A group of Chinese EB-5 investors is demanding arbitration proceedings with Related Companies to determine whether they can inspect the developer’s books.
Douglas Litowitz, a lawyer representing the investors in the Hudson Yards megaproject, emailed a written notice this week to Related CEO Jeff Blau and counsel Andrew Harris of Levitt & Boccio. A messenger also served the documents to the developer’s West 55th Street office.
The dispute dates back to June, when Related informed the EB-5 investors — foreign nationals who collectively poured some $1 billion into Hudson Yards — that it was going to stop paying distributions because of the pandemic.
After hearing the news, a group of 30 investors wrote to Related demanding an on-site inspection of the developer’s financial records. They also sought assurances that they would get paid, claiming they had only just learned, on closer inspection of their contracts, that payments were considered discretionary. “The investors fear that you have tricked them into a perpetual state of nonpayment,” the letter said.
In response, Harris said the investors did not have rights to inspection under their original agreement, according to copies of the correspondence viewed by The Real Deal.
A spokesperson for Related said in an emailed statement Wednesday that returns on investment are a function of the market “and obviously this is a challenging time.”
“We were off to a good start,” the spokesperson added, “but we now need to be patient.”
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The EB-5 visa program is a system where foreigners invest money into job-creating businesses in the U.S. in exchange for green cards. Beloved by developers looking for cheap capital, the program has over the years been marred by fraud, litigation and lengthy delays.
The majority of EB-5 investments are structured similarly to loans — the investors put money into a fund that makes a loan to a developer, and that money is repaid after the loan matures. But Litowitz said his clients each invested $500,000 in Hudson Yards through a preferred-equity model, a somewhat less common structure.
It’s not unusual that developers determine their own timelines for repaying EB-5 funds. The United States Citizenship and Immigration Services prohibits agreements from outlining certain specifics about payments, including timelines. However Litowitz argues that without a loan-maturity date, and with distributions stopped, his clients are stuck in a state of limbo that could be never ending.
Yet recourse for the investors might be an uphill battle. In his formal request for arbitration, Litowitz claims the original agreement waives or severely limits many of their rights, and could make dispute resolution “prohibitively expensive for each investor.” All disputes must be addressed in arbitration, with the loser paying the legal costs of the winner, Litowitz said in the document.
The escalating back-and-forth comes as the developer contends with a series of setbacks at Hudson Yards, including the departure of bankrupt mall tenant Neiman Marcus, and the recent announcement that TAK Room and Bouchon Bakery will also close. The mall has been shut since March under state orders. It’s unclear when it will reopen.
If the proceedings move forward, an arbitrator could determine whether investors can view the developer’s books and records, and whether Related has to give them a timeline for repayment.
Write to Sylvia Varnham O’Regan at so@therealdeal.com