I recently had the pleasure of presenting on the state of the NYC real estate market with the NYC Regional Center in six different cities across China.
The NYC Regional Center is the largest EB-5 investor in the U.S. They have raised $850 million dollars in the last 3 ½ years over ten different projects, including Atlantic Yards, Steiner Studios, and the GW Bus Terminal.
The EB-5 program has been in existence for decades, but only became widely popular in 2009 when the market collapsed and conventional lenders pulled back from the market.
The way the EB-5 program works is that foreigners invest $500,000 to create ten U.S. jobs, and in exchange they receive a green card. Although this is open to people around the world, the overwhelming majority have come from China.
This was my first trip to China, and I was blown away by the scale of newfound wealth. Cities such as Beijing and Shanghai dwarf New York City as their populations number well above 20 million people. I was advised not to discuss the returns NYC real estate has to offer as they are diminutive compared to the explosion of China’s property values. That being said, the Chinese are not searching for returns from their EB-5 investment which typically range from 3-4%. They are interested in the green card which affords all that the U.S. has to offer, namely the potential education and the lack of pollution.
Many Chinese who bought properties in their homeland years ago now find their investment to be worth many multiples more today. For the EB-5 investor, refinancing to produce the funds necessary and the required proof of funds the Dept. of Homeland Security ultimately approves of, is quite common.
For the individual, transferring money out of China is easier said than done. Their government only allows a transfer out of $50,000 or less, otherwise, permission must be sought and a hefty tax must be paid. As a result, there is a lot of talk about money being illegally transferred out of the country.
The exception to the rule is the SoHo Chinas of the world who are well connected with the government. While I was in Beijing, it seemed like there was a massive SoHo China building on every other block. It is no surprise that they invested $1.4 billion for a 40% stake in the GM Building.
This is just the beginning for Chinese investment in the U.S.. I met with several attorneys in China who said they had clients with tens of millions of dollars who were looking to invest.
For these high net worth individuals, an EB-5 investment is usually the first step. Although there are 250-300 Regional Centers approved by the U.S. government they can potentially choose from, there is tremendous caution in China after a recent EB-5 scandal in Chicago where money was taken, but the project was not developed and green cards were never issued.
By contrast, the NYC Regional Center has an amazing track record. They have helped generate over 2,200 conditional green cards from over 1,600 investors. They also stress the track record of their development partner, and how well collateralized an investment is. Massey Knakal also assists by valuating potential properties to give extra assurance.
They differentiate themselves by providing mostly debt in public private partnerships, which provide the assurance that there will be a surplus of created jobs necessary to produce the green cards.
The NYC Regional Center provides the ultimate assurance by holding the EB-5 investors money in escrow until the conditional green card is produced. This is uncommon in the industry, where funds can sometimes be used before the project proves to be a success.
Raising money in China for the EB-5 program requires great coordination with local agents who bring in the potential investors and handle much of the immigration process. While in China, we presented in six different cities to audiences ranging from roughly twenty to a hundred people. After a two hour presentation on the EB-5 program, the NYC Regional Center’s track record, the specific investment opportunities, and my talk of the NYC market, many investors signed up on the spot to commit. Investors need to act quickly as the NYC Regional Center projects tend to sell out quickly.
Developers should take note of the opportunity to bring in an EB-5 investment. Although the process to receive the funds can take longer, the interest rates are worth the wait, as they are typically below what conventional lenders will offer.
Because the EB-5 program hinges on job creation, projects with a city infrastructure improvement prove to be very helpful. Hotels or projects with large food and beverage components are also great candidates, as they usually create more than the needed number jobs required for the program.
As the financing market begins to loosen up and construction loans become plentiful once again, this could create competition for EB-5 investments. To become more competitive, some Regional Centers may begin to offer mezzanine debt or JV equity, as apposed to construction loans. Regardless, the EB-5 Program has been a true win-win as foreigners receive green cards, projects are being built and jobs are created. Above and beyond, there is no doubt that there is tremendous wealth from mainland China trying to find its way here to purchase NYC real estate.