Ceiling on Chinese in EB-5 Program Provides Billions More for Developers

By David North on October 26, 2017

The central thrust of the immigrant investor (EB-5) program is for wealthy Chinese to lend money at ridiculously low rates to American multi-millionaires in the urban real estate business.

Now a complication in that program — the numerical limits on migrants from a single country — has resulted in, according to this Wall Street Journal headline:

Backlog in EB-5 Immigration Program Creates Cash Hoard for Property Developers

While I often suspect a conspiracy among the big city ultra-rich and the nation's pols, I can't say that in this case. This looks like an unplanned boon for urban, EB-5-funded real estate developers, a population that does not need any more good luck, but is getting it anyway.

Here's how it works: The immigration law, sensibly, does not want any one nation to dominate our immigration flows; it, for similar reasons, does not want any nation to dominate any single category in the immigration flow, such as EB-5.

Given the continuing disconnect in China between those with financial power and those with political power (and a certain amount of corruption), many rich Chinese are anxious to get immigrant visas to the United States and have opted to chip in $500,000 to the EB-5 program in exchange for a family-sized set of green cards. There are so many of these worried rich Chinese, that the waiting period between making the investment and getting the conditional green cards has risen to as much as 10 years.

Now, in the rest of the immigration process, if there is a waiting period, the aliens simply get older before they come here (that's a subject for another day) and there are no financial complications. But in the convoluted and controversial EB-5 program it is not that simple.

The EB-5 investments are supposed to remain in place and remain "at risk" from the time the application is made until the green cards are granted. But suppose the investment process is over — the building has been built and sold, or refinanced, in say three or four years, for example. So what happens to the money if the Chinese investor's EB-visa is still in the waiting queue?

It so happens that I was tipped about this problem by a San Francisco financial manager, Seth R. Freeman, who heads EM Capital Management, the day before the WSJ story was published. He said that the combination of circumstances will leave a number of real estate developers with many EB-5 millions on their hands, which must be "re-deployed" from the original investment to something else, something not necessarily as appropriate as the original investment, and perhaps riskier.

The "at risk" element in EB-5 investments is, of course, a bit of a sham, as most EB-5 money is invested in nominally at-risk special purpose limited partnerships or limited liability companies whose whole business consists of lending money to the real estate developers at 1 or 2 percent a year. The alien investors thus have no up-side opportunities for more income than the interest rate, but could lose everything if the project collapses or if the money is mishandled or stolen.

Freeman, on the interest rates paid to the investors, said "They are lower than the ones parents charge their kids on loans to them."

In more formal terms, this means that non-economic factors (family affection, in one case, and desire for green cards in the other) skew the economics of these loans.

The WSJ article suggests that this latest development may hinder the next efforts to renew the main part of the EB-5 program, now due to sunset in December. It points out that the vetting of the re-deployed funds is less rigorous than the vetting of the first round of investments (which in my eyes is pretty casual already), and that there are no job-creation requirements for the re-deployed moneys. My sense is that EB-5 will be renewed again as an addition to a spending bill, with no floor debate, as has been the case repeatedly in recent years.

The upshot is that the big city real estate developers who have done so well with EB-5 moneys in the past, are now going to do even better, with the extra money hanging around for as much as a decade.