An EB-5 immigrant investor visa is normally appealing to wealthy foreign individuals seeking a permanent residency in the United States. However, investing in the wrong EB-5 can have catastrophic consequences for investors. This includes the risk of losing the entire investment (which is usually $500,000) as well as losing permanent resident status in the United States.
Unfortunately, for the 60 or so foreign investors that invested in the Las Olas Resort Project (550 Seabreeze), last month turned out to be a week of troubling news. Specifically, on January 25, 2018, the development was sued for foreclosure by the Lender. The Lender has also filed for an emergency Motion for the Appointment of a Receivership due to the possible failure of the entire investment.
THE ORIGINAL PROJECT PLAN
The EB-5 project was sold to foreign investors as an attractive opportunity to invest in a brand-new boutique beachfront resort in Fort Lauderdale, Florida (The Las Olas Ocean Resort). According to marketing materials distributed by the Regional Center, the project was supposed to have 136 rooms, a 9,000 square feet restaurant space (to be managed by Grupo Andersons—the owner of Señor Frogs), a VIP lounge, and a private “Ocean Club” facility for private club members.
According to our investigation, the EB-5 project was estimated to cost approximately $50 million dollars. Of that amount, the Las Olas EB-5 project raised $30 million dollars from foreign investors. This translates to approximately 60 foreign investors, mostly from China and South America. The project was supposed to be fully completed by March of 2017.
THE UNFORTUNATE REALITY
Unfortunately, it appears that the project is turning out to be anything but successful. According to a Complaint filed by the Lender in Florida District Court last week, the Las Olas Resort Project (550 Seabreeze) has been allegedly plagued by a myriad of irregularities, waste, and charges of outrageous fees by the principals (in excess of $1.8 Million).
Through the course of our investigation, we uncovered that, in 2013, the Las Olas Resort Project (550 Seabreeze Development, LLC) executed a promissory note with a Lender (The Bancorp Bank) for approximately $50 million dollars. The property, the rental space, and the leases were offered as collateral for the loan. This loan was in addition to the $30 million the EB-5 project had already received from foreign investors. Under the terms of the loan, 550 Seabreeze was supposed to adhere to a number of covenants, most of which were allegedly breached by the EB-5 project late last year. Below are some of the alleged events of default (according to the Complaint filed by Bancorp last week):
- 550 Seabreeze project failed to make the required payments under the loan for December 2017 and January 2018.
- 550 Seabreeze failed to complete the project by March 2017 (as required under the loan agreement and as pitched to foreign investors).
- 550 Seabreeze performed a number of changes in the project (in terms of budget and project costs) that were unapproved by the lender (or by the investors).
- 550 Seabreeze lost its anchor tenant (Señor Frogs) and failed to secure another tenant for the restaurant space and room service for the hotel.
- 550 Seabreeze lost its property manager (Aston Hotels and Resorts) and failed to secure another property manager.
Notices From General Contractor Does Not Bode Well For the Future
According to the Emergency Motion for the Appointment of a Receivership (by Bancorp), the general contractor and key subcontractors have notified both 550 Seabreeze and to the Lender (Bancorp) that they are about to “walk-off” the job and cease all work due to nonpayment by the EB-5 project. This does not bode well for the future of this already troubled project.
According to the Lender, the 550 Seabreeze project also submitted inflated or incompetent estimated costs needed to complete the project, unsupported by a budget or adequate documentation, which (according to the Lender) exceed the remaining approximate amount of $13 million in unfunded loan proceeds by as much as $10 million.
THE MOST TROUBLING NEWS HAPPENED JUST LAST WEEK
But perhaps the most troubling issue at hand, according to the Court Documents filed in Florida District Court last week, is the allegation that the EB-5 project principals Ken Bernstein, Eugene Kessler, and Jack Kessler allegedly proposed a plan to eliminate the investment made by foreign investors. Specifically, the 550 Seabreeze project principals allegedly sought the Lender’s support for a pre-packaged bankruptcy that would subordinate or eliminate the debt owed to EB-5 investors. In other words, under this plan allegedly proposed by the principals, investments made by the foreign investors through the EB-5 project could be effectively erased.
Given the situation of the 550 Seabreeze EB-5 investment (Las Olas Resort), foreign investors should seek legal counsel to assess their options and possible recourse.
At Vernon Litigation Group, we focus on protecting investors from professional incompetence, conflicts of interest, and fraud which result in significant losses or other damage. Our EB-5 practice includes pre-investment due diligence as well as investigations and prosecutions to recover significant damage that has already occurred. We offer representation nationwide and to foreign investors living abroad.
For more information, contact:
Phone: (239) 319-4434
E-mail: info@vernonlitigation.com
Victor Bayata is a partner at Vernon Litigation Group. He focuses his practice in the areas of business and investment litigation, arbitration (including FINRA, JAMS, and AAA arbitration), employment disputes involving financial advisors and other investment professionals, and securities-related matters.