copyright the Chronicle August 6, 2014
by Joseph Gresser
JAY — Bill Stenger and Ariel Quiros didn’t live up to state standards when they waited nine months before notifying 35 EB-5 investors they had dissolved the partnership that owned the Tram Haus Lodge at Jay Peak Resort, according to Brent Raymond, director of International Trade and the Vermont EB-5 Regional Center.
Mr. Stenger, co-owner of Jay Peak along with Mr. Quiros, agrees that the notification process was botched.
But both men say the contract signed by all parties to the project gave Mr. Stenger and Mr. Quiros the power to make such a decision. Mr. Stenger said he will keep investors in other projects better informed in the future.
Mr. Raymond said about half of the 35 Tram Haus investors contacted his office with concerns about the way their investments were handled.
Some “contacted us with wild allegations, but did not provide evidence to back them up,” Mr. Raymond said Tuesday in a telephone interview. In addition to complaining to the state, a number of the dissatisfied investors took their concerns to VTDigger.com, which first reported the story last week.
The 35 investors were limited partners in Jay Peak Hotel Suites L.P., established to build and operate the Tram Haus Lodge as part of a project financed with money raised using the federal EB-5 visa program.
Under that program, a foreign investor can gain permanent residency status in the U.S. and a path to citizenship by putting $500,000 in an approved project that creates at least ten jobs per investor.
Money from the EB-5 visa program has helped Mr. Stenger and Mr. Quiros pay for three hotels and other amenities, including a water park and ice arena at the resort. They are also in the process of using the program to raise money for other projects, including a biotechnology facility in Newport and a hotel at Burke Mountain.
In return for their investment, the 35 Tram Haus investors were promised that a hotel would be built that met job creation standards set by the U.S. Customs and Immigration Service (USCIS), and they would become eligible for permanent residency status. Because the law requires that EB-5 investors have some management oversight over the business, the investment was organized as a partnership.
Mr. Quiros and Mr. Stenger were general partners, with oversight of day-to-day operations, and the 35 investors, who put a total of $17.5-million into the hotel, were limited partners. According to Mr. Raymond, an agreement that “all the investors signed, and presumably read,” set out the powers of the general partners, which included the ability to end the partnership.
Mr. Raymond said the partnership was a normal business structure, not one that was invented by Jay Peak. In general, he said, the state, which is the only one in the nation to run its own regional EB-5 center, used models supplied by USCIS when it put together the memorandum of understanding on which its EB-5 approval was based.
He said the memorandum has evolved from a four-page document to one ten pages long. The Tram Haus document was put together in 2007, in relatively early days for the EB-5 visa program, Mr. Raymond said.
According to Mr. Stenger, an EB-5 project is subject to stringent review by state officials before investors can be invited to participate. They look at all the details of the project to see whether it will create the proper number of jobs, using a formula created by the USCIS.
Once the state gives its approval, the developer can seek EB-5 investors. Those investors also take a close look at the project. The prospectus sent out by Jay Peak to those considering making an investment strongly encourages them to hire their own lawyer to protect their interests.
“Over 90 percent of the people who invest in these projects have visited Vermont to see what we’re doing for themselves,” Mr. Stenger said.
Although investors can sign up for a project, Jay Peak, or other developers, cannot use their money until the USCIS gives its final approval.
When Jay Peak began working on EB-5 projects, such approval took around six months. It currently can take three times as long because of a large increase in such projects around the country, Mr. Stenger said.
He said USCIS is working to reduce the time it takes for projects to be reviewed and approved or disapproved.
Once a project is underway, the state keeps an eye out to make sure the developers are proceeding according to the original plans. Mr. Raymond said the state looks over a project’s finances, and is in contact with a developer at least once a month.
Because Jay has so many EB-5 projects in progress, Mr. Raymond said, it’s rare for a week to go by without contact between his office and Jay staff.
Since the EB-5 program began oversight, regulations have been toughened, and a project getting started today would have to provide audited financial information, Mr. Raymond said.
While the Tram Haus limited partners could not be guaranteed a return, they were given an equity stake, that is, ownership of the actual hotel. Under terms of the partnership, 100 percent of the hotel’s profits were to be divided among the limited partners during the life of the partnership.
Jay Peak charges the partnership the cost of running the hotel maintenance and for booking vacationers’ stays.
Mr. Stenger said the revenue stream increased as the hotel became more successful. In the last years of the partnership, investors received something around a 2 percent annual return, he said. That amounted to approximately $10,000 a year.
After the hotel operated for two years and investors received their green cards, the limited partners could legally be promised a specific return on their investment and full repayment on the $500,000 each put into the project.
Mr. Stenger and Mr. Quiros chose to dissolve the partnership, in the process taking ownership of the hotel out of the hands of the limited partners and converting their initial investments into unsecured debt.
The debt is scheduled to be redeemed no later than 2018, Mr. Stenger said, with investors being paid interest at a rate of 1 percent annually.
“My mission is to pay them off sooner, and I will,” Mr. Stenger said.
In response to investor complaints about becoming unsecured creditors, Mr. Stenger said he has pledged the full resources of Jay Peak as a guarantee that all the investors will see the return of 100 percent of their money.
He admitted that not informing investors of the change in their status in a timely manner was “a very big mistake.”
“The buck stops with me,” he said. He attributed the error to a heavy travel schedule, which distracted him from keeping a close enough eye on lawyers who were drawing up legal documents for the project.
Mr. Stenger has made many trips abroad in search of investors for current projects, including the AnC Bio plant and a hotel under construction in Burke. He is the public face of Jay and has served as its chief salesman.
In response to reports of dissatisfied EB-5 investors, Mr. Stenger said he plans to be more forthcoming when he arranges the payout for people who put money into the Hotel Jay.
Those investors will be eligible to start an exit from the project next year, Mr. Stenger said, and he has already gotten in touch with them to discuss the change in their investment status.
“We want their reasonable expectations to be met,” he said.
Mr. Raymond said he is looking into the possibility of changing the rules for EB-5 limited partnerships, perhaps giving limited partners some degree of control over the general partners’ decisions.
That could prove tricky, he said, because restricting the general partners’ freedom of action could be hazardous to the financial health of a project, or could jeopardize the ability of investors to get a green card.
He began to say Jay Peak followed standard procedures in arranging to repay investors, but stopped himself.
“Jay Peak is in the forefront” of projects that are returning investor principal, he said.
Asked if any of the investors had filed legal action over the decision to dissolve the partnership, Mr. Stenger said he saw no basis for a claim.
When Mr. Raymond was asked if he thought one or more investors might sue, he replied, “I wouldn’t be surprised.”
contact Joseph Gresser at email@example.com