Sunday, October 27, 2013

The logical next step in EB-5: set up your own regional center, as in "Developers trade U.S. residency for China's cash"

Crain's reports Developers trade U.S. residency for China's cash, with the sub-heading "Silverstein Properties, The Related Cos. and others are among those setting up so-called regional centers to spin the promise of American residency into cash. Numbers of such operations are expected to double to 24 in just the next six months."

The headline itself is head-spinning, if you think about it. Why exactly should developers, or any other business, get cheap loans by offering green cards, which are public assets?

Only because of a loosely-written federal law that grants immigrant investors green cards for themselves and their families if they park $500,000 in a low-interest investment that creates--thanks to an economist's report--ten jobs.

However, if they're just substituting a low-interest loan for a typically higher-interest one, they're not creating jobs, they're creating more profits for the developer. Visas are public assets and, as I've written, it would make more sense for the U.S. government, as some other countries do, to simply require immigrant investors to park the money in government bonds, so at least the public is assured of some return.

The latest twist

The story begins:
Several major New York City developers are lining up to get permission from Washington to raise money through a government program that allows foreigners to become residents in the U.S. in exchange for investing in job-creating projects, including real estate development, here.
According to sources, Silverstein Properties and The Related Cos. are in the process of receiving approvals from U.S. Citizenship and Immigration Services to open their own so-called regional centers rather than using New York City- or state-sponsored centers to market their real estate projects to wealthy foreign investors.
Known as the EB-5 foreign investor program, it has been successfully used in several real estate projects in the city in recent years, such as the Gem Tower that was built by Extell Development and a large mixed-used development in downtown Brooklyn called City Point. The program allows developers to source cheap debt from foreign markets, especially China, which has a growing class of wealthy citizens eager to gain residency in the U.S.
EB-5 fundraising has been around for years, but a move by developers to create their own capacity to originate debt through the program opens the potential for its expansion experts say. Previously, developers had used third-party sources, like the New York City Regional Center, to handle EB-5 transactions.
Note that the New York City Regional Center, which was used by Forest City Ratner (always ahead of the curve) for the "Brooklyn Arena and Infrastructure Project," is not sponsored by any government. Most regional centers are private businesses, approved by the United States Citizen and Immigration Services (USCIS) but middlemen taking their cut.

Cutting out the middlemen

From the article:
"Once you have your own regional center, it can be easier to raise EB-5 funds for more projects," Mr. [Steven Polivy, the head of law firm Akerman Senterfitt's New York City real estate practice] said. The typical method has been for developers to raise money through the financing vehicle one project at a time through organizations like the NYC Regional Center.
The move will also allow the developers to save on the fees they would have to pay to third party regional centers and also set down their own deal terms, such as how much interest they are willing to pay foreign investors.
The numbers

From the article:
"Developers are getting senior construction financing from traditional sources like banks and then using EB-5 to supplement that," Mr. Polivy said. "Normally a mezzanine loan in today's market is about 15% but you can get the same capital from EB-5 and pay a 5% return."
The money quote 

Nearly two years ago, I pointed to a quote from Andrew Kimball, then director of the Brooklyn Navy Yard:
The Brooklyn Navy Yard got New York's first batch of EB-5 money.
“At first, we were sort of scratching our heads, thinking, is this real?” said Mr. Kimball. “The next thing we knew, we were falling out of our chairs.”
Why? Maybe because it's hard to fathom a program that "creates" jobs without having to actually count them, but instead relies on an economist's report.

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