EB-5's Black Hole & Reuben Bros. W Play

The Black Hole of EB-5

It seems fitting that an instrument dubbed the “crack cocaine” of real estate finance would result in a serious comedown.

EB-5, the cash-for-green card federal job-creation program that become a CRE darling in the mid 2010s, pulled in billions of dollars, mostly from Chinese investors, for some of the country’s most ambitious developments. It’s been hailed by the industry as a way to create high-paying domestic jobs, while giving foreigners a clear path to the American dream – developers can get pretty poetic when offered debt at half the rate of conventional mezz. Detractors though, slammed it as a giveaway to developers, a magnet for fraud, and a corrosion of the American dream. 🦅 

A few years after the biggest wave of EB-5 raises, some of its uglier scenarios are coming to light.

EB-5 (Cont.)

A new lawsuit (h/t PincusCo) filed by Related boss Jeff Blau, in which he claimed that irate EB-5 investors in Hudson Yards were harassing him and his family, spurred The Promote to take stock.

Related was one of the biggest beneficiaries of EB-5, raising hundreds of millions through it and lobbying heavily in Congress to keep it intact. In ‘20, Related paused distributions to EB-5 investors in Hudson Yards, citing pandemic-related volatility. The company said at the time that all required payments had been made to the investors, and the distributions were discretionary. That summer, a group of the investors demanded that Related open its books, alleging that the developer had “tricked them into a perpetual state of nonpayment.” Most EB-5 investment is structured as mezz, but a lawyer for the investors said this particular deal was structured as pref, which complicated matters. Lawsuits are by definition one-sided, so it’s impossible to get a full picture from the outside, but what’s clear is that the program is littered with such stories and cries for transparency. When things go wrong, you’ve got a scattered crew of foreigners unschooled in the US legal system going against the legal machines of the biggest builders – not quite a fair fight.

Let’s hop east to TSX Broadway, the tragicomedy in Times Square: Mark Siffin’s Maefield acquired the leasehold at the site for $540M and planned a wildly intricate redevelopment, telling EB-5 investors – whose money was ported (allegedly against their will) from a neighboring Maefield clusterfuck at 20 Times Square – that it would be worth $4B+ upon completion. Cost estimates on the project kept rising, and this summer, a Maefield/Fortress JV lost the project to its senior lender Goldman Sachs. Mezz doesn’t fare too well in such scenarios.

And on the West Coast, take the DTLA boondoggle that is Oceanwide Plaza. In March, EB-5 investors said that the value the developers pegged on the project had no basis in reality: it’s based on a ‘17 appraisal, which means it ignores the development’s nearly 5Y on ice, its state of neglect and the impact the pandemic has had on the area’s office market.

“The Debtor’s views on value are grossly overstated,” the investor group said in court papers. Oceanwide Holdings, the soon-to-be defunct Chinese developer behind the project, has acknowledged that it owes at least $370M at the site, including $170M to the EB-5 investors.

The program was overhauled and reauthorized in ‘22, with stricter quotas for each foreign country, higher minimum investment thresholds, an explicit allocation for rural areas – check out this fascinating Frum-friendly EB-5 project on Lake Okeechobee in Florida – and a fast-tracked green card. Those tweaks reignited interest from Chinese nationals. But what remains murky is the path to recourse if/when things go bad.

Reuben Bros Swooping In on W South Beach

On Thursday, CO held its Power 100 gala at Manhattan’s historic Lever House, a property that tycoon Aby Rosen lost in ‘20 after a lengthy battle with the Korein family. I mention the venue and Aby because the following day a gala attendee called with news about an in-progress Aby deal: the W South Beach, which Aby owns in partnership with David Edelstein, is poised for a new majority owner: Reuben Bros., the voracious vehicle of billionaire Brits Simon & David Reuben, is in advanced discussions to come into the property in a recap deal valued at $400M+, The Promote has learned.

Newmark’s Doug Harmon is advising on the transaction, which is yet to close. Both sellers and the broker declined to comment, while the Reubens couldn’t be reached. Edelstein bought the 3.5-acre property for $77M in ‘04, after a promise to the seller, who operated a Holiday Inn there, that he’d build a special hotel. He then brought in RFR to take a 50% stake, and the partners opened the hotel-and-condo project in ‘09. In ‘23, they traded lawsuits over their buy-sell agreements.

Aby, as readers of The Promote will be well aware, is in the thick of it, fighting battles on multiple fronts to save his trophy portfolio: he just sued landlord Cooper Union in a bid to stay put at the Chrysler Building, and is also using the Solil Management Goldman family feud to buy time on money he owes them.

As for the Reubens: They are everywhere, buying everything from Vornado’s New York retail assets to Gary Barnett’s debt on Central Park Tower to LA’s long-suffering Century Plaza development. Juicy read here for more color.
 

Dream Outcome for Spec Office Bet

Chobani, the favored post-Pilates snack for the yuppie set, has given the Manhattan office market reason to rejoice: The yogurt behemoth is taking the entire 22-story, 121K sf building at CBSK Ironstate’s 360 Bowery, as good a validation of their spec office bet as the developers could hope for. Chobani is winding down at its current digs in Soho, and per TRD ramped up its space demands after completing the $900M acquisition of La Colombe ☕️ last year. The developers (Charles Blaichman, Abe & Scott Shnay, Michael & David Barry) bought into the Noho site in ‘19, paying hotelier Eric Goode $60M for a stake in the building occupied by B Bar, and landed a $70M BofA construction loan in ‘22. This outcome – put up a primo boutique building and convince a top-tier tenant to take all of it – is the kind that drives spec office dreams across the city, from Hudson Square to the Village.

Quickies

• Mack alleges another Joe Chetrit default - this time at a former Times Square flophouse 🛏️ 

• Veris explores sale/refi of Jersey City rental 

• “Capital of capital:” Nuveen opens office in Abu Dhabi 🇦🇪 

•  Large Loan Verrone strikes: Ex-LNR special servicing head Job Warshaw jumps to Iron Hound; Verrone bills him the “Derek Jeter of workouts” ⚾️

• Vanderbilt U. (all-in annual cost $95K 😿) adding Chelsea campus; also being (successfully) courted by Steve Ross in West Palm Beach

• Benefit Street REIT closes $1B CRE CLO - more on them in our “Quiet Kings of Capital” feature here 👑 

• Down the turnpike: A $138/foot all-in Jersey office bet paying off

• Quarter-billion in CRE loans headed to Houston auction block

• A vivid argument against rent stabilization 

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