cash,” said Mona Shah, a New York lawyer who works on EB-5 deals. “It doesn’t help that there are some developers who show distinct lack of respect for EB-5 money. It’s easy money.”
Shah said she represents a hotel developer who is looking to reduce the principal owed on an EB-5 loan, because the property closed due to the pandemic and is unlikely to return to profitability quickly. In other cases, developers are seeking to extend loan terms or withhold payments entirely, Shah said.
No Timetable
At Hudson Yards, roughly 2,000 EB-5 investors poured $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. After Neiman Marcus Group Inc., the luxury retailer that was the anchor of the upscale mall at Hudson Yards, declared for bankruptcy, Litowitz asked Related to tell his clients when they could expect to get their money out of the project. He also asked the developer to open its books so his clients could determine whether the pandemic had diminished the value of their investment.
“The Related deal is interesting because the terms given to the Chinese are so bad that it’s almost like a test case for how bad a structure can be and still be legal,” said Litowitz, whose brother Alec is the chief executive officer of hedge fund Magnetar Capital. “Dostoyevsky said, ‘If murder is allowed, everything is allowed.’ That’s how I feel about this case.”
Related has been unmoved by those requests.