EB-5 MARKETING AT THE OVERSEAS PROPERTY AND IMMIGRATION EXHIBITION IN BEIJING, CHINA 警告通过美国的“区域中心EB-5签证中国投资房地产申请人”

It was in 2013 that this blog first started discussing the risks to foreign investors when investing in so-called “regional centers” approved by the US Citizenship and Immigration Services agency for the U.S. EB-5 Visa program.

A regional center is usually a private enterprise organized to pool invested funds from foreign investors seeking the EB-5 visa, the visa that grants permanent green cards to immigrants that invest a minimum of $500,000 in an enterprise that creates at least 10 permanent U.S. jobs.  The normal minimum is $1 million, but “targeted employment areas”, areas having unemployment greater than 50% above average, have that threshold reduced to $500,000.

Many investors have mistakenly believed that approval of a regional center by USCIS means approval of the soundness and integrity of the regional center.  The USCIS was never given the mandate or the resources to vet these regional centers, however.  Nor have they been given the authority to terminate regional centers for malfeasance, only for failure to submit paperwork on time.  According to Baidu Baike (a Chinese on-line encyclopedia), there were 5539 Chinese EB-5 investor lawsuits filed in U.S. courts just within the 18 months between February 2014 and August 2015, or more than 300 investor lawsuits per month. That’s a large number considering that only 10,000 EB-5 visas are allocated per year.

When first studying EB-5 regional centers, I cynically suspected that a lot of these EB-5 regional centers were founded by real estate developers who couldn’t find funding elsewhere -- turned down by all the banks. 

As I looked into the backgrounds of these regional center executives, however, I found that I had not been cynical enough.  Many have no real estate development experience and were instead underemployed immigration lawyers, securities salesmen and realtors appointing themselves as middlemen in search of worthy real estate projects.  At my first EB-5 conference, when I introduced myself as a commercial appraiser to regional center exhibitors, I was often asked if I knew of any projects that needed funding.  I said yes, all of the many projects that had been rejected by my lender clients, such as a proposed Biblical Theme Park to be built in a flooded Texas sand quarry.

Worse yet, when I conducted background checks on regional center executives, many had histories of civil liens and judgments against them, foreclosures, and even bankruptcies.  Background checks were not part of the USCIS vetting process in approving I-924 applications from prospective regional centers and their founders.  One of the regional centers represented at OPIE did not disclose to investors that the CEO had gone through bankruptcy 12 years ago, recently sold 20% of his regional center to a Chinese company (these are all investor funds) at about the same time he bought a $2.9 million power boat, and then went into default on his primary home loan last October.  Yet he is soliciting $443 million for a large luxury residential project.  What investor, knowing this, would trust their funds to such a man?

USCIS investigators were not trained to vet business enterprises wishing to operate regional centers; they traditionally investigate visa fraud, such as fraudulent marriages for green cards.

In the last 3 years the SEC (U.S. Securities and Exchange Commission) has been assisting the USCIS by investigating regional centers that violate U.S. securities laws, yet USCIS keeps on approving new regional centers faster and faster, with 824 approved regional centers as of today.  This surplus of regional centers will spell the ruin of many existing centers that can no longer find enough investors for worthy projects.

One of the first major actions by the SEC was against “A Chicago Convention Center” and founder Anjoo Sethi, described in my post http://www.internationalappraiser.com/2013/05/attempt-to-defraud-261-chinese.html.  If USCIS had had a proper vetting process, this 29-year-old pharmacy technician would have probably not been given the authority to take $156 million from investors to supervise construction of 5 hotels and a convention center.  His claim of 15 years of development experience would have been quickly derided.  No one in the U.S. thought to verify permits with the city of Chicago (it only takes one phone call) or verify hotel management contracts with the three major operators, including Starwood and Intercontinental Hotels Group. Instead, it was a rival exhibitor at a property exhibition in China who blew the whistle on Mr. Sethi.  In my own observations, fraudulent regional centers tell much bigger lies in China than in the U.S., and China is the source of 83.5% of EB-5 applicants. This was the reason I went to China. 

At this point, I think the most important issue to consider is how to repatriate the funds of thousands of foreign investors who have been defrauded.  The SEC is on the case, as is the FBI (Federal Bureau of Investigation), but justice is slow and meticulous, and there are hundreds of regional centers, with more added all the time without proper due diligence.  All that is required for regional center approval is an economic report from one of the econo-whore consulting firms. 

I have currently complained to the SEC about three dozen EB-5 regional centers.

 

Here are the red flags I have noticed in researching these regional centers:

 

1.       Fake mailing address.  If the regional center has no personnel at the advertised mailing address, how much confidence would you place in them?

2.       No mention of the persons managing the regional center.  Don’t you want to know who you’re entrusting your money to?

3.       No projects advertised.  Many times their web sites claim that U.S. Securities Laws prevents them from disclosing their projects within the U.S., but when I go overseas, I either see no projects or fake projects on their web sites.  EB-5 applicants should look for “shovel-ready” projects and not projects that do not even have development approvals.

4.       Unqualified executives.  If one wants to invest in a real estate development, the regional center should be managed by a successful real estate development company, not immigration lawyers, securities salesmen or realtors.

5.       Fake projects.  A phone call to the local planning office will disclose whether the development project is real and approved.

6.       False representation of success.  For instance, one regional center crows about all the Wal-Marts they’ve built, but these stores were built in 1992, long before the regional center existed. Claims that 100% of applicants have received green cards, particularly from regional centers only two years old, are very doubtful.

7.       Regional center executives who have not properly disclosed their unfavorable legal histories. I can do a $10 background check on a regional center executive and often find a history of 1) civil court judgments, 2) tax liens, 3) foreclosures and 4) bankruptcies.  If these events were not disclosed in the offering document, typically a PPM (Private Placement Memorandum), the regional center has violated the Securities Act of 1933.

 

PS: October 4, 2016 update

 

As a result of my Freedom of Information Act Request to USCIS, I have received names of all EB-5 regional centers that still exist and have obtained permanent visas for their investors.  There are 46 of them out of the now 863 regional centers in operation.  In other words, only about 5% of regional centers have fulfilled their purpose in getting their investors permanent visas.

 

Here is my assessment of the landscape of the 863 EB-5 regional centers:

 

20% are fraudulent

  5% are effective

75% are ineffective for various reasons:

 

1. They are too large in scope and will never become fully invested because they are competing for investors with 862 other regional centers.

2. The leaders are not qualified to create the jobs.  Many are opportunistic middlemen that founded a regional center before they even find a project to build or fund. They pay themselves salaries.

3. Some will not be able to prove that they created 10 jobs per investor.

 

 

Worried investors are welcome to contact me privately about concerns about their regional centers, as are their attorneys.  Feel free to contact me if you have been cheated.

 

 

On the Subject of Flipping Foreign Beach Lots for Profit

A failed Brazilian beach community visited in 2012. Notice that most lots are more than one kilometer from the beach.

 

I get occasional e-mails or phone calls by or about someone contemplating buying a vacant lot in a waterfront subdivision in Latin America or the Caribbean, and these would-be buyers have probably not read some of my older posts.

I recently received two inquiries related to Belize and Panama. Both inquiries related to oversized subdivisions (as large as 1000 lots), of which only a handful of homes have been built. Both would-be buyers, though, were not planning to relocate soon to these communities. One just wanted to flip. The other wanted to “buy before it’s too late”.

For several years, private lenders have sent me to appraise such planned communities in Costa Rica, Belize, Mexico, Brazil, Barbados, St. Maarten, the Bahamas, Jamaica, and Trinidad. The situations were approximately similar in that homebuilding or lot sales had stalled and the whole subdivision was reeling in debt, yet each community had glossy brochures and dazzling web sites. Sometimes there were many lots sales having occurred several years ago, but these were to flippers who put 20% down and got financing from the developer, as they sometimes disclosed in on-line investor forums. They often responded to advertisements such as “Own your own beachfront lot for only $200 per month!” Few homes were built compared to the number of lots sold.

Then, when buyers realized that their lots had declined in value by more than 20%, they stopped making payments, and the lots reverted back to the developer through foreclosure. Meanwhile, the developer may be still be advertising that his planned community is 70%+ sold. For some developers, this has become a racket: Collect the down payment and monthly payments, foreclose, and then start the selling process all over again while crowing about the number of lots sold.

In communities like these, I see nothing but falling land values. The developer is having to compete with lot owners who want to sell their own lots, which is a classic oversupply situation that only depresses lot values.

For those who bought lots with the intention of actually building and occupying them, they are also at risk of loss in value and loss of promised amenities. I have seen so many subdivisions which were advertised as gated communities with luxury amenities, but ended up with abandoned guardhouses and no security from outside intruders.

 

If you really want to live in “Paradise”, I would advise to buy in a community which is mostly built out, with actual homes built and occupied, and with a history of recent sales. If sales have stalled, some of the promised amenities, such as spas, clubhouses, and golf courses may not get built after all.

Also beware of marketing tricks. If the developer claims that “Phase One has already sold out!”, ask to see Phase One. Are there any homes built? I saw a situation in Brazil where there was no Phase One developed before they started advertising Phase Two. I saw a situation in North Carolina where all but one duplex in the sold out Phase One was a non-arm’s length sale between a partnership and its partners at the inflated price of $500,000. These looked like mobile homes on stilts. Most of the units had “For Sale” signs in front. Despite my warning, a client of mine went out of business lending $17 million on future phases. Even if homes are built, the subdivision can still fail if most of the homes are still empty.

If the advice to "buy before it's too late" comes from Ronan McMahon, consider the source and my previous post about him.  I have similar suspicions about Katherine Peddicord.

Flipping foreign properties is a dangerous sport, best left to clever local investors. And if you want to live in a new “foreign paradise” community, make sure that there are people actually living there.

Appraisal of a Resort near Victoria, British Columbia

This was an appraisal done for financial reporting purposes for a Chinese corporation that acquired the resort 2 years previously.

 

Chinese investors have already bid up the Vancouver housing market to prices unaffordable to most Canadians. I even have a Chinese friend who owns three Vancouver condos while he lives in the San Francisco Bay Area.

 

Some Chinese investors are now competing with Canadian investors for commercial real estate. Capitalization rates for British Columbia hotels have dropped by half since 2003 (from 12 to 14% to 6 to 8%).  The BC tourist industry has particularly benefited from the until-recent growing oil wealth of western Canada, particularly Alberta.

 

View from my room

 

The subject property is a 5-star bayside resort on Vancouver Island with a restaurant, bar, spa and marina. Guests were observed to be middle-aged couples, presumably Canadian (who else would vacation in Canada in March?), and the ambiance of the resort makes it a good place for “second honeymoons”. Management is by Canadian professionals. In the two years under new ownership, net operating income has increased by almost 5%, with higher gains in gross revenues, occupancy and operating profit.

 

What is unique about this resort, though, is that only 30% of revenues come from room revenues. 53.5% of revenues come from food and beverage operations, which for most hotels normally have low profit margins or are even loss leaders. In this case, though, the profit margin on food and beverage operations exceeded 28%; the food was excellent, and the hotel often serves as a venue for weddings and other community events. The spa contributed another 12% of revenues and the marina contributed about 6% (but was the department with the highest profit margins).

 

I found it unusual that I was hired by an appraisal firm that was hired by another appraisal firm. Perhaps the Hong Kong Stock Exchange is intent upon truly independent valuations, which I would applaud. On this blog I have been critical in the past about the Singapore Stock Exchange, which seems to let corporations hire any appraisal whore that they choose.

 

The financial statements seemed to conform to the new Uniform System of Accounts for the Lodging Industry. I was presented, however, with excerpts from another appraisal done by an unknown appraiser as of the same valuation date. This appraiser was of the opinion that the hotel had appreciated 48% in value in the previous two years, despite only a 5% increase in NOI. I had no details of the appraiser’s income approach, which is the approach I generally rely on for profitable hotels, but I suspect that this appraiser did not adjust the income and expense statements for “reserves for replacement” for FF&E (furniture, fixtures and equipment) and other building components, which I generally see estimated at between 3 and 5.5% of gross revenues for hotels. The general manager of the subject hotel even estimated 4% “CapEx” for the subject resort.

 

The other appraiser’s sales comparison approach was an abomination. The simplest way of comparing hotels is on a “price per room” basis, but this works best for limited service motels which earn their revenues substantially from room rentals. All of the comparable sales prices he used were inflated and incorrect, which would have been easily verified by going on-line to British Columbia’s free land registry web site: http://evaluebc.bcassessment.ca , where real estate sales are publicly recorded. Although publicly recorded sales of BC hotels have been as high as $275,000 per room in the last two years, this appraiser made awkward adjustments (up to 100%) to justify a value of $533,333 per room, without considering that this resort’s restaurant, bar, spa and marina operations accounted for much of the value of the resort.

International investment heats up in the renewable energy sector

Solar-paneled roof of National Stadium in Kaohsiung, Taiwan, producing 1 megawatt of electricity

My appraisal practice has changed significantly in the last year. Whereas I spent the last few years visiting struggling or proposed luxury home subdivisions, hotels, tourist projects and golf communities in foreign countries, my clients have reduced their appetite for such risky ventures. Nowadays more than half of my work involves the valuation of land for solar photovoltaic energy production, AKA solar farms.

There seems to be a great appetite for cross-border investments in renewable energy infrastructure projects. Such projects are able to attract capital from investors not needing high returns, but focused rather on steady, long-term yield from contractual government or utility company payments that reimburse them. Renewable energy infrastructure seems a safe and easy investment compared to foreign casinos and luxury vacation resorts.

Each week brings one or more announcements of cross-border renewable energy deals. Last week, Swiss-owned Adiant Capital Partners sold a 37 megawatt UK solar farm to UK-owned Foresight Group. Canadian-owned Northland Power has announced a $177 million IPO for wind farms in Canada and Germany. Australian fund AMP Capital is entering the Japanese renewables market. The Blackstone Group (U.S.) has announced that its second energy fund, $4.5 billion in size, focusing on renewable energy assets worldwide, has been oversubscribed.

There is construction risk, of course, but many transactions are also structured as sale-leasebacks of the land the renewable energy projects are built on. And management risk of renewable energy infrastructure is nothing compared to commercial real estate, unless you have Homer Simpson pushing the buttons.

Renewable energy infrastructure is now so mainstream that Google and Apple are investing, including a Norwegian-owned project in Utah that I recently appraised, in which Google will be partially financing the development of a $157 million solar plant.

Another example of a multinational solar farm venture I evaluated was a duo of Ecuadorian solar farms to be developed by a German manufacturer financed by private money from the U.S. The deal fell through because the German CEO didn’t understand that his firm had to own or buy the properties they would be mortgaging and that licensing and power purchase agreements had to be finalized before the investor would commit funds.

Valuation methods for solar farm land

The approach of choice is the sales comparison approach, which works well in California due to the large number of publicly recorded transactions. Solar farm appraisers are not always so lucky to find verifiable sales, though, in foreign countries and “non-disclosure” U.S. states (such as Utah, New Mexico and Texas) and sometimes must turn to a land residual approach to valuation, in which land values are imputed by valuing the completed project and then subtracting development costs and expected entrepreneurial profit. The recent reduction in development costs has justified rising values of land with power purchase agreements and public approvals.

The role of technology in increasing solar farm land values

The last few years have seen escalating land values in the U.S. southwest for land which has secured conditional or special use permits for solar photovoltaic energy production as well as power purchase agreements with utility companies. The reason for this land price appreciation has been because the value of such land is a residual of the cost to develop it for solar PV use, and the cost of PV technology has fallen more than 50% in the last several years, but rates for electrical usage have not fallen.

Much of the deflation in solar PV development costs is the result of cheaper technology being imported from Taiwan and China. I have recently been on a research trip to Taiwan, for example, to study their solar PV and wind power innovations.

There may be a temporary halt in falling solar PV development costs, however, as the U.S. government in February has imposed “antidumping” penalties on Chinese and Taiwanese manufacturers. The antidumping duty on Taiwanese solar cells is now 20%, and the new duties on Chinese solar panels will range from 39 to 52%.

Wind-powered park at Cijin Beach, Kaohsiung, Taiwan

Also, with the price of oil falling more than 50% in the last year, there may be less public pressure to subsidize renewable energy projects. These combined forces may temporarily stop the tide of rising values for solar farm and wind farm land.

This may be a temporary hiccup, though, in a long-term trend of renewable energy sources to replace fossil fuel technologies as our predominant power production technology, as production costs are likely to continue to fall as technology advances. Compare these advances to shale oil hydraulic fracturing technology, which is only more expensive than conventional on-shore drilling. Ten years from now, the world of energy production is likely to be quite different than today.

Solar-powered golf course in Chiba prefecture of Japan, near Inba, as seen from my plane flight

Wind-powered business park in Kamisu, Ibaraki Prefecture, as seen from my plane flight

What is the Future for Bakken Real Estate?

 
 Dunn County "man camp" operated by Civeo, itself laying off 45% of staff

North Dakota and Canada's Bakken region can be considered a true boomtown economy, and with booms there are often busts based on changing economic circumstances.

The precipitous fall in oil prices is likely to whipsaw the Bakken economy, as shale oil production costs anywhere from $55 to $85 per barrel, and at this moment, West Texas Intermediate oil is trading on NYMEX for $47.88 per barrel. However, this figure represents the value of West Texas oil, not Bakken oil, which must be transported much farther than West Texas oil. The added transportation costs range from $11 to $19 per barrel of oil, meaning that the value of Bakken oil is much lower than for WTI.

This morning, the price offered at the pipeline for Williston Basin Sweet oil was just $31.69 per barrel and the price offered for Williston Basin Sour (meaning high sulfur content) was $22.58 per barrel.

Drilling activity in North Dakota has already been declining, with the number of drilling rigs declining 23% so far since this oil boom’s peak. The reason this number has not declined more is because much of the oil being produced at the moment is "hedged" or pre-sold at yesterday's prices. If current prices stay the same or decline more, the real bust might not occur for a few more months. That will be when layoffs accelerate and the man camps, motels and RV parks start experiencing significant vacancies.

The effect on real estate will be significant, and I have personally witnessed a similar collapse while working as an appraiser in Houston, Texas, from 1984 to 1987, when I lost my job in the Texas real estate collapse after oil prices fell to $9 per barrel.

Most affected will be the value of land previously considered to have development potential. There has been a proliferation of Bakken-area land parcels being advertised as ideal for business park, RV park or hotel development, at prices up to $200,000 per acre. Most of these are still raw, undeveloped land, and their highest and best use just may be a return to farming or ranching. It may be common to see commercial land values falling by more than 90% as highest and best use changes from commercial to agricultural.

RV parks will also be in jeopardy, as they typically house temporary oil workers who may be first to go as layoffs continue. Other “man camps” are already in trouble. Man camp operator Civeo, featured in the above photo, has announced layoffs for 45% of its total worldwide staff and saw its stock price plunge 50% yesterday. Its stock price is now $3.11 per share, an 89% decrease in the last year.

The lodging industry will also be severely impacted, as many hotel rooms were built to accommodate the boom in temporary workers, and there will be a consequent oversupply of rooms.

PS: Bakken update, January 14, 2015

The number of active drilling wells in North Dakota has fallen to 158 as of today, over 26% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet is $29.44 per barrel and $20.33 for Williston Basin Sour, representing further declines of 7% and 10% respectively in the last week.

PPS: Bakken update, March 5, 2015

The number of active drilling wells in North Dakota has fallen to 113 as of today, 47% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has risen to $35.19 per barrel for Williston Basin Sweet and $26.08 for Williston Basin Sour.

What this means is that Bakken oil producers are receiving 20 to 28% more for their oil in the last 2 months, as North Dakota drilling activity has dropped by 30% in the same time period and inventories shrink.

The consequences for the real estate sector will be negative.  Since the peak of Bakken drilling activity in mid-2012, the number of active drilling rigs has declined from 215 to 113, a drop of 47.5%.  Considering that each drilling rig employs 100 to 125 workers, this represents job losses of about 10,000 to 12,000 workers, workers who were living in motels and RV parks, and some who might have been renting apartments or even searching for a home to buy.  Despite the improvement in the price willing to be paid for Bakken oil, these benefits will go to the oil producers and not the real estate market.

PPS: Bakken update, March 16, 2015

The number of active drilling wells in North Dakota has fallen to 111 as of today, 48% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has plummeted to $28.44 per barrel for Williston Basin Sweet and $19.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  It put itself up for sale last week and the stock popped up to $40 per share after reporting interested buyers, at which time I sold this stock short. With current assets and a book value of property, plant and equipment (probably above market value) adding up to $13 billion, and liabilities of $8.3 billion, current market capitalization of $6.4 billion as of this moment seems at least 50% too high.

Related story:  http://on.wsj.com/1BNWrPY

PPS: Bakken update, March 27, 2015

The number of active drilling wells in North Dakota has fallen to 97 as of today, 55% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has increased to $32.44 per barrel for Williston Basin Sweet and $23.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  I sold this stock short 2 weeks ago at $40 per share and it closed today at $30.50 per share, for a personal gain of 23.75% in 2 weeks.

PPS: Bakken update, July 15, 2015

The number of active drilling wells in North Dakota has fallen to 73 as of today, 66% below the peak of the Bakken oil boom. The Plains All American Pipeline is no longer publishing offering prices for Bakken crude, but oil prices in general are higher compared to March, and the offering price for Nebraska Intermediate, closest in proximity to Bakken, is $39.50 per barrel today.  This is better news for oil companies, but bad news for Bakken-area real estate, as a two-thirds reduction in drilling rigs means that some oil workers might be moving out of state. The effect on employment could be muted, though, because up until this year, many workers were working double shifts so that they could earn six-figure incomes.  Still, this hinders their ability to pay the inflated rents of yesterday.