On Nov 04 2013 by H. Ronald Klasko
Perspectives on the China Market (Part 2)
As promised in my earlier blog, I am reporting on my findings regarding the Chinese EB-5 market following my visit to China during which I presented my clients’ projects to agents, investment bankers and advisors to high net worth individuals. Here is what I found:
- The market is very good right now. The Chicago Convention Center scare is over, and SEC involvement is not a significant concern.
- There is a lot of interest in two issues: the possible increase in the minimum investment amount and the possible EB-5 quota retrogression. The former is not a large concern; the latter is. The sense is that very few Chinese investors would be dissuaded by a minimum investment amount of $750,000 (some would say the same thing about $1,000,000). However, a significant EB-5 quota backlog could deter a large number of investors. Absent legislation, EB-5 quota waiting lists could be the biggest challenge in the coming months.
- Direct EB-5 is hot. The quicker processing time is certainly one of the reasons. The interest in pooled direct EB-5 is certainly one of the biggest changes in the marketplace in recent years.
- Most of the agents, especially the larger agents, realize that traditional escrow (released upon approval of each investor’s I-526 petition) is no longer realistic for regional center EB-5s because of the extended processing times (it may still be realistic for direct EB-5 petitions which have a significantly shorter processing time). Based on meetings with a large number of agents, the consensus is that most would be willing to consider one or all of the following: release upon I-526 filing with developer guarantee; release upon first I-526 approval; 80-20 holdback (20% of the total EB-5 money remains in escrow and the rest is released to the project).
- Administrative fees of $45,000 to $50,000 are very accepted in the Chinese marketplace.
- Agents are aware that there are few exemplar I-526 approvals on the market. Exemplar approvals, while helpful, are not critical for marketing.
- The geographical location of a project appears to be less critical. Although New York, Washington, San Francisco and Los Angeles are still the preferred locations, most agents are willing to consider good projects in other locations.
- Agents give significant weight to the reputation of the developer and the reputation of the professional project team (immigration lawyer, securities lawyer, economist and business plan writer).
- Job cushion is a critical issue. However, the amount of job cushion that is considered sufficient varies, generally between 10% and 30%.
- Approximately half of the agents with whom I spoke are willing to consider a project that is outside of the current approved regional center geographic boundaries. In such a case, the expanded geography would have to be approved as part of the investor’s I-526 petition.
- EB-5 as a percentage of the total capital stack remains a critical issue. More agents than previously look for projects where EB-5 is less than 50% of the capital stack. The amount of developer equity in the project is very important.
- Real estate-based projects remain the most popular. Some believe that there is a glut of hotels on the market.
- Government money in a capital stack is very significant.
- Although agents prefer that EB-5 money be in a first position in the capital stack, many will consider EB-5 money in a second position if there is significant developer equity behind the EB-5 money.
- Generally, agent compensation is on the rise. More – but not all – agents want points on the deal than previously.
I expect to be back in China in four or five months, and I will be interested in seeing if any of the above will have changed.