New EB-5 Scandal and a New Victim, a Big Bank

By David North on April 9, 2018

One of the dubious glories of the EB-5 (immigrant investor) program is the wide variety of ways in which it can be misused, and the resulting wide variety of victims.

This week's EB-5 mess involves several to-be-expected factors:

  • 60 investors (all Chinese);
  • An inept (at best) developer; and
  • A tourist complex in a sunny place (Florida).

But it also includes a new wrinkle, an American bank as a victim. In many other cases, notably the various projects in Vermont, the banks have been portrayed as co-conspirators, and have lost a lot of money as a result.

The EB-5 program gives a family-sized bunch of green cards to alien investors who put $500,000 into a Department of Homeland Security approved — but not guaranteed — project that, supposedly, will produce 10 American jobs. Most of these projects are urban real estate ventures.

Most of the EB-5 money is used as, in effect, loans or mezzanine financing; the EB-5 money is often lent at laughably low rates, such as 1 percent a year, and the developers, both straight and crooked, love the program for that reason.

Back to the specifics:

The hotel is the Las Olas Ocean Resort ("the waves" in Spanish) on the beach in Fort Lauderdale, now under construction.

The bank is the nation's seventh largest, The Bancorp, Inc., headquartered in Minneapolis. It foreclosed in January on a $50 million loan it had made for the hotel's construction, according to Law360 (partially behind a paywall) and various Florida publications, saying that $36,940,000 was still owed.

The developer, 550 Seabreeze Developer LLC promptly filed for Chapter 11 bankruptcy, slowing the foreclosure proceedings. The construction was well behind schedule.

Of the 60 EB-5 investors, 31 of them have asked to intervene in the proceedings, partially on the grounds that the EB-5 element in the whole matter was ignored in some of the court papers.

The builder, Straticon, threatened to walk off the job if its bills were not paid by 550 Seabreeze; it also filed a $5 million lien against the project. Straticon's actions may well have set the foreclosure into motion.

Meanwhile, the regional center — the middleman entities that usually play a major role in most EB-5 scandals — is barely mentioned in the various filings. It is the Miami-based Florida Overseas Investment Center. A reviewer of EB-5 programs nationwide, EB-5 Investments, which gives regional centers marks for transparency, found this one to be "non transparent" — never a good sign.

Another bad sign was the cost of the project. One business journal said that it was supposed to be a $50 million project, yet $30 million was raised from the investors, and there was a $50 million loan. Hmm.

Meanwhile, and we cannot have a report on EB-5 without discussing lawyers, the investors' attorney, Jeff Schneider of Levine Kellogg Lehman Schneider & Grossman (a Miami firm), pointed out that:

[T]he rights and interests that the EB-5 investors seek to protect by this limited intervention are real and substantial ... the investors' EB-5 status is imperiled by the requested relief of foreclosure sought by the bank in this case and could be imperiled if a receiver were to be appointed who was unfamiliar with the complicated EB-5 issues.

My translation of the above is that the bank, which did not mention the interests of the EB-5 investors in its filings, may be willing to throw the alien investors under the bus in order to get more money out of the settlement. The investors want a trustee that knows the EB-5 program, and there certainly is one available in Florida, Michael Goldberg, the Floridian who is doing what appears to be a stunning job as the Vermont EB-5 case trustee.

This is at least so far a civil case and, unusually, one in which the Securities and Exchange Commission does not play its routinely useful role as the cop on the beat. What is not unusual is the lackluster job of the Department of Homeland Security, which runs the EB-5 program generally, and which has allowed this particular mess to develop in Florida.

Further, the editors and the reporter for Law360, have summarized the problem very well. The headline (this is the editor's work product) says:

Fla. Hotel Project Struggles Highlight EB-5 Risks

and the reporter, Nathan Hale, writes that this is:

[A]nother vivid illustration of the federal initiative's risks.

Hopefully Congress and the administration will pay attention to those wise words.