By Katherine Clarke and E.B. Solomont, The Real Deal
Jared Kushner’s role in the White House has made his family’s EB-5 project in Jersey City notorious worldwide. But EB-5 insiders say any shady behavior by Kushner Companies is par for the course in a program that is opaque by design.
EB-5 capital has been dubbed the “crack cocaine” of real estate financing, with U.S. developers seeing it as a cheap alternative to traditional bank financing and a part of the capital stack that grows in importance as funds from banks dry up. Critics say developers abuse the program by using it to build luxury residences in prime neighborhoods rather than stimulating low-employment areas, which was what the program was designed to do.
But critics say the Kushner family may have pushed the limits further still by touting its connections to the Trump administration while soliciting EB-5 money for One Journal Square, a $400 million, two-tower project in Jersey City. Pitching the project to Chinese investors over the weekend at a Ritz-Carlton hotel in Beijing, Kushner’s sister Nicole Kushner Meyer referenced her brother’s role in the White House. The pitch event also included a presentation that displayed a photo of President Trump, though a spokesperson for Kushner said the picture was displayed by event’s organizers, not Kushner Companies. Former White House ethics czar Richard Painter called the attempts to cash in on the Trump-Kushner connection “incredibly stupid and highly inappropriate.”
During the Beijing pitch, Kushner Companies did not disclose major obstacles at the project, which, according to Bloomberg, included the loss of its anchor tenant WeWork and the potential loss of $30.4 million in city bonds and a 30-year tax abatement — issues that could potentially put investors’ money at risk. And the project cost, according to the pitch deck, was nearly $1 billion, Bloomberg reported, more than twice the projected cost that Kushner Companies pitched to the New Jersey Economic Development Authority in November 2015. The number of planned units in the pitch deck is also nearly double the 744 originally described.
A Kushner Companies spokesperson declined to comment for this story, though the company did issue an earlier statement in which it apologized if Nicole’s mention of the connection to Jared was interpreted as an attempt to lure investors. But industry insiders said the gaffe has put renewed scrutiny on a program that some politicians and activists have described as a vehicle for dirty money to enter the U.S, one that is susceptible to fraud and corruption by developers. The EB-5 program was extended through September, as part of an appropriations bill President Trump signed into law May 5.
“This program is becoming a political football,” said Clem Turner, an EB-5 securities attorney who drafts offering packages for investors.
“It’s getting a lot of coverage today because of this [Kushner incident], but it’s well documented that the EB-5 rules and the EB-5 program has been controversial,” said Seth Freeman, CEO of EM Capital Management, a San Francisco-based EB-5 consulting firm. “There’s been relatively weak oversight of regional centers [the intermediaries between developers and investors] and their obligation to oversee underlying projects.”
Michael Gibson, managing director of USAdvisors, a registered investment advisory firm that does EB-5 due diligence work, said the Kushners’ sugar-coating of their project is emblematic of a general lack of transparency in the program.
Developers tell investors “virtually nothing” about the projects they’re backing, Gibson said. “All of the funding is done through Chinese agents, so they are the investor’s primary point of contact. Once they get paid their commission, the developer typically doesn’t tell even them what’s happening.”
In New York, a number of projects with red flags have tried to attract EB-5 funds.
Joseph Beninati of Bauhouse Group, for example, continued to try to raise $140 million in EB-5 funds for his firm’s planned 950-foot, 113-unit condo tower at 3 Sutton Place, even after it became clear that his lenders were closing in. In December, lender Gamma Real Estate finally took control of the project in a foreclosure auction.
In the case of the New York Wheel, which secured $150 million from EB-5 investors, the developers did not disclose that the partnership was mired in litigation and that the wheel’s projected costs had almost doubled to over $500 million.
So, what, if anything, did the Kushners do wrong?
“To the extent that the financial projections in the business plan were based on the existence of an anchor tenant, it would be important to update them that the anchor tenant backed out,” Turner said. “To the extent something is disclosed that later changes, there’s a duty to update it.”
While it’s not clear if any White House ethics rules were violated when Nicole name-dropped her brother, Turner said the Kushners only broke securities law if they explicitly said their connections to the White House would benefit the project.
“You certainly can tell the truth– if your brother is Jared Kushner, you can say that,” he said. “However, implying that there would be any special federal benefit as a result of the connection is probably in violation of a federal law, since the executive branch really doesn’t get involved much with EB-5. Any implication that Trump could exert influence on a typical EB-5 deal is not true.”
Bob Cornish, an EB-5 securities litigator in Wilson Elser’s Washington, D.C. office, agreed: “Absent a violation of registration requirements or disclosure issues in marketing or offering documents, it is highly unlikely that the SEC would take action against the Kushners or those working with them on their real estate projects,” he said.
Still, the use of Jared Kushner’s name and Trump’s image at the event has raised more issues of potential conflicts of interest stemming for Jared’s role in the White House.
“There are a couple of things that are really ugly,” said Nuri Katz of migration agency Apex Capital, who said displaying the Trump image was a brazen attempt to woo investors who see clout with the president as a sign of safety. “What possible connection does the president have to building an office building in New Jersey, unless her brother was her brother and the president was the president? She [Nicole] is not stupid. She knew what she was doing. She knew that people assume, since this is run by the family of the president, that nothing bad can happen.”
Sources said those connections would hold special weight in China, where “the more influence you have with government, the better off you are,” Katz said. The migration agents who market these deals are famous for touting their connections to the government. Linda Mei He, the head of Beijing-based Wailian Overseas Consulting Group, has been known to mix with the likes of Henry Kissinger and touts her abilities to get Chinese students into top U.S. schools.
Even if Meyer hadn’t evoked the Jared or Trump administration connections on stage, Chinese promoters were likely mentioning their names to potential investors, sources said. “That doesn’t absolve the Kushner family from adopting communication standards and scripting their presentations to avoid this,” Freeman said.