“Financial investment returns are a function of the market economy and obviously this is a challenging time,” Related spokesman Jon Weinstein said in an email. “We were off to a good start, but now we need to be patient.”
EB-5 was a sleepy program until the 2007-2008 financial crisis, when developers like Related looked overseas to replace traditional financing sources. They found a bonanza: foreign investors who viewed U.S. real estate as a safe asset and were principally concerned with obtaining visas, meaning they were willing to accept returns as low as 1% and sometimes less.
The program, which provided visas to foreign investors who sank at least $500,000 into U.S. projects that created at least 10 jobs, was meant to promote investment in rural areas, as well as urban locales with high unemployment. But gerrymandered districts allowed EB-5 funding to flow to developments like Hudson Yards and an Extell Development Co. tower on Manhattan’s Billionaire’s Row.
Wild West
Roughly $36 billion in EB-5 capital flowed into the U.S. from 2010 to 2019, according to estimates from Invest In the USA, a trade group, though the program has become less popular as the backlog of applications grew and the investment threshold increased.
The program attracted scrutiny when Kushner Cos., the developer formerly run by Jared Kushner, who is President Donald Trump’s son-in-law, sought EB-5 funds from Chinese investors.
It also gained a reputation as a Wild West, rife with false promises and conflicts of interest. Theoretically, lending money to big projects should have been more solid, but even marquee developers haven’t been shielded from the pandemic.
As Covid-19 cases surged through the New York City area this spring, Prokhorov’s Onexim canceled sporting events and concerts at the Nassau Coliseum. By June, the company decided that the pandemic had made the events business unappealing, and signaled its intention to hand the arena lease over to lenders.
On Aug. 20, Nassau County announced a deal with the U.S. Immigration Fund, which funneled EB-5 capital into renovations at the arena. As part of the agreement, an affiliate of the EB-5 group assumed the lease, promising to operate the building so the National Hockey League’s New York Islanders could eventually return to the ice.
Maureen Hanlon, CEO of Nassau Events Center, which had operated the building for Onexim, said she was sorry to abandon the arena, but happy to reach an agreement that allows “the county to receive its rent and, most importantly, for the fans to have a functioning arena as soon as health guidelines allow.”
Gary Friedland, who has studied the program as a scholar-in-residence at New York University’s Stern School of Business, expects that because of the pandemic and the way the loans are structured, many EB-5 investors won’t be repaid.
“Many of these EB-5 loans were made when the market was much stronger,” said Friedland. “With the market downturn, many of these loans are very vulnerable.”
This article was provided by Bloomberg News.