State Tightens Standards For EB-5-Funded Ski Condos In Ludlow
State regulators last month told an EB-5 developer in southern Vermont to stop marketing a ski condo project to potential immigrant investors for the time being.
The Vermont Department of Financial Regulation has directed the developers of South Face Village, located adjacent to the Okemo Mountain ski area, to update an agreement with investors and accept new state oversight measures. The developers and the state are still negotiating terms and are expected to resolve outstanding issues in the next few weeks, officials say.
The state is imposing more stringent standards on EB-5 projects in the wake of fraud allegations at Jay Peak and Burke Mountain ski resorts in the Northeast Kingdom. The Securities and Exchange Commission alleged in April that developers Bill Stenger and Ariel Quiros misused $200 million in immigrant investor funds and defrauded more than 700 investors from 74 countries in a “Ponzi-like” scheme.
Both Quiros and Stenger have denied the charges.
The fraud is alleged to have taken place in spite of the state’s particular responsibility for oversight of EB-5 projects. The Vermont EB-5 Regional Center, a division of the Agency of Commerce and Community Development, is one of two state-run regional centers in the nation. State officials were required to monitor the projects but failed to require the Jay Peak developers to submit quarterly reports. The agency also allowed Stenger and Quiros to sidestep millions of dollars in administrative fees that should have been paid to the state.
In 2015, the agency agreed to cede regulatory control of EB-5 projects to the Department of Financial Regulation. The department is now retroactively tightening up the rules and requiring other EB-5 developers in Vermont to adopt stricter practices.
At South Face Village, DFR is requiring the developers to update a private placement memorandum with investors and to accept additional oversight, especially with regard to the use of escrow funds. The new private placement memorandum for South Face, a document stating risks and objectives to potential investors, must be updated to reflect changes to financial details, including the value of appraised property and revenue projections. The department is also asking South Face Village to sign a new agreement with the state.
In a May 13 letter explaining the state’s concerns, James Whitehouse, an investment compliance analyst for DFR, told Douglas Hauer, the lawyer for South Face Village, that “the project must not solicit new investors until such time as the new (agreement) is signed, which will occur when the DFR deems the revised and amended (private placement memorandum) effective.”
Whitehouse also wrote that once the agreements are updated, the developers need to advise current EB-5 investors of “the material changes to the offering and give them the opportunity to resubscribe or withdraw from the project.”
The details were first reported by Vermont Public Radio’s Peter Hirschfeld.
The federal EB-5 program allows overseas investors to move to the United States in return for creating jobs. A minimum investment of $500,000 is required in exchange for a visa.
State officials did not provide the exact number of foreign investors involved in the South Face Village project, a 300-acre development with a $200 million price tag.
Construction has started on the development, which features upscale condominiums and townhouses on the southeast face of the mountain. The retreat will feature gourmet restaurants, pools, hot tubs and a health club. A dozen condo units have already been sold.
Patricia Moulton, secretary of the Agency of Commerce and Community Development, said the chief reason for the temporary suspension is to implement new protections for investor funds held in escrow.
Moulton described the suspension as “normal,” although the last time a project was suspended it was for reasons that went beyond normal, she acknowledged. Two projects associated with Jay Peak — the AnC Bio research facility and one at Burke — were suspended in 2014 for seven to nine months.
In the past, developers have had immediate access to the money for construction. Now, the state wants to require the developers to set aside a percentage of the funds for investors who may need to be reimbursed.
Moulton said this is one of the lessons the agency has learned from Jay Peak. EB-5 developers are obliged to reimburse investors if their visas are denied or if they withdraw their applications with U.S. Citizenship and Immigration Services. Stenger, the CEO and president of Jay Peak resort, took as long as six months to return investor funds in several cases, and in another never returned the money.
Moulton said the state wants to implement protections to ensure that if visas are denied, money is available to reimburse investors within 90 days as required under USCIS rules. The state is still negotiating with South Face over what percentage of the escrow money should be retained.
“We have to learn our lessons from the Jay Peak situation, and I think we are learning them,” Moulton said. “As the program has tightened up nationally, we have been tighter here in Vermont, and we are taking the next tightening, if you will.”
Moulton said every Vermont EB-5 project going forward will be under greater scrutiny than before, but exact details haven’t been finalized. The state, for example, will likely require that developers hire third party administrators to manage investor funds for construction in order to make sure withdrawals are legitimate.
The state’s proposed oversight has frustrated the South Face developers, who had already agreed to a memorandum of understanding with the state. They believe their project is already in compliance with federal regulations.
In a May 23 email with state regulators, Hauer said the escrow recommendation is “not acceptable,” adding that “our client is not altering our escrow agreement.”
“We need DFR to be reasonable,” Hauer wrote.
Hauer declined to comment on the ongoing negotiations, as did Andrew Becker, vice president of the South Face Village project.
Michael Pieciak, the new commissioner of financial regulation, also declined to comment.
In an April 21 email, Becker expressed frustration with the marketing hold to Christopher Smith, the director of capital markets for the DFR.
In the correspondence he informed Smith that he had investor interest from two foreigners — a friend of two active Russian investors as well as someone from the Phillipines.
“I would really appreciate your prompt action as signing investors in this climate would be a real coup for both of us,” Becker wrote.
In his response, Smith told Becker, “We intend to work diligently and as quickly as possible. But we cannot sacrifice our regulatory obligations for the sake of convenience. I’m sure you understand.”
Moulton said negotiations with the South Face developers were going well and she expects the suspension to be lifted within a week or so.
“I don’t think there are fatal issues here,” Moulton said. “Most are very correctable.”
The department has expressed concern over other aspects of the development.
In May correspondence with South Face Village representatives, DFR’s Whitehouse asked for clarification on certain land acquisition and development costs, pointing to discrepancies in financial estimates.
Whitehouse wrote that DFR “is concerned that the necessary distinctions between the various business entities are not being properly delineated.”
Whitehouse also cast “doubt as to the profitability of the project,” pointing to numbers in the economic impact study submitted by the developer.
The spreadsheets Whitehouse referred to were redacted when the records were released to VTDigger. Moulton said there were questions about the financials but that the state was confident there were no misrepresentations.
Moulton also brushed off rumors in email correspondence that the Vermont EB-5 Regional Center was in jeopardy of losing its status from the U.S. Citizenship and Immigration Services after the EB-5 fallout.
She acknowledged that other regional centers were telling investors to stay away from Vermont projects said the center is active and approved.
“We are alive and still doing good work,” she said.
- Vermont EB5 Regional Center
- Vermont Agency of Commerce and Community Development RC
- Jay Peak - AnC Bio Vermont
- Jay Peak - Q Burke Mountain Resort, Hotel and Conference Center L.P.
- U.S. Citizenship and Immigration Services
- UNITED STATES SECURITIES AND EXCHANGE COMMISSION
- Ariel Quiros
- Bill Stenger
- State of Vermont vs Bill Stenger & Ariel Quiros
- UNITED STATES SECURITIES AND EXCHANGE COMMISSION vs Ariel Quiros & Bill Stenger
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