Another Budding EB-5 Scandal in California's San Gabriel Valley

Is this the City of Hope?

An attorney retained me at the request of a skeptical investor in this EB-5 project sponsored by the America FX Regional Center, LLC, approved as an EB-5 regional center in 2016, well after it was understood that there was an ethical crisis in the EB-5 regional center industry. I was supplied with an initial Offering Memorandum, dated 6/1/16, and a restated Offering Memorandum dated 4/24/17 for the project "FX Boutix Duarte EB-5 Lender".

The goal of the offering was to develop a 318-room FX Boutix hotel across from the City of Hope, one of America’s top ten cancer research centers, in the middle-class Los Angeles suburb of Duarte, California. The total project floor and parking area was to be 445,000 square feet. So far, they have received more than $53 million from 96 Chinese investors, but have never received development approval for their oversized project, and the development application was withdrawn several weeks ago, according to City Planner Jason Golding.

The principals of this EB-5 regional center are Sherry Ho and Alvin Tzuen-chung Ho, former chairman of the Chinese hotel firm FX Hotels Group. He is also known as Hou Zunzhong, depending upon whether the name is pronounced in the Mandarin or Taiwanese dialect. The FX Hotels Group is a hotel corporation traded on the Taipei Stock Exchange, but with almost all its hotels based in the People’s Republic of China. This corporation has lost 95% of its share value since the beginning of 2014. As of today’s closing share price of 3.05 Taiwanese New Dollars (worth about 10 U.S. cents), this company’s market capitalization is equivalent to about 6.3 million U.S. dollars. One Asian stock analyst joked that FX’s only success was taking Taiwanese money and dumping it into bottomless pits in China.

Here’s the chart action in recent years, and consider that one U.S. dollar is approximately equal to 30 Taiwan New Dollars.

It seemed that the Mr. and Mrs. Ho misled investors in the America FX Regional Center by stating that Mr. Ho’s family owned the FX Hotels Group and that FX Hotels Group was interested in foreign development. Most of FX Hotels Group is owned by other Chinese hotel corporations such as Furama and Fu Lihua. Almost all FX hotels are in China.

The second Offering Memorandum for America FX Regional Center has no mention of Mr. Ho or any affiliation with the FX Hotels Group. This might be because Mr. Ho was fired in spectacular fashion at an FX shareholders’ meeting on 3/28/17, after another year of losses, which was video recorded and published on the China Times web site, including police called in to quell Mr. Ho. http://www.chinatimes.com/realtimenews/20170406001317-260410  He had not been notified in advance that he was going to be replaced on the spot by the leading shareholders.

Perhaps this news was behind Mr. Ho’s ouster:

“FX Hotels Group Inc. Auditor Raises 'Going Concern' Doubt
Mar 31 17
FX Hotels Group Inc. filed its Annual on Mar 31, 2017 for the period ending Dec 31, 2016. In this report its auditor, Deloitte and Touche LLP, gave an unqualified opinion expressing doubt that the company can continue as a going concern.”

Meanwhile, a new, restated Offering Memorandum for the America FX Regional Center was published less than a month after his ouster, and there is a disclaimer that investors should not expect FX Hotels Group to manage the property.

The most outrageous inaccuracy in the Offering Memorandum, stated on page 2, is the claim that the hotel would be built across the street from the City of Hope Medical Center, which includes a 217-room hospital with 40 extra rooms for visiting family members. Most patients are cancer patients.

The City of Hope is actually located 1.2 miles from the location of the hotel project, as measured in the Google Map below. The gold and red colors along the route indicate traffic bottlenecks due mainly to shoppers patronizing Wal-Mart and Home Depot in the immediate area.

Visiting investors must have instead been shown the closed Santa Teresita hospital across the street behind the discount retail center anchored by “Dollar Tree” and “Smart and Final” stores, shown in the top photo. Santa Teresita surrendered its surgical/acute care license in 2004, and the 5-story building in the background is composed of offices and vacant space, but there is also an adjacent 131-room senior care home.

The architect's drawing seem to have no compatibility with the L-shaped site, as seen below:

In terms of locational advantages, this project is also a miss because it is not located on the Gold Line light rail system serving the San Gabriel Valley, including a stop for the City of Hope. The nearest west stop on the Gold Line, Arcadia Station, includes several all-suite hotels such as Springhill Suites, Hilton Garden, 2 Extended Stay Americas, Residence Inn and Doubletree, all with a better restaurant selection than Duarte offers. Visiting families would not need to rent a car or deal with the Duarte traffic jams associated with Walmart and Home Depot. The subject hotel project, on the other hand, is not located on the light rail line.

So, there should be 96 Chinese investors asking, “Where’s our money?”

The actual City of Hope

Timeshares, Fractional Vacation Home Ownerships and Condotels are a Bad Deal

Fairway Forest

By now there are millions of disappointed investors in these types of properties. The most important lesson learned is that buildings are a deteriorating asset.

When these property types were originally conceived in the 1980s, the U.S. economy was beset by a high rate of inflation. Real estate was known to provide protection from inflation, because property values were increasing at a similar rate, and leveraged rates of return were even higher. In the early 1980s, condotels had also become the rage in Miami Beach.

My mother was a realtor at the time, and she and her fellow agents were all encouraged by their broker to buy timeshare units at a resort known as Fairway Forest in western North Carolina. They were told that they were fixing their vacation costs at 1980s prices while their investments would continue to appreciate in value as vacation travel would become more expensive in the future. I even co-signed the deed.

By 2007, my mother was retired and living off a limited fixed income. The maintenance fees on the timeshare had increased to $40 per month and she asked me to take over the deed and use the unit as I wanted. I never visited the actual unit, but since it was part of Club Wyndham, I exchanged my week for other places each year – Hawaii, San Francisco, New York, San Antonio and Mexico. My week only counted for 3 days, though, for a stay in Honolulu, San Francisco or New York.

In a few short years, the maintenance fees were increased to $80 per month, meaning that I was paying $960 for 3-day stays in Honolulu, San Francisco and New York, which I could get for a similar cost without any sort of vacation club ownership. Units at Fairway Forest could be rented for just $850 per week. I was also losing money in opportunity costs, as twice I had to turn down profitable appraisal assignments because I had already invited friends to vacation with me in Hawaii. I would rather lose money than lose friends.

I quickly learned that listing a timeshare unit for sale only attracted scammers. I offered the unit for free to my brother and his family, but he told me that he could get better deals on vacation residences just by shopping around. The $960 in maintenance fees was a deal breaker. Meanwhile, I received constant letters from scammers on soliciting their help to stop paying maintenance fees.

Just Google “Wyndham Timeshare” and you will see what I mean.

Luckily, belonging to a scuba diving club, my offer of a free timeshare in Club Wyndham attracted a taker, someone who had come along on our diving trips to Hawaii and Cozumel.

Meanwhile, the various hotel awards programs I belong to have recently been calling me with the secret mission of selling me timeshares.  Today it was IHG (InterContinental Hotels Group), known particularly for its Holiday Inn franchise. When a caller with a foreign accent tells you that they are "recording this call for quality purposes", it means that they are about to try sell you a timeshare and they want recorded proof of your order. Why do they need proof so badly? Just hang up.  

Why are timeshares and  condotels a bad deal?

It's the maintenance fees, Stupid!

This leads me to an important concept that gets forgotten in the real estate investment world, that buildings are deteriorating assets. Hospitality assets deteriorate even faster because of the exacting standards of the hospitality industry, under constant pressure to renovate. This is why maintenance fees are always rising for timeshares and condotels and other fractional vacation interests.

Meanwhile, an excess of vacation properties was built between 2005 and 2008, and values plummeted in the Global Financial Crisis of 2008 and many have not yet recovered due to the oversupply. The only phenomenon I see is maintenance costs increasing faster than property value appreciation, of which I have not seen any. That is today’s economic reality as we live in a world of low inflation. Your timeshare or condotel just might be worth nothing as an investment, but you can still use it for fun.

As for condotels, I first witnessed them in the early 1980s, spurred by the 15-year Accelerated Cost Recovery System enacted by the Economic Recovery Tax Act of 1981, but the Tax Reform Act of 1986 took away these benefits, and the burgeoning oversupply of vacation units killed the condotel industry, a historical fact that keeps getting forgotten after each time this industry collapses.

Constant problems with condotel investments include high maintenance fees, on the order of $10 per square foot per year, having to share 35 to 50% of revenue with management without any guarantee of occupancy, having to frequently buy new furniture packages to comply with the hotel franchise rules, HOA dues, housekeeping fees, special assessments and elevated insurance costs. On top of that, this is an investment type that rarely experiences capital appreciation. If capital appreciation was reasonably expected, the hotel developer would never have needed to sell units prematurely.

Condotels continue to re-emerge as a brilliant new concept before crashing in flames yet again and forgotten. Now I am once again getting e-mails from Mondinion about a brilliant new concept: the Condotel.

Industrywide failure to consider buildings as deteriorating assets

The real estate industry in general in the 1980s newly embraced a valuation method called “Discounted Cash Flow Analysis”, in which valuations were based on 10-year cash flow projections. That is what I was hired to do after graduating from SMU in 1984 with an M.S. in Real Estate degree. The only problem is that most of the DCF practitioners inflated income and expenses at the same rate of inflation, not acknowledging that buildings were deteriorating assets. Every DCF valuation thus became inflated, and hundreds of millions of dollars were lost in the collapse of the commercial real estate industry in the late 1980s and early 1990s.

In a book I was commissioned to write for the Appraisal Institute in 2011 (see sidebar), I was prohibited from mentioning that over the long term, expenses always increase faster than rents, because buildings are deteriorating assets. If you don’t believe me, think about your car expenses. Are they really increasing at only 2.5% per year according to the CPI (Consumer Price Index)? Of course not, as cars are also deteriorating assets.

As for Club Wyndham, I was satisfied with the exchange possibilities, but displeased with the high-pressure sales tactics used on me whenever I showed up to peacefully use my reserved unit. Club Wyndham, why could you not just leave me in peace to enjoy my vacations without high pressure salespersons?

In the last 2 years, in Manhattan, the unit would never be ready, even if I arrived at 8:30 pm, and I would be handed off to a high-pressure salesman trying to convince me to buy more points or I would never be able to stay at their place again. 

There was also the Mandatory Information Breakfast Meeting I was required to attend during every stay at any Club Wyndham property. The first time, in Hawaii in 2007, I showed up and was denied admission because I did not bring identification, which was fine with me. They must have thought I was a tourist attempting to steal their orange juice and plastic-wrapped muffins.

In San Antonio, I attended their Information Meeting on a Sunday morning, to which I was bussed several blocks away, thus assuring I would not escape during the Texas summer heat. The speaker casually chatted with me before the Meeting started, mentioning that he had been a flight attendant before entering the career of timeshare sales. I had orange juice and muffins and scrambled eggs. 

When he started the presentation, the only information he provided for the first 15 minutes was about himself, in which he had elevated himself to being a former airline pilot. Then he asked all of us to chant the phrase “Today is the Day!” I felt like I was trapped in an Amway sales rally and quietly left, walking several blocks back to a nice unit on the San Antonio Riverwalk. I lived nine years in the Texas heat and humidity, so I could handle the walk. Plus, if you have read my other posts, I have done plenty of work in tropical locations, and sweated profusely in places such as Acapulco, Fiji, Costa Rica, St. Maarten and Roatan.

When I returned to my building, the doorman had already been alerted of my escape. He asked me if there was a reason why I left the Information Meeting so suddenly. I just said, “Today is not the day.”

Now chant after me: Do not attend the Information Meeting!

Making Borrower Background Checks Part of the Appraisal Process

In two previous posts I suggested appraisers sometimes do “background checks” on loan applicants, which is contrary to everything taught to me as an appraiser and even seems blasphemous. After all, the same real estate should be worth the same, no matter who is buying or refinancing it, and the standard definitions of market value assume the sale of the appraised property on the open market to a third party. A staff appraiser at a lending institution may even be accused of “not minding his own business” in conducting such a check. “How dare you question a borrower’s integrity! Home Savings of America attracts only the most honest borrowers!” R.I.P., Home Savings.

I started doing background checks in 2012, though, and have no regrets, as I have rescued clients from scammers.

The Achilles Heel of the appraiser/valuer profession is reliance on false information. That is why an appraisal report may have many pages of “Assumptions and Limiting Conditions”, including the dangerous assumption that all information provided to the appraiser is true. This is supposed to absolve an appraiser from liability, but it does not necessarily serve the client’s interest, if the client is a lender or buyer.

The last time I discussed this was 8 months ago in my post, http://www.internationalappraiser.com/2017/06/commercial-mortgage-straw-buyer-scams.html , when I decried the proliferation of commercial straw buyer scams used to sell unmarketable properties. These scams seem to be becoming more sophisticated and organized. Instead of a lone individual who may have responded to a LinkedIn ad, there may be several people involved now, including an attorney (to scare the appraiser), a public relations executive (why would a good property even need PR?), and a “Capital Markets” representative from one of the major brokerages. CM is also an acronym for cow manure.

One of the characteristics of a straw buyer scam is that the buyers are the ones to show the property, with the seller not present, and they do everything they can to persuade me to inflate the value, such as providing me with inappropriate comparable sales data. In some cases they have already acquired the property, such as acquiring the seller's LLC (not recorded as a real estate transaction) or establishing a private joint venture with the seller. If the appraised value comes in too low, straw buyers do not try to negotiate a lower selling price, but instead waste their efforts on discrediting me. In my latest encounter with such a group, they even chronicled my bowel movements.

In the past, I used to waste many hours on e-mail rebuttals. Then I found that an $8 background check per person can stop such people in their tracks. The principals of the most recent group I encountered had multiple tax liens, a foreclosure and a bankruptcy. Their backgrounds did not match up with the project they were supposedly going to develop. All the arguing stopped once they were exposed for who they really were.

Another relevant post:
http://www.internationalappraiser.com/2013/01/when-extra-due-diligence-on-borrower.html

A Reassessment of Real Estate Guru Ronan McMahon: Real Math vs. "Ronan Math"

Almost 5 years ago I published a post that was critical of International Living magazine and their anointed real estate guru, Ronan McMahon, for the bad investment advice being presented. http://www.internationalappraiser.com/2013/02/ronan-mcmahons-real-estate-trend-alert.html I also pointed out a conflict of interest, as IL must serve its advertisers, and certain problematic real estate markets were being continually touted despite declining real estate values. (In my own travels, I have observed that the foreign vacation home/retirement home market has not yet recovered from the global financial crisis 9 years ago, and the price of land has been declining for years.)

Each month, Ronan McMahon writes in IL of another “get rich quick” market, and I have to bite my tongue because I may not have been to that place recently or at all. Nevertheless, in the last 5 years I have received many e-mails about the blog post about him, plus more than 50 comments published on the post, and no one has ever disputed me, but many have thanked me. I’m still waiting for the comment, “Ronan and Real Estate Trend Alert made me rich!”

Which brings up his latest article in the November 2017 issue of International Living, “Gold in the Hills: Prime Ocean Views No One is Looking For”. The article mostly refers to Nicaragua, where I have not visited yet, but he also refers to Costa Rica as a real estate investment success story. As he specifically refers to “ocean view” land in Costa Rica, I feel the need to offer a dissenting opinion.

My first appraisal of Costa Rican ocean view land was in early 2009, before I started this blog. When I returned in 2012 I was surprised to find that asking prices on ocean view land had declined by 75%, and there were many “se vende” [for sale] signs around. Two years later the asking prices were even lower, and the only sale I could find was an ocean view parcel that sold at one third of its listing price.

Real Math vs. Ronan Math 

This brings to mind his constantly deceptive proofs of price appreciation of his previous buy recommendations.  The legitimate method of measuring price appreciation is to measure closed sales prices over a time period and establish a price index or compute percentage increases over a fixed time period. The big real estate brokerages do this in the U.S., and I saw the same process used in France. Although I do not always trust brokers, I have learned to rely on their data. Occasionally, I have seen a realtor enter a false comparable sale into the Multiple Listing Service or LoopNet, but that is not common, so it should not have much effect on price indexes.

"Ronan Math" involves taking the lowest closed sales price in a condominium complex, probably a smaller unit, at the beginning of the time period, and compare it to the highest asking price in the same complex (probably a larger unit) some time later. There is no discussion of today's closed sales. Then he tells the reader that if we had taken his advice, we could have achieved returns over 100%. This is so disingenuous that it mocks the field of Mathematics.

The truest statement McMahon made in the article was “There needs to be a finite amount of coast and beach.” My own observations of Costa Rica are that it has an almost infinite amount of ocean view land, owing to its topography and coastlines, and much of this land is for sale.

Magazine articles often use callouts (insets) to reinforce the key points of the article. McMahon uses two callouts in his latest article:

“Make a killing in the medium to long term”

It’s been a long time since I’ve heard of an investor making a killing in Costa Rica. If this is happening, I would expect it be happening in a trendy neighborhood in San Jose, where the real land shortage is.

“The better the views, the more you’ll sell for.”

A view is worth little, though, if it has no access nor building permits nor infrastructure nor water or the grade is too steep for development.

McMahon never discusses such things, though, suggesting that his knowledge of real estate investment is primitive at best. It's almost as if he has never taken a class in real estate. 

Each article also recommends buying in a “Path of Progress”. My own observation is that the moment an area is labeled as a “path of progress”, asking prices for land skyrocket and then gradually fall as reality sets in that progress takes longer than expected.

In 5 years, no one has e-mailed me or left a comment that my opinion of Ronan McMahon is wrong.  His real estate investment advice is consistently bad.  I have seen no testimonials to the contrary. Even his arithmetic is bad.

So why does International Living continue to employ him?  It is because IL is a sales organization and McMahon is a master bullshitter. 

Some of my friends in the real estate sales profession have a favorite film -- Glen Garry Glen Ross -- released in 1992 with such star actors as Al Pacino, Kevin Spacey, Alec Baldwin, Ed Harris and the late Jack Lemmon. All the characters are land salesmen at a Chicago real estate firm, relentlessly telemarketing land in the faraway states of Arizona and Florida using every sales trick in the book.

The management of the firm sends Alec Baldwin to motivate the salesmen into improving their sales or face termination, with lines such as:

"Only one thing counts in this life -- get them to sign on the line which is dotted."

and the oft-quoted "ABC -- Always Be Closing".

So remember that Ronan McMahon and International Living have an agenda that might be inimical to your interests -- to get you to sign on the line which is dotted.

"Wot? Are you accusing me of bad arithmetic, too?"

Rental Properties Marketed on Mondinion.com and PropertyO.com

Rental home in Inkster, Michigan

Lately I have been receiving e-mails from real estate agencies Mondinion.com and PropertyO.com, both headquartered in the United Kingdom, advertising preconstruction opportunities to buy individual rental units in hotels, senior care facilities and apartment buildings.  These opportunities are often accompanied by guarantees of rental income for a period of two or more years and sometimes an optional buyback from the seller at higher price after a few years. 

As it has been 4 years since my last UK valuation assignment, I cannot comment on the merit of these investment opportunities which are mostly in the UK. It has been my observation over the last 33 years, though, that when properties are being built for investors rather than occupants, that is the sign of a real estate market entering a bubble phase.

If owner-occupants cannot outbid investors, that is a sign of impending weakness.  Investors often enter these transactions expecting that negative cash flows will be rewarded by ever-increasing property price appreciation, but such a market collapses on itself when there is an insufficient number of renters to occupy all units and cover the investor’s ownership costs. In Southern California I saw this happen in the early 1990s and again starting in 2006 in the more distant L.A. suburbs. Southern California home prices plunged afterwards.

One disingenuous technique I see used by advertisers on Mondinion is to advertise unbuilt projects with projected 9% yields, ignoring the Law of Supply and Demand.  An increase in the supply of units could drive rents downwards. This is a natural consequence of building for investors rather than occupants. New York City is already experiencing the consequences.  The median price of a new condominium has so far declined 27% this year, yet many more luxury condos continue to be built.  Likewise, the ultra-luxury Metropolis in downtown Los Angeles is experiencing a slowdown of sales as an estimated 60% of buyers are investors, not occupants.

Existing Rental Properties for Sale

Recently, Mondinion and PropertyO have advertised U.S. rental home investment opportunities in areas I have appraised in. One thing in common is that all the properties have been in depopulating cities.

The first opportunity was that of rental homes in the Detroit, Michigan metropolitan area. Curiously, the advertisement stated that this investment was not suitable for U.S. investors, raising the question of “how can an investment unsuitable for U.S. investors be suitable for foreign investors?” Another questionable claim was that all of this seller's properties were in "safe neighborhoods". The broker is Marigold Investment Properties, a British company.

Having a friend make an inquiry, I was informed of a 900 sf, 3 bedroom, 1 bathroom rental home, built in 1955, available in Inkster, Michigan, a western suburb of Detroit, for the price of $48,000, guaranteed to produce $9000 per year in rent. The owners paid $26,500 for this home on 4/23/15 and have assumedly renovated it since then.

Checking a demographic research web site, I found that this forecasted rent was close to the estimated median rent of $738 per month ($8856 per year) for Inkster. I was also pleasantly surprised to find that the official living area (per tax assessor) was 1036 square feet. What was more sobering was an estimated local vacancy rate of 16.9% (better than Detroit’s 22% vacancy rate), and a population decline of 37% in the last 50 years. More troubling is that NeighborhoodScout.com rated Inkster as having a higher crime rate than 93% of Michigan communities, with a violent crime rate three times the Michigan average. Not a "safe neighborhood", as advertised.

I sometimes consult data-aggregating web sites such as Trulia.com and Zillow.com to garner real estate market information. All analysis is done by computer, which is not quite as accurate as a competent and honest real estate appraiser. Trulia has estimated the median home value in Inkster as $42,300, having declined 50% in the last decade. Zillow placed the median home value at just $40,900. Zillow estimates that this home has decreased in value by 14% in last month. CoreLogic indicated nearby home sales in the last month in the $38,000 to $43,000 range.

Trulia.com report on the subject property and its neighborhood

Why you should hesitate to buy rental homes in depopulating cities

I have seen other rental home opportunities marketed by PropertyO in other cities such as Chicago, Cleveland and Memphis. These are all depopulating cities. DNAinfo.com, for instance, compiled a list of the 10 U.S. cities losing the most residents between 2015 and 2016:

1. Chicago

2. Baltimore

3. Milwaukee

4. Detroit

5. St. Louis

6. Shreveport

7. Columbus

8. Cleveland

9. Jackson, MS

10. Memphis

Here’s the reason to avoid such investments:  Depopulating cities experience decreasing property values and rents. Investing in older buildings in depopulating areas is a prescription for failure.  The Rust Belt, for instance, has many cities that have lost half their population in the last 50 years, including Detroit, Cleveland, Youngstown and Dayton.  This usually means increasing vacancies, despite gallant leasing efforts.  Rents are so low that only the lowest cost renovations make any sense, too.  Even then, new space gets built, hastening the demise of the older buildings. 

Back to Inkster, this investment is being marketed without any guaranteed rents, but the seller will manage the property for you for 10% of gross rental income.  Such a high rate is typical of a problematic housing market where good tenants are hard to find. 4% is more typical.

I have also seen other rental properties marketed with short-term guarantees of rental income.  “Guaranteed rental income for the first two years” is a seller promise that should be interpreted as a sign of weakness, not security, because an adequately performing rental property does not need to be sold with any such guarantees.  It is almost tantamount to saying that Year 3 is going to be a crapshoot because tenants are hard to find. Do not be surprised to see that the property’s previous asking price has been inflated to more than cover the amount of these guaranteed rents. Can the guarantor remain solvent if real estate rents and prices decline, though?

This reminds me of a phrase I have sometimes read on Craigslist:

“Only a scammer will ‘guarantee’ your transaction.”

-- Craigslist

The International Appraiser’s 3rd Successful SEC Whistleblower Complaint Against an EB-5 Regional Center

This week the SEC filed an asset forfeiture action against the Home Paradise Regional Center in Commerce, California, a EB-5 regional center that gained temporary green cards for foreigners based on false reports to the USCIS on its alleged creation of 345 jobs at a fake home and commercial design center in Ontario, exaggeratedly measured at 111,000 square feet.

I first became acquainted with Home Paradise in Beijing at the Overseas Property Investment Exhibition. http://www.internationalappraiser.com/2016/05/overseas-property-and-immigration.html

A background check on Ed Chen, the CEO of Home Paradise, revealed a history of liens and civil judgments against him before he started Home Paradise, a matter of public record, which he had a duty to disclose this to investors per U.S. securities laws. If investors had known his legal history, they may not have entrusted him with $545,000 each.

All of this once again indicates the initial flawed design of the EB-5 visa regional center program. Imagine a federal agency announcing, “Who wants to collect tens of millions of dollars from naïve foreign immigrants?” and all of the hundreds of entities who responded by saying “We do! We do!” and not a single background check was performed. I wouldn't want the responsibility of creating 10 jobs out of each $500,000 investment. 

To get approved as a regional center, the most difficult thing they had to do was order an economic study proving the number of jobs they were going to create.

The approved regional centers were never subject to audits, just a yearly I-924A form explaining their job creation progress to functionaries in Washington, DC. Was it realistic to expect truthful I-924A reports? Now we know that Home Paradise was lying, as was the California Investment Immigration Fund I reported on in April. http://www.internationalappraiser.com/2017/04/california-investment-immigration-fund.html

Now the USCIS has already started a program to visit more than 200 regional centers per year to check facts, while the SEC investigates regional centers suspected of fraud. With 843 EB-5 regional centers, though, this process will take a long time.

It is time for USCIS to make I-924A forms public (meaning that the public does not have to obtain consent from the regional center). Civil servants in Washington might not know if a regional center is lying, but local rivals and investor advocates can find the lies much quicker than the current regulatory system if allowed access to the I-924A reports.

EB-5 Regional Centers Touting Fake Projects. Here are some more.

Mythical California Chinatown in Rancho Cucamonga, advertised in China

EB-5 regional centers are hastily assembled, opportunistic business entities who have received approvals from the USCIS to collect $500,000+ investments from foreigners seeking U.S. green cards. The idea is to pool the foreign money into a job creating enterprise that creates at least 10 jobs per investor, and the foreign investor is then given permanent residency after 2 years.

While in Chicago during the summer of 2013, I visited the site of the “A Chicago Convention Center” scandal. This fake EB-5 project promised a new convention center and five hotels on a 2.8-acre site along the Kennedy Expressway leading to O’Hare Airport. This scam lasted a couple of years, attracted the endorsements of Illinois Governor Quinn and Illinois Senator Durbin, and collected $160 million from 290 mostly Chinese investors before a rival regional center manager took one look and turned the developer, Anjoo Sethi, into the SEC. In those two years, no one had called Chicago planning officials to verify that this was an approved project. http://www.internationalappraiser.com/2013/05/attempt-to-defraud-261-chinese.html

In the eleven years I have been practicing as an independent appraiser, at least half of my practice has been the valuation of land entitled for development projects. Calling the relevant planning officials is one of the first things I do, because real estate developers occasionally lie or forget to disclose costly conditions of approval.

When I returned from my Chicago trip, I called a former neighbor of mine who is a Chinese-born immigration attorney.  I asked him if he referred clients to EB-5 regional centers.  He said, “No, because I don’t want to go to jail.”  I figured that I was possibly on to a new, unaccountable industry rife with fraud.

The most conspicuous local EB-5 regional center in LA was that of the California Investment Immigration Fund (CIIF) in the lobby of the San Gabriel Hilton hotel. I visited them during the summer of 2013 to ask about what projects they were working on, and I was told about Victoria Center, a hotel, office and restaurant project to be built in the desert town of Indio, California. I called the Indio planning department and they confirmed a development application for Victoria Center, but it lacked an office building. Nevertheless, I gave CIIF the benefit of the doubt.

Two years later I stopped by the CIIF office again to inquire about the Victoria Center, and the manager on duty had a frightened look on her face. She denied knowledge of Victoria Center. Since the CIIF had been open continuously since 2008, I asked her if they had found anything to build in the ensuing 7 years, and she gave me a Chinese-language brochure featuring a new project in Rancho Cucamonga, CA, pictured above, to be called California Chinatown. I called the planning officials in Rancho Cucamonga and they had not heard of it. 

Considering that the California Chinatown project was not even featured on the CIIF U.S. web site, I did some searching and found that CIIF had an alternate Chinese web site (www.ciif-eb5.com) with several fake real estate projects in Ontario, Riverside and Rancho Cucamonga. I called the relevant planning authorities and none were familiar with these advertised projects. These were fake projects, the most absurd one being the future headquarters building of the American Chinese Business Association, a fake business association created by CIIF to gain access to politicians. Before the FBI raid, political commendations were posted on the front window, such as this one:

I referred the matter to the SEC (Securities and Exchange Commission) and they called me one month later to ask me to discuss the matter with the FBI (Federal Bureau of Investigation).  The FBI raided CIIF and shut it down in April 2017, 17 months after I made my initial complaint. Charges have not been filed yet because the nature of the raid was to seize evidence.

Since November 2015, I have made complaints on over 30 EB-5 regional centers, and the U.S. government has pursued complaints against two of them – CIIF, and the ZGlobal regional center, aka PDC Capital, operated by Emilio Francisco. The SEC and FBI are limited in resources and must follow meticulous investigative procedures which take time, but result in 90+% conviction rates.

I have a high regard for the work that the SEC and FBI are doing, but this still leaves the problem of how quickly the EB-5 regional center industry can be cleaned up.  There are 835 regional centers at present, none of which have had their executives properly vetted by background checks, and my own background checks of some of these executives make me quite uncomfortable; many of them are underemployed lawyers, securities salesmen and real estate salesmen, not skilled in job creation, with legal histories of tax liens, civil judgments and foreclosures, and occasional bankruptcies  I am concerned that there are fraudulent regional centers still taking hundreds of millions of dollars in money from foreign investors.

Some of the EB-5 regional centers I have contacted would not discuss the projects that they are supposedly working on. I find this suspicious, but I cannot prove wrongdoing.

Some other regional centers advertise fake projects, projects that city planners deny any knowledge of, and this wrongdoing is more apparent and more interesting. Let me tell you about some of them.

United Venture Regional Center is headquartered in Turlock in California’s Central Valley and advertises oversized projects in poor, undersized cities. Here are some examples from their web site http://www.univrc.com/projects:

·       Under Kern County they mention that they are building a 55,500 square foot office/hotel project in the town of Wasco.  Roger Mobley, the head of the Wasco planning department, (661) 758-7200, tells me that no such project has been proposed nor has anyone from the UVRC acquired land that would support such a development. The planner also considers the project to be too large to work in Wasco, a town of 25,000 residents, 22.4% of which are incarcerated in the local prison.

·       Under “Villa Crest” they announce Villa Crest Apartments and Commercial Complex, which will encompass 126,800 square feet of office, retail, restaurant and apartment space in Ridgecrest, a military town of 29,000 residents. Pam Contreras of the Ridgecrest Economic Development Department tells me that no such development application has been received.

·       Under “Westpointe Commercial Complex”, they announce a “165,700 square feet retail commercial center with office buildings, a supermarket, a restaurant, and a residential facility” in Ceres, California. City Planner Tom Westbrook confirms that there is no such proposal in his city. He can be reached at (209) 538-5778.

American Vision Regional Center is based in Houston.  Open for business since as early as February 2013, there is only one project listed on their web site, and several others vaguely listed as “Coming Soon”. The only illustration of an EB-5 project they claim to be theirs is an office building called the Kingwood  EB-5 project. 

Kingwood is a town near the Houston Intercontinental Airport. However, the office building depicted above is that of the canceled 25-story office tower which was to be built at 22 Waugh Drive in the Houston Heights area near downtown Houston. This project was canceled due to the lack of preleasing activity. Meanwhile, American Vision’s CEO has made the following vehicular purchases since entering the regional center business:

2013 Bombardier Canada boat, 1/10/13

2012 Mazda 6i, 6/21/13

2012 Jeep Patriot, 7/22/13, $15,995

2014 Triton Boat trailer, 5/2/14

2015 Porsche Macan, 6/6/14, $49,900

2015 Toyota Scion, 11/3/14, $24,900

2015 Mercedes Benz 350, 5/15/15, $48,300

1984 Land Rover, 4/19/16

1987 Land Rover, 4/19/16

Meanwhile, the Southeast Florida EB-5 Regional Center has several unverifiable projects listed on its web site.  It started last year with a Great American Diner to be built at 6239 Lake Worth Road in Greenacres, Florida with $3 million from 6 EB-5 investors. Instead, the land has been listed for sale since 2014.  Meanwhile, they have since announced a 300-room Marriott Westway hotel to be built at 1216 N. Atlantic Avenue in Daytona Beach, but city planner Hannah Ward denies receiving a proposal or development application for this project.

Finally, they have announced the Biscayne Park Residency, a 44-room continuing care retirement community with a 5-star restaurant and 38,000 square foot office building to be built in Miami, but unknown to Miami city planning personnel I have talked with. The selected operator, the SR Healthcare Group, is a previously unknown operator, founded on 10/7/15 and declared inactive since after being revoked after its annual report.  Meanwhile, the operator of the SE Florida EB-5 Regional Center has a sordid legal history of 29 liens and civil judgments against him and one bankruptcy.

Golden Pacific Ventures in Concord, California, states on its web site:

“Below are specific projects Golden Pacific has worked with developers and immigrant investors on building.

Plantation Agro-Tourism

Combining a the world’s largest organic tea plantation with a luxury destination resort makes “agro-tourism”.  Organic agriculture meets vacation spot.”

Their photo is actually of the well-known BOH tea plantation in Malaysia’s Cameron Highlands, which serves as a tourist destination to escape the heat of the lowlands of Malaysia.  Visit http://www.kualalumpurbudgettour.com/cameron-highland-tour/cameron-highland-tour.htm and you will seem the same tourists in the photo.

It also troubles me that the managers of this regional center have such lengthy legal histories, such as tax liens, civil judgments and foreclosures.

At the EB-5 Investors Magazine conference in Las Vegas in January 2016, I visited a booth of the Great Southwest Regional Center advertising a 90-room Holiday Inn Express and the 264-unit Lakeside Vista Apartments in a 70-acre tract called Westside Peak in San Antonio, Texas, near Lackland Air Force Base.  The San Antonio city planners claimed no knowledge of these projects or any development applications, nor was this parcel legally subdivided for development of these projects, but what was more surprising was that the land for these projects had actually been listed for sale on LoopNet since 8/20/2014, and 65.35 acres are still listed for sale .  

I questioned Rich Zhang of EB-5 Investors Magazine about whether he failed to vet this regional center, and he seemed to get right on their case, and the fake projects were soon removed from their web site.  No new projects have been announced on their web site, but meanwhile, the CEO has purchased the following vehicles since being approved by USCIS to be an EB- regional center:

2012 Mercedes CLS 550               $71,300

2013 Jeep Wrangler Sahara        $27,695
2014 Mercedes CLS                       $106,500
2014 Mercedes E350                    $51,900
2015 Mercedes GLK350               $37,900
2015 Mercedes S550                    $94,400
2016 Mercedes S550                    $121,550
2016 GMC Sierra                           $49,135
2017 Mercedes GLE350               $52,000

Meanwhile, the CEO's younger brother, who serves as managing director, has a history of two bankruptcies, a civil judgment against him, and a recent tax lien.

Considering that every EB-5 applicant must supply more than $500,000 of capital and that there are 835 EB-5 regional centers we know little about, it concerns me that tens or hundreds of millions of dollars might be in the process of being stolen by people who are not vetted and not audited.

I believe the EB-5 scandals that have emerged so far are just the tip of the iceberg because none of these entities and their executives have been vetted by background checks or have been audited.

Every year, each regional center must report to USCIS on form I-924A about their progress in creating jobs . If I want to read a particular regional center's I-924A, I must make a Freedom of Information Act request, but I first have to receive the regional center’s written permission. In other words, USCIS is granting the same privacy standards to regional centers as they grant to vulnerable visa applicants.  But regional centers should not merit such privacy when they are taking billions of dollars from vulnerable visa applicants. The bad regional centers would probably not consent to my FOIA requests, any way.

The California Investment Immigration Fund is a case in point.  They filed false I-924A forms claiming progress that they never made and even got conditional green cards for 3 of China’s top 100 criminals. If I had been able to read their I-924As, I could have stopped the fraud two years sooner.

I wrote the following suggestion to Senators Feinstein and Grassley (the Senate's EB-5 skeptics) last week. Make all I-924A forms public; redact visa applicant names for their privacy.  Functionaries in Washington are not in the position of knowing the truthfulness of the I-924A forms, but a lot of local people like me will be watching, and the lies will be detected much more quickly.  For the EB-5 program, sunlight is the best disinfectant.

Commercial mortgage “straw buyer” scams

Future Bible theme park or flooded sand quarry?

“Straw buyer” mortgage scams are often associated with handwritten “real estate investors wanted” signs stapled to telephone poles. Call the number on the sign and someone might just offer you $5000 to buy an overpriced house for them, using your good credit and good name. After closing, just transfer the deed to them and they will take over the payments. Then they disappear before you can transfer the deed and you are stuck with a house you overpaid for and are legally obligated to make mortgage payments for. You can’t report them to law enforcement, as you have just become a part of the mortgage fraud. The FBI has already labeled the practice of using straw buyers to mislead a lender as illegal "nominee fraud".

Straw buyers are sometimes employed in commercial mortgage scams, too, but are likely to be knowing participants in the fraud. They may be recruited in a LinkedIn group by someone offering $50,000 to someone to help buy a commercial property that cannot sell. For a clever person down on his luck, this can seem like good money.

The straw buyer has to come up with a believable enterprise that would make a compelling story that would justify an unwarrantedly high offer.

In one such case, a hyperscale computing startup company sought a location at the edge of a southwestern city and chose a 70-acre parcel to build a 100,000 square foot headquarters building. Their CEO presented me with an unsigned purchase contract for $8.5 million, of which $4.5 million would be provided by my client as a first mortgage loan and the remaining $4 million would be seller financing. I am always on the guard against “soft second” financing, which is tacitly a forgivable loan, so I checked the preliminary title report and the listing history of the property for some answers.

Red flag no. 1: The preliminary title report ordered for the buyer requested only $4.5 million of title insurance coverage, not $8.5 million.

Red flag no. 2: The property had been listed for sale on LoopNet for 28 months and the sellers renewed their listing 8 days previously at a price of $6.9 million.

Red flag no. 3: The sellers, who were local, never tried to contact me or meet me at their site, a situation I find common in straw buyer scams. They count on their straw man or men, hired for their marketing skills, to do their selling. Most ordinary sellers want to be there when I visit and can be pushy as hell, but in straw buyer scams they never want to meet me or talk to me.

Red flag no. 4: The borrower’s company had no history. A check of LinkedIn indicated several employees scattered around the country, but way too few employees to justify a 100,000 square foot headquarters building. The company web site was supposedly under construction and had the cryptic statement, “We are in stealth mode”. This statement is now 6 years old.

When the appraised value ended up being too low, the CEO insisted on having the appraised value increased, even flying across the country to bother the lender. I told the lender to ask him why he does not make the same effort to have the purchase price reduced; after all, this shopworn property was already listed for sale at $1.6 million below the contract purchase price. The borrower responded that he didn’t want to bother the sellers. He instead ordered an MAI appraisal which claimed that the property was worth $10 million.

Then I ordered a background check on the CEO and everything became clearer. While I expected someone with perhaps a PhD from Cal Tech or Stanford, instead I found someone with a bachelor’s degree in political science who kept on moving around from apartment to apartment in various states, had a bankruptcy on his record, as well as a criminal conviction for check fraud – perhaps the type of guy who would respond to a “real estate investors wanted” ad.

In a more colorful straw buyer scam, I was sent to Texas to visit the site of a proposed Biblical theme park, seen in the above photo. The developer had a purchase contract for $3 million but stated that the property was really worth $12 million. Although this developer claimed to have an office near the airport, he insisted that I meet him at a Denny’s restaurant near the site. (I prefer to meet real estate developers at their offices just to prove to me that they are real developers.)

I had already tried to run a background check on this man, but his name was so common, I could not distinguish him from many other people. I found his LinkedIn profile, but he had no history that extended back farther than 5 months. He claimed to have an MBA from Harvard. I e-mailed the HBS registrar and they replied that there was no record of him as an MBA student.

After a one hour presentation at Denny’s of marked up surveys and a singularly unusual illustration,

he drove me to the site in a rented subcompact car. The site was an abandoned, flooded sand quarry. I commented that a lot of the land was under water, and he responded that much of Disney World was built on Florida swampland and that the water would suit his “Jesus walking on water” and “Moses parting the Red Sea” exhibits. But quarry water can be deep, and the only uses I have seen quarries repurposed for are agricultural or fishing uses. Perhaps he could have built a "Voyage to the Bottom of the Sea" exhibit?

(The above illustration, titled "Babylon", was located by Google search as created by Austrian artist P. Pirker in 2007 and is available for free download at fantasyartdesign.com . It has been downloaded 17,302 times since 2007.)

The developer's survey indicated that the parking lot would extend into the adjacent nature preserve, and he said that the local town had approved this intrusion, although the nature preserve was state-regulated. When I walked on to the nature preserve I found four of these signs:

Imagine children and alligators in the same parking lot.  What could go wrong?

Researching comparable sales I found the perfect one just across the street, an abandoned sand quarry which sold for $225,000 to an organic farmer, which begged the question, how can one abandoned quarry be worth $3 million and the other just $225,000?

There was no development plan, not even a written plan that could be shown to me. There was no sewer leading out to this site and the road leading to its southern boundary was only two lanes, but then he told me that he had searched the world for the right location for a Bible theme park, and that this was it.

I had no credulity left, but since I now knew what he looked like I did a Google image search and found him as an alumnus of Tel Aviv University (an Israeli university). But when I re-ran the background search I found no history of the man after year 1987. No addresses, phone numbers, relatives, co-workers, places of employment, property ownership, etc. It was as if he had not been in the United States for more than a quarter of a century. Israel, perhaps?

His project did not get funded, but I learned some other amazing things. The man had two legitimate social security numbers. How can this happen? The Social Security Agency explains that it assigns sequential social security numbers to an immigrating family, but a minor is permitted to request his own unique SSN, which he did at age 17 while also having his name legally changed. A background search on the other SSN showed the use of both the old name and the new name and at least one alias name.

Here is the pattern of a commercial straw buyer scam:

1. The buyer, not the seller, shows the property.
2. The seller does not contact me, and if I contact them they tell me "talk to the buyer."
3. The buyer inundates me with irrelevant and misleading data designed to inflate my estimate of value.
4. When the appraised value is too low, they try to either beg or bully me to increase the appraised value. 
5. Most buyers thank me when I tell them they are overpaying for a property and subsequently reduce the price (Yay!) or else terminate the deal. Then I suggest that the buyer gets the seller to reduce the price and they tell me that they can't do that, yet there are no other bidders on these undesirable properties. And there's no sale.

In some cases, the straw buyers have already acquired the property, such as acquiring the seller's LLC (not recorded as a real estate transaction) or establishing a private joint venture with the seller. If the appraised value comes in too low, straw buyers do not try to negotiate a lower selling price, but instead waste their efforts on discrediting me or begging me to increase the appraised value.

Here are some parting thoughts. Appraisers are trained to analyze the property only; whoever owns it is immaterial because the standard definition of market value asks us to estimate what the next owner would pay for the property. In real life, though, an appraiser can be misled by false representations. Doing a background check on a commercial mortgage applicant can often clarify the loan applicant’s real agenda and alert the appraiser to perform a higher level of verification of the facts presented.

Related posts:

 http://www.internationalappraiser.com/2013/11/critical-thinking-skills-needed-for.html

http://www.internationalappraiser.com/search?q=purchase+scam

http://www.internationalappraiser.com/2013/05/down-payment-fraud-in-perpetrators-own.html