Chinese EB-5 investors in major New York developments want their millions back
Frustrated by up to 15-year wait times, they are talking with attorneys about how to pull out of projects such as 701 Seventh Ave., 1568 Broadway and One Wall St.
UPDATED, Jun. 19, 12:18 p.m.: When eager Chinese citizens invested in the Times Square Edition Hotel through the EB-5 visa program roughly four years ago, they expected to secure green cards within five years.
But the controversial program, which has brought billions into New York City real estate projects, is facing a major backlog in applications that has driven up wait times. Some Chinese investors, now facing waits as long as 15 years, have enlisted American attorneys to help them get their money back — a trend that could disrupt a source of financing that has become vital to developers.
Between Maefield Development’s Edition hotel at 701 Seventh Avenue and 1568 Broadway, a hotel project also known as TSX Broadway, dozens of investors have organized on the popular messaging application WeChat to figure out how to bring home their money, usually $500,000. They are prepared to forfeit their visa applications altogether.
“Nobody anticipated the delay time,” said Ronnie Fieldstone, a Miami-based securities lawyer who has been contacted by the 701 Seventh investors. “It’s somewhere between 10 and 15 years now.”
From EB-5’s inception in the 1990s until about 2014, there hadn’t been any backlog in the program. It evolved in the late 2000s into a convenient marriage between Chinese nationals hoping to secure a green card for their children’s education and developers hungry for cheap debt in a market where it was scarce. But with the longer wait times, many Chinese see it as a bet no longer worth making: by the time the green cards come through, their children may be too old to avail of permanent residency rights (the cutoff is 21).
The U.S. government, however, requires that investments remain “at risk” in an active project until all of that project’s investors’ visas are approved. At 701 Seventh, for example, there are approximately 400 investors. Because of this, EB-5 funds must often “redeploy” money from one project to another, and some believe that investors aren’t fully aware of what they’re signing up for.
“The Chinese think they’re making one risky investment and they’re getting it back,” said Douglas Litowitz, a Chicago-based attorney who has been in touch with some EB-5 investors in 701 Seventh. “They have no concept of the redeployment. They can’t read English.”
Fieldstone said he expects that most of the investors in 701 Seventh are willing to work with U.S. Immigration Fund (USIF) — the regional center that shepherded in the initial investments — to redeploy funds into other projects. Those projects could include TSX Broadway, the 550,000-square-foot hotel and retail project across the street. Others, however, just want out, green cards be damned.
And with more than $16.6 billion in EB-5 money coming up for repayment or deployment by 2020, according to EB-5 services firm NES Financial, there could be many more cases like this to come.
USIF’s founder Nicholas Mastroianni said in an interview that investors can drop out of the green card process and take their money back once the original loan they invested in is paid off. Those financings usually carry five-year terms.
“Once the investors invest they are committed for the initial loan term,” Mastroianni said. “Once that’s over or if we’re paid back earlier, we can then return their capital contribution.”
However, Litowitz, who is looking to bring a lawsuit to dissolve the investor fund, said the documents shared with investors don’t make this aspect clear. He believes investors should have more information about how USIF conducts business, including what it pays Chinese migration agents, like Qiaowai (QWOS), who bring the investors into projects.
“We made the investment mid-to-late 2016, and [i]526 [green card petition] are not proved yet,” one TSX Broadway investor wrote in an email reviewed by The Real Deal. “And the project haven’t started yet as well, therefore we doubt where the funds are now. QWOS and USIF didn’t tell us the truth regarding all these facts. So now we want a refund, however, they couldn’t.”
But at least one investor has already managed to get their money back on an investment made in TSX Broadway just two years ago.
Documents reviewed by TRD show the investor’s attorney requested a $500,000 contribution back from USIF in December. In the letter, the investor alleged that the migration agency that worked with USIF, Qiaowai, made a series of misrepresentations about the quality of the investment and the timeline for green cards. They further claimed Qiaowai told investors in April 2016 they would have green cards within five years, even though the backlog was known to be mounting. At that time, the estimated time for Chinese nationals to receive a green card was already more than six years, an analysis of United States Citizenship and Immigration Services (USCIS) data for the first quarter of 2016 by the EB-5 industry group IIUSA shows.
That same month, USIF agreed to refund the investment, a consent withdrawal signed by Mastroianni shows. When asked about the claims by TRD, Mastroianni called them “falsehoods” but would not comment further. Representatives for Qiaowai did not return a request for comment, and a representative for Maefield, the developer behind 701 Seventh and TSX Broadway, declined to comment.
EB-5 investors in other projects across town are looking to mimic what the TSX Broadway investor did.
Roughly a dozen investors in Harry Macklowe’s One Wall Street residential conversion project in Lower Manhattan have approached Litowitz, he said. Macklowe Properties, which didn’t work with USIF, is authorized to accept a total of $274 million in capital from more than 175 investors, according to previous reports. A representative for the developer did not comment on the capital raise. And apart from himself and Fieldstone, Litowitz said he was aware of two other attorneys at the Manhattan-based firm Reid & Wise who are also looking to represent as many as 100 investors in 701 Seventh. Those attorneys, Matthew Sava and Shiyong Reid Ye, did not return calls seeking comment.
Mastroianni stressed that investors choose to consent to redeployment in the overwhelming majority of cases, and cited a recent project in which he said 92 percent of investors did just that. He’s fought back against claims from Litowitz by recently having attorneys at the firm Paul Hastings send him a letter, alleging that the lawyer used WeChat to “advise [investors] based on many falsehoods.”
“Our clients will be vigilant in monitoring your social media activity as it relates to USIF and its affiliates,” the letter states, “and will take appropriate action to protect its interests and seek legal redress for any damage suffered.”
Litowitz maintains that many of USIF’s investors are not properly informed of the investment conditions on the front end, and that immigration attorneys also often don’t explain the backlog properly.
“They were manipulated because they wanted to get out of China,” he said.
This isn’t the first time USIF’s interactions with potential investors have come under scrutiny. One of its clients, Kushner Companies, was subpoenaed last year by the U.S. Attorney’s office in Brooklyn and the U.S. Securities and Exchange Commission after an investment roadshow incited an international controversy. Nicole Kushner Meyer, Jared Kushner’s sister, reportedly referenced her brother’s White House connections in a pitch to investors.
Online materials from Qiaowai, which USIF tapped to promote Kushner Companies’ One Journal Square development in New Jersey, suggested that the developer’s success was guaranteed. In an interview with TRD last month, company founder Charlie Kushner and president Laurent Morali said they couldn’t be blamed for what third parties say about their projects:
“We don’t speak Chinese!” they said.
While reform proposals to the EB-5 program have circulated in Washington for years, increasing the number visas is not among the most commonly circulated changes. Some lawmakers have sought to end the program entirely, citing several instances of investment fraud. Critics also doubt the program really creates jobs or helps boost economically depressed communities as it was originally intended. The “gerrymandering” of “targeted employment areas” has driven the lion’s share of investment into high-end real estate projects, they argue.
The program sunsets on Sept. 30, at which point Congress can pass reforms or simply do what it has always done: temporarily renew it.
Fieldstone, who described his involvement with the 701 Seventh investors as “not adversarial,” said the growing backlog and the concerns from investors that come with it has an easy solution: more visas.
The program is capped at just 10,000 new visas per year. “If you had more visas,” he said, “the backlogs would drop off.”
Clarification: This story was updated to clarify attorney Ronnie Fieldstone’s comment on investor redeployment options.