What happens when an EB-5 project fails?

The Real Deal tallies the fallout from the Las Olas Ocean Resort project, whose developers filed for bankruptcy

Oct.October 30, 2018 03:30 PM

550 Seabreeze Hotel (Credit: iStock)

In 2012, a trio of developers drew up plans to build a 12-story InterContinental hotel in Fort Lauderdale Beach. The Las Olas Ocean Resort would include a 12,000-square-foot restaurant from the management company behind Senior Frog’s.

To fund the development, the ownership group tapped Bancorp Bank and later, dozens of Chinese investors who poured in millions of dollars through the federal EB-5 visa program. In all, around $75 million flowed into the project.

But today, the original developers have been booted and the investors are clawing through the court system to get their money back.

The Real Deal took a deep dive inside what happens when one EB-5 project bites the dust.

Las Olas developers

The team led by Ray Parello, Ken Bernstein and Jack and Eugene Kessler were longtime associates or employees of Turnberry Associates, the Miami development group led by the Soffer family. A brochure for the 136-key Las Olas project — at 550 Seabreeze Boulevard — boasted the group has developed “well over 15 million square feet of upscale shopping centers, hotels condominiums & clubs.” The partnership, which called itself 550 Seabreeze Development LLC, claimed the Las Olas development would have a total value of $101.2 million when completed.

Today, it is still under construction.

In August, a U.S. bankruptcy court judge approved the foreclosure sale of the unfinished property. Bancorp Bank had filed suit months earlier, after the developers missed interest payments on their loan. The same developers still face a separate lawsuit from a group of EB-5 investors, individuals with little power to recoup their money. While the owners of the 268-vehicle parking garage to go across the street from the development — JAWOF 515 Seabreeze LLC — have not filed for bankruptcy, creditors are seeking to seize the property to pay off some of the remaining liabilities.

The Ray Parello group is now facing allegations of fraud, aiding and abetting fraud and civil conspiracy from the EB-5 investors suit. Paul Singerman of the law firm Berger Singerman, who represents the four men declined to comment on the case. In a previous statement, the law firm blamed the failures on Hurricane Irma, but the project has been plagued with problems long before that storm ripped through last year.

Bancorp Bank

The developers secured initial financing from Bancorp Bank, which provided a $21.5 million loan. By 2012, the project had ground to halt and the development group sought another $50 million loan from the bank.

Bancorp Bank would only provide the additional funds if the developers secured at least $15 million from EB-5 subscriptions, which awards foreign investors green cards in exchange for investing at least $500,000 in a U.S. development project. A vast majority of EB-5 investors have been from China.

Exceeding expectations, the developers received $30 million from 60 EB-5 investors by the end of 2015. Work on the property was progressing, but the group again ran into financial trouble and was unable to meet its March 2017 project completion deadline.

In January 2018, Bancorp Bank filed a foreclosure suit against the developers, 550 Seabreeze Development LLC and JAWOF, for missing loan interest payments. The mortgage was in default, according to the suit, with an unpaid balance of $36.9 million. With interest and attorney fees the bank was owed $37.6 million.

By June, the development group filed a motion in bankruptcy court to establish procedures for the sale and auction of the property. Two months later, a bankruptcy judge approved a $39.1 million sale to a subsidiary of Magna Hospitality Group.

EB-5 investors

Many of 60 of the Seabreeze project’s EB-5 investors are from China and several of them were introduced through a broker in their home country who handed over a glossy project brochure.

Xia Cao was one of those investors, and is now part of a group of 21 EB-5 investors who have sued Bancorp and the developers, alleging they were misled. They contend each was promised a hotel room as collateral and would also be considered secured creditors if the project defaulted.

As a secured creditor, an investor would receive priority repayment during a bankruptcy proceeding and when a project is complete. Without it, as in many cases with EB-5 investments, the investor has no guaranty and can only get paid back after the secured creditors.

“We thought that the program was safer than any other at the time,” she said. She spoke through an interpreter from Reid & Weiss, a law firm that co-represents the EB-5 investors, along with Levine Kellogg Lehman Schneider and Grossman. The backing of an accredited U.S. financial institution in the project also made their investment seem secure, she said. The law firm is in talks with other Seabreeze EB-5 investors about joining the case, though doing so would be an added cost some can no longer afford. Xia Cao and her husband secured mortgages and loans to raise their $500,000.

In recent years, the EB-5 program has been mired in administrative troubles and widespread allegations of fraud and misuse. Numerous investors have filed lawsuits and its long-term existence remains in doubt. The program recently received an extension, this one only through Dec. 7.

The EB-5 program has awarded green cards to thousands of investors, and developers have successfully used it to create jobs.

Chinese brokers

The Chinese real estate brokers who introduced many of the EB-5 investors to the Seabreeze project are not facing any legal repercussions from the deal, despite charges they failed to explain the accompanying risks to investing. Critics say there is far less regulation in China to ensure brokers are providing accurate representations of a given project in the U.S. And there is ongoing debate as to whether these Chinese brokers are subject to the Securities and Exchange Commission broker-dealer rules and the same rules as investment brokers would solicit investment.

New owners; who gets paid back?

Because Magna Hospitality Group acquired the property out of bankruptcy, it is not responsible for any liens or claims, including any of the EB-5 fallout, according to court documents. Though the project is more than 70 percent complete, court documents show it could require another year of construction.

Rhode Island-based company Magna will use the same contractor and many of the same subcontractors on the remaining work. Magna has agreed to comply with certain reporting guidelines that will assist the EB-5 investors, but only in obtaining their visas.

Magna did not respond to a call for comment.

The $39.1 million the company paid for the property allowed Bancorp Bank to recoup its money in full, according to Levine Kellogg. Meanwhile, none of the EB-5 Seabreeze investors has received any of the $30 million investment, said Jeffrey Schneider, a founding partner at the law firm. Most, however, have been issued green cards.

Bancorp Bank did not respond to a request to comment.

Schneider said while this repayment structure is common in EB-5 projects — where developers fail to offer EB-5 investors a secured interest in the equity — his clients were led to believe they had that assurance. Like what has happened in the Seabreeze case, developers will sometimes just pay the large institutional investor, leaving the EB-5 investors with nothing.

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