On Oct 08 2014 by H. Ronald Klasko
Update on the China EB-5 Market
I recently completed my semi-annual trip to China. On this trip, I covered three cities, meeting large numbers of migration agents and a variety of wealth advisors, attorneys and Chinese developers.
As always, I came away with a variety of impressions that are not always consistent from visit to visit.
The prevailing sentiment is that the China market is a tough one at this time. There are two prevailing concerns among investors. One is the fear of fraudulent or unsuccessful projects. This is fueled by recent negative publicity (chief among the offending media being Fortune Magazine), as well as recent publicity regarding failed projects, such as the dairy plant in South Dakota. This creates a much more cautious and selective group of investors, who take longer to make decisions than previous generations of investors.
The other complication in the market is the fear, uncertainty and misunderstanding regarding the impending EB-5 quota retrogression for people born in mainland China. This appears to be issue No. 1 among interested Chinese EB-5 investors. The misinformation and misunderstanding that I confronted includes that USCIS will stop accepting I-526 petitions from Chinese nationals and priority dates not being established until I 526 petition approval.
I spent significant amount of time in many meetings and at five seminars explaining the realities of the likely quota retrogression, including the importance of Chinese investors getting their place in line to establish a priority date. I explained that, once quota retrogression sets in, it will likely be longer – and possibly significantly longer – for later filers than for Chinese nationals who file at the present time.
The impact on children is, not surprisingly, also a major issue, with many questions regarding whether it is already too late to protect the age of the child, whether the investor can be changed from the parent to the child and whether the child could be the investor from the beginning, as well as what age is safe for the parents to file to protect the age of the child. All of these issues will be the subject of a separate blog and will be discussed during our upcoming firm seminar.
Exacerbating these problems is the fact that the Chinese real estate market is suffering down times. This is a new phenomenon in China, which has experienced a sustained real estate boom that has created many of the Chinese millionaires and EB-5 investors. However, it is now very difficult for Chinese nationals to sell their homes at anywhere near the peak value.
Unlike six months ago, there does not appear to be a glut of excellent investment projects on the market. Many agents are looking for good projects, especially for launch in 2015 after the Chinese New Year.
As a general rule, agents in China are performing more extensive due diligence and becoming more educated and conservative in choosing projects to promote. Availability of real estate collateral is more important than ever. Increasing amounts of developer equity and decreasing amounts of EB-5 capital make projects more marketable. Agents want more assurances of the availability of the entire capital stack, which assures that the project will move forward. Likelihood of repayment of EB-5 loans is a major focus.
The types of escrow being accepted among the Chinese agent community is evolving. There is far less insistence on investment funds remaining in escrow for each investor until each investor’s I-526 petition is approved. Depending on the project, some agents will accept holdback escrow while others will only accept the release of any investment funds when the project is approved through either an exemplar petition or more often through approval of one or more investors’ I-526 petitions.
Interestingly, many agents are open to – and some prefer – release of investment funds upon I 526 petition filing. This must be accompanied by a credible guarantee from a reputable developer that the investment funds of any denied I-526 investor will be returned upon I-526 petition denial.
The issue of export of currency is hot. The negative publicity regarding the Bank of China’s Yu Hui Tong program has forced the temporary cessation of that program. Many Chinese investors are reverting to the more traditional use of ten or eleven friends and family to transfer currency. Smaller banks and other institutional entities are still engaged in a much smaller scale in the currency export transfer process. The expectation is that the cessation of the Yu Hui Tong program is temporary only.
Interestingly, with the shutdown of the Canadian program and with the Australian program requiring an investment approximately ten times the amount of the U.S. program, the chief competitive program appears to be that of Portugal. Although the amount of investment in Portugal is more than the U.S. program, entry into the EU is perceived as beneficial. But the U.S. is still the first choice for most investors, especially because of the perceived advantages of U.S. educational institutions for the investors’ children.
Things change rapidly in China. The only certain thing is that things will be different when I return six months from now than they are now.