Part of a federal immigrant investor visa program, the Cleveland International Fund could have been collateral damage in a criminal investigation.
View full sizeAdam Blackman, Kristen Laughlin and Steve Strnisha, from left to right, lead the Cleveland International Fund in Pepper Pike. The fund is preparing to lend again, after months spent in limbo after its founder was indicted in the collapse of an Eastlake credit union. The company pairs wealthy foreign investors with Cuyahoga County real estate projects, as part of a federal visa program that gained popularity during the recession.CLEVELAND, Ohio -- Four months after its founder was indicted in the spectacular collapse of an Eastlake credit union, the Cleveland International Fund is ready to start lending again.
Launched in 2010, the company found swift success pairing foreign investors with local real estate projects, including a $275 million office-and-hotel complex on the east bank of the Flats and the expansion of University Hospitals.
That run of achievements stalled in February, after Pepper Pike businessman A. Eddy Zai, who started the fund, was accused of playing a key role in one of the largest credit union failures in U.S. history.
The Cleveland International Fund, a participant in a federal immigrant investor program, was never part of that case. But it was stuck in the middle, as government officials pursued Zai's assets to recoup $16.7 million in allegedly fraudulent loans. A unique funding mechanism for Northeast Ohio projects could have been collateral damage in a criminal investigation.
Yet that didn't happen.
In a strange convergence -- a negotiation that every participant described as one of the most unusual things they've ever experienced - the fund's executives, the government and business leaders found a way to save the company.
An ownership change took Zai out of the mix. An independent review found no impropriety at the fund. The U.S. Attorney's Office, which could have seized money coming into the business, agreed instead to take payments intended to reimburse Zai for his former stake in the company. And a federal judge signed off on the deal.
Now the fund, which has amassed $105 million for Cleveland projects, hopes to raise money for a hotel overhaul in downtown Cleveland and the new American Greetings Corp. headquarters at Crocker Park. While waiting for a final sign-off from U.S. Citizenship and Immigration Services, the company's new owners are considering new Northeast Ohio developments and looking to draw investors from Latin America, South America and Europe.
The next year will demonstrate whether the Cleveland International Fund can shake the bad publicity associated with Zai, who pled not guilty to 34 counts of bank fraud and other crimes and is expected to stand trial in the fall. And the fund's coming achievements, or failures, could illustrate how much of the company's success sat with its public face, an immigrant entrepreneur who was, by turns, effusive and elusive, and how much of it hinged on the people working in the background.
"One of the questions we've dealt with across the board is 'Can you fundraise?'" said Steve Strnisha, a well-connected financing expert who has worked with the fund since 2010 and recently became its chief executive officer. "There was an impression that (Zai) did 100 percent of it. And, however that impression was developed, fortunately it was not the case."
Since February, Kristen Laughlin has spent days on the phone with people in China, where most of the fund's investors live. The company's chief marketing officer, Laughlin found herself answering questions, stressing that investors' money is safe and explaining changes at the fund's offices in Pepper Pike. Some investors needed to vent, to share their feelings about broken trust. But other contacts, including overseas agents who recruit investors, just wanted to know when CiF will have another project ready.
Since February, only one investor has pulled out of the fund.
Program is 'a win-win-win,' borrowers say
Part of a little-known but increasingly popular federal visa program, the Cleveland International Fund offers wealthy foreign investors and their families a shot at U.S. residency if they put money into projects that create jobs in Cuyahoga County.
The fund bundles money from dozens of investors into construction loans. In some cases, those loans are the only option to fill a financing gap that otherwise could scuttle a project. In other situations, the fund can offer lower-cost financing than competing lenders.
After all, these investors aren't expecting a hefty return. They want to get their money back, but the big payoff comes in the form of visas, access to U.S. health care and schools for their children.
"To a certain extent, it's a win-win-win," said Steve Smith, senior vice president and chief financial officer at American Greetings, which is still likely to use a CiF loan to build its headquarters. "The investors get their residency privilege. The borrower gets the low cost of funds. And the community gets the benefit of job creation."
That formula seemed to be working in Cleveland, even as some other regional investment centers struggled to line up investors or produce the required number of jobs.
Then Zai resigned, just before being charged in connection with the 2010 collapse of the St. Paul Croatian Federal Credit Union. And the fund's local supporters faced the prospect of scrapping a successful business and starting over, in an increasingly competitive international arena.
On Feb. 12, just days after the indictment, Adam Blackman bought Zai and his family's 90 percent stake in the company.
Blackman, the fund's chief operating officer, had worked there since January 2010 and already owned the remaining 10 percent of the business. The price for the rest: $22 million, in a note payable over 10 years, with low interest and no personal guarantees.
The federal government quickly laid claim to that note, to cover the credit-union loans. Then the government went one step further, going after payments coming into the fund from projects -- money needed to run the business. Without cash coming in, caught between Zai and the government, there was no way the fund could survive.
But federal officials were willing to talk to Strnisha and Blackman, who now jointly own the company.
"I've, candidly, found the situation that we're in a challenge," Strnisha said. "I kind of get turned on by challenges."
Late last month, the U.S. Attorney's office reached an unusual deal with the executives. Instead of paying Zai for his stake in the company, the fund will send the money to the federal government, which will put the cash in escrow until the credit-union case is resolved. The fund will have money to operate. And the government might get paid faster, Strnisha said, if the fund succeeds in finding new projects and recruiting investors.
"I personally have never had a situation like this," said U.S. Attorney Steven Dettelbach, whose office brought in Peter Raskind, the former leader of National City Corp. and a troubleshooter for the Cleveland school district and the Cleveland-Cuyahoga County Port Authority, to evaluate the fund and vet the deal.
"I think it's important, as we do our jobs, to protect the victims' rights," Dettelbach added, "but to do it in a way that protects the broader public interest. ... I'm not a real estate developer, but I'm told that in this time of tough financing, that this (fund) helps with downtown development. And all of us who live here want the Cleveland business community to have the same programs as competitors in any other city."
Fund's leaders hope to tell new story
At the request of the fund's advisory board, executives hired law firm Jones Day and accounting firm Skoda Minotti to conduct an independent review. The companies scoured emails, sifted through documents and interviewed current and former fund employees.
In a April 2 letter to Strnisha and Blackman, Jones Day Partner Stephen Sozio wrote that the reviewers found no misconduct at the fund. And there was no evidence that investors' money was used improperly.
"It's unfortunate that there will always be some questions that the fund will have to answer, whether it's in the local market or foreign markets," said Baiju Shah, a member of the advisory board and the chief executive of BioEnterprise, a health care-focused nonprofit. "It was very important to go through the process we've gone through and to make those findings available."
That advisory board, which had no decision-making power, likely will disappear. The fund plans to establish a formal, five-member board of directors, according to a restructuring agreement filed in federal court. Strnisha and Blackman each expect to own 40 percent of the company. And they hope to sell a 20 percent stake to Cleveland Development Advisors, an affiliate of the nonprofit Greater Cleveland Partnership, the region's chamber of commerce.
Since 1989, CDA has invested $160 million in hard-to-finance real estate projects, many of them in Cleveland. If the organization agrees to take a stake in the Cleveland International Fund, it would control three board seats and could nudge the company toward investments in key community priorities. Business leaders say this "civic embrace" is necessary to demonstrate support for the fund. And it might help the fund in China, where investors value public-private partnerships and checks and balances.
CDA President Yvette Ittu said the organization will decide on its role within 30 to 45 days.
The fund's executives give credit to Zai for dreaming up the business and launching it at the right time, when demand for innovative financing was growing but the stream of new immigrant investment companies hadn't yet become a flood. But they're eager to move beyond the turmoil of the past few months, and to tell a new story -- about success in a region they believe can capture interest and investment on a global scale.
Reached by email, Zai declined to answer specific questions about the fund and his experience letting it go. "As founder of an important economic development engine for our region that constantly delivers results today," he wrote, "I hope that it continues to succeed well into the future."
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