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.