Real estate experts with whom I've spoken tell me there is no way the proposed 28-story, $121 million luxury apartment tower Flaherty & Collins plans to build at the site of the former Market Square Arena site can ever cash flow. It perplexed me why even with the nearly $25 million the City of Indianapolis contributed to the politically-connected developer for the costly tower that any lender would ever loan money to the company that has a past history of building costly high-rise buildings only to file bankruptcy before work was completed. It turns out that the hucksters are relying on the controversial EB-5 immigrant investor program to raise a substantial part of the capital it needs for the project.
Under the EB-5 program, wealthy foreign investors from countries like China, India and Saudi Arabia can purchase green cards to immigrate to the U.S. by investing between $500,00 and $1 million in a qualified business project in the United States. The program has been rife with fraud. Last year, federal prosecutors charged a 30-year old man, Anshoo Sethi, with defrauding Chinese investors out of $160 million to build a hotel and convention center on the city's west side with the backing of red-faced state and local officials that Sethi had no concrete plans, let alone experience, to develop. Crooked politicians have jumped into the act. Former Chicago Mayor Richard Daley and his son have been working on several EB-5 projects in Chicago and elsewhere. Daley is working primarily with Chinese investors. Congressional investigators have sought more information about the program, including whether favors were given by the Obama administration on projects backed by Sen. Harry Reid (D-NV) and Gov. Terry McAuliffe (D-VA). Some observers fear that persons involved in espionage and terrorist activities are getting a green light to enter the country as lawful permanent residents. An ABC News investigation found multiple examples of investors with sordid pasts being approved for green cards through the program.
The Indianapolis Star's John Russell has a lengthy story today in which he tells us the 360 Market Square Project is relying on bank loans for just $57 million. The rest it plans to raise from foreign investors. The Star doesn't make this point, but shouldn't Indianapolis City-County Councilors have been told that Flaherty & Collins planned to bring dozens of foreigners to the U.S. as part of its plan to build it's city-backed deal before they signed off on it? I recently inquired of council sources about rumors Flaherty & Collins was having trouble financing the project. The council was assured there were no hang-ups in financing. They just didn't explain the unconventional funding they were relying upon:
. . . The company originally said it planned to start construction last spring. But spring came and went, and no ground was broken. The company later said construction would begin in the fall. But the ribbon-cutting and ceremonial groundbreaking didn’t take place until three months ago, as the officials worked to nail down financing.
They ended up with an unconventional financing package.
In addition to $57 million in bank loans, and $23.4 million from the city, Flaherty & Collins is turning to a controversial federal program known as EB-5 for one-quarter of the funding.
The program allows wealthy foreign investors to get on the fast track for U.S. residency if they plunk down cash to support a growing company.
Foreigners who invest up to $1 million in certain U.S. businesses — or just $500,000 in a depressed area — can qualify for legal permanent residency and a “green card” that lets them live and work here indefinitely.
The investment must create or preserve at least 10 full-time jobs within two years, after which the investor can apply for a green card.
The program has given rise to widespread complaints of fraud and abuse. Several projects across the country have gone bust, leaving investors without money or green cards . . .
A Reuters investigation in 2010 found that thousands of immigrants have been burned by misrepresentations that EB-5 promoters make about the program.
Fortune magazine found that EB-5 investments are typically sold through unregistered securities offerings and rarely involve financial brokers, so deal documents receive no scrutiny from the Securities and Exchange Commission and face little due diligence.
“Because the EB-5 industry is virtually unregulated, it has become a magnet for amateurs, pipe-dreamers, and charlatans, who see it as an easy way to score funding for ventures that banks would never touch,” the magazine wrote.
Flaherty & Collins had been negotiating since 2014 with CMB, an EB-5 regional center based in Rock Island, Ill., to get its project included.
CMB took on the project and issued fliers that touted its design and strong support from the city as key reasons it would succeed.
“The residential tower’s iconic cutting-edge design rivals the architecture of any development in the United States,” the flier said.
CMB officials said last week that it has raised more than $25 million for the project.
Despite criticism of EB-5 financing, Flaherty & Collins said it regards EB-5 as a solid source of funding.
“It’s not like drug money or something,” Collins said.
“To us, it’s just like any other lender,” Flaherty said . . .It's not like drug money or something? The truth is that Flaherty & Collins will have no idea where these investors got their money and won't care. As long as they're ponying up their $1 million contribution to an investment doomed to be a colossal failure, who cares where they got their money. The firm is ensured of making a large sum of money from development fees from the project so whether it succeeds or fails as a going concern is of no concern to them. It's other people's money, after all. One point that's not mentioned is there is an annual cap of 10,000 visas that can be issued each year under this program. That cap was reached for the current fiscal year on May 1, which means new visas won't become available until the next fiscal year begins on October 1.
The Star wasn't much concerned at the time, although Russell does include in his story the fact that Mayor Ballard's former deputy mayor of economic development, Deron Kitner, who brokered the deal between the City and Flaherty & Collins, is now working as the company's general counsel. It's just a free-for-all with this administration. Ballard has been assured federal and local prosecutors won't investigate the rampant public corruption in his administration so they're just raping and pillaging taxpayers at will until his term ends at the end of the year.
UPDATE: The New York Times had a story on Friday about the growing popularity of the EB-5 program. The story speaks very approvingly of the program, although it mentions how developers qualify many projects in economically booming areas as projects eligible for the lower investment threshold of $500,000 per investor by claiming nearby census tracts with higher unemployment rates. I suspect Flaherty & Collins did the same for their project, even though the luxury high-rise building is being built in an area that quite clearly is not economically-depressed. Hat tip to the reader who noticed this story.