It was the middle of 2015 when the long-stalled plan to redevelop the Battery Maritime Building in Lower Manhattan began to unravel. Unable to come up with the money to finish the project, developer Dermot Company halted construction, defaulted on its rent and was slapped with multiple lawsuits.
But the 150 Chinese nationals who collectively invested $77 million into the project through the EB-5 visa program knew none of that, according to a lawsuit that alleges one of New York’s most prolific regional centers intentionally misled investors and mismanaged their money.
In what reads like a cautionary tale about the EB-5 program — which grants foreign investors a U.S. green card in exchange for $500,000 — the suit described the investors as “unsophisticated Chinese nationals, most of whom neither speak nor read English.”
“They sought the American dream,” the suit added. “But their dream has been turned into a financial nightmare.”
The suit, which was filed in May, alleges that the New York City Regional Center, led by George Olsen and Paul Levinsohn, misled investors from the outset — claiming Dermot would be investing $17 million and that the city of New York would contribute $145 million. (The $145 million was actually for East River Esplanade Work, according to the suit.) Ultimately, only 60 percent of the project was completed although all of the investors’ money was spent, the suit said.
Further, the NYCRC allegedly “misrepresented that everything was proceeding smoothly in numerous newsletters, e-mails, press releases and other documents” they sent to investors. An August 2015 newsletter, for example, had nine pages of reports and pictures describing construction progress. By that time, however, Dermot was in default.
Dermot won a city contract in 2006 to redevelop the Maritime Building. The firm, based in New Jersey, made plans to renovate the building’s Great Hall while adding a rooftop restaurant and a boutique hotel. After construction stopped in mid-2015, the developer was slapped with lawsuits from both the city and NYCRC.
In September 2016, the NYCRC took legal action after Dermot allegedly failed to pay interest on its $77 million loan. Two months later, the city’s Economic Development Corporation — which owns the site — sued the developer for defaulting on its rent. (At the time, Dermot allegedly owed $1.2 million.) That same month, the NYCRC threatened Dermot with foreclosure on the Battery Maritime Building.
“We were getting ready for construction in 2012 when Hurricane Sandy hit,” Stephen Benjamin, Dermot’s CEO, told The Real Deal in late 2016. “Sandy destroyed the project and caused a greater than 12-month delay. The delay, coupled with the costs of construction going up significantly, made the original project budget just unsuccessful.”
In late 2016, the NYCRC finally told the investors what was going on, according to the May lawsuit.
But by that time, the suit said, the NYCRC pocketed millions of dollars on the redevelopment project. According to the suit, the NYCRC advanced the entire $77 million loan within the first 12 months of its effectiveness date in 2011, triggering a 2 percent origination fee worth $1.5 million. It also paid itself a $1.5 million annual management fee over several years. At a certain point, investors allege the regional center loaned Dermot $5.5 million to satisfy an equity requirement under its lease with the EDC. The investors don’t know what happened to the money.
This past October, the city tapped Centaur Properties and Cipriani USA to take over Dermot’s sublease.
David Lerner, an attorney for the NYCRC — which has raised EB-5 funds for the Brooklyn Navy Yard redevelopment, the Barclays Center, Pier A in the Financial District and others — dismissed the complaints as “without merit.” And in court documents, the regional center claims the investors were not naive to the risk of development in NYC as they claimed.
“Plaintiffs claim they were ‘unsophisticated’ when in fact they expressly represented and were required by law to be sophisticated investors and to have their investments be ‘at risk’ in order to qualify for permanent residency in the United States,” court documents stated. In fact, EB-5 investors are required to be an “accredited investor” and “qualified purchaser” under U.S. law, which requires at least $5 million in other investments.
Further, it argued, the investors’ main objective was to receive permanent U.S. residency for themselves and their family — which they got. “All Plaintiffs received approval for conditional green cards for themselves and immediate family members,” court documents stated. A total of 345 individuals, both investors and their relatives, achieved permanent residency in the U.S. via the project.