Will Hong Kong Protests Affect EB-5?

The pro-democracy protests in Hong Kong that began in September this year may have an impact on the EB-5 world in the US. Namely, that dissatisfaction with the government may lead some of Hong Kong’s wealthier citizens to seek quick immigration options to other countries. 

A Brief History

For those unfamiliar with the system of governance in Hong Kong, it operates under a limited democracy, often referred to as “one country, two systems”. This is the result of the 1997 returning of the island to China by the British, who had held since their victory of China in the 1839 First Opium War. Since 1997, Beijing grants Hong Kong certain limited freedoms that it doesn’t to other parts of China: a four tiered seemingly autonomous government system with its own checks and balances, a capitalist economy and a democratic voting system.

The democratic voting system hit a hitch in August this year when reforms in Beijing lead to a change in the way the head executive of Hong Kong is chosen. These reforms require a special election committee in Beijing to select the three candidates for the people of Hong Kong to chose from; the subtext being that these are three people that are acceptable to the Communist Party. The Guardian UK has done an excellent job explaining the development.

How This Could Affect EB-5

When individuals participating in EB-5 are asked why they are immigrating, they most often comment that it is to give opportunities to their families and their children. In a nutshell, this is a primary reason for all immigration in general. An Immigration.net survey listed among the top reasons for immigration: financial security, a higher standard of living, better education, and seeking a safer political climate. To those that are financially able to consider immigration as an option, providing these opportunities for their family is a strong motivator to immigrate.

Taking all of this into consideration, one must also remember that it is common for an inciting political incident or change in laws to create mass waves of migration from one place. These motivations and the political climate in Hong Kong may create the perfect storm. 

Look at the case of Hong Kong in the 1980’s and 1990’s. Thirteen years prior to the handover of Hong Kong back to China, the British and Chinese government signed the agreement that the island would be returned in 1997. This was public knowledge and able people started to leave Hong Kong in droves. By different estimations, between 25,000 and 35,000 people left each year until a giant spike in 1989. The Tiananmen Square protests happened that year. Evidently many Hong Kongers didn't agree with how their soon-to-be leaders handled the protest and there was an increase in immigration to 62,000. By 1990, 1% of the population had left.

Depending on how this civil unrest plays out in Hong Kong, EB-5 offers a potential way out for some citizens. It is no secret that there are many wealthy people in Hong Kong, though since 1997 many of them have stayed in what has been one of the trading and financial centers of Asia. Though these conditions are changing as well.

According to the World Bank, Hong Kong’s economy is suffering from the current protests, while China’s is not. A reported $50 billion drop in Hong Kong Stock Exchange share values has happened as a result of the protests. This comes at a time when for the first time ever (as of Sept. 1) Chinese investors are allowed to invest in the HKSE through the Hong Kong-Shanghai Connect. All of this could contribute to a shift in focus away from Hong Kong to Shanghai as the new financial center of China. Simply put, the conditions of life for the wealthy and upwardly mobile in Hong Kong may be changing for the negative. 

The potential for a spike in Hong Kong EB-5 is not based on the protests alone. Rather, the protests and an exodus of citizens are both symptoms of the same potential cause: fear of Beijing’s control over Hong Kong’s citizens. The focus has been on the students, but it was only a student protest in the beginning and now more and more people are rallying behind them. 

While not everybody in Hong Kong is camped out, a study by Hong Kong Polytechnic University showed that 59% of people support the protestors. This is a large number, much higher than the 1% of people who left in the 90s. Consider how a wealthy Hong Kong business professional reads this. Consider the longstanding Cantonese speaking communities worldwide (virtually every American Chinatown was established by Cantonese speakers). Consider the effect the last wave of Hong Kongers had on the real estate markets of Vancouver, San Francisco and Seattle. It’s not that far out of the realm of possibility that it could happen again.

The difference now is that the US government has an established program for wealthier would-be immigrants. Its impossible to say if this will attract more Hong Kong immigrants to the US over Canada (which saw more Hong Kong immigrant growth during the 90s). However the real question is what will happen with the protests. Certainly another Tienanmen Square incident is highly unlikely; but will China repeal its election plans? It seems almost as unlikely for an immediate about face. 

As protesters continue to remain in the streets long after the planned October 1st deadline, violence by the police is becoming more common. Remember that China is already the number one source of EB-5 applicants. These protests and the accompanying violence are happening in that same country, only in a part that has a free media and the international spotlight. It would seem then that the impetus would be even greater. 

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David Guastella is an EB-5 consultant for Guanxi Consultants based out of Chicago, IL. More information on David and Guanxi Consultants can be found here.

Chinese Visa Backlog for FY 2014

At the 2013 AILA EB-5 Investors & Regional Centers Conference in Chicago on August 22-23, there were  panels on a variety of EB-5 topics. During the last panel before the Q&A, Bernard P. Wolfsdorf, Robert Gaffney, Yi Song and Charles Oppenheim lead a discussion titled “China Issues.” However, the presentation took an unexpected turn when Charles Oppenheim from the US Department of State announced that a visa backlog for Fiscal Year 2014 existed for Chinese investors. As a result, no new Chinese investors could be issued EB-5 visas for the rest of the fiscal year. The prepared slides and talking points went out the window and a new discussion on the backlog and the future between China and the US EB-5 program began. It was breaking news for the conference.

As I mentioned in a previous post, the EB-5 investor visa program is predominantly made up of Chinese investors (70-85% depending on the year). Aside from determining how the programs are marketed and the approaches that immigration lawyers are taking to attract projects and clients, the high numbers also impact a federal limitation on how many investors can come from each country.

Each country is restricted to 7% of the total numbers of visas issued each year in any visa category. This includes EB-5. Prior to this year, the restrictions have not mattered, because (1) there were enough spots for anybody that was able to pass the application process, and (2) China was able to use the extra spots that other countries weren’t using. As of August the EB-5 program is now gaining enough popularity in other nations that China is no longer getting to use the extra spots.

In other words, the Chinese EB-5 community has been benefitting tremendously from other nation’s lack of knowledge or interest in the program.

Yi Song, an attorney at Mona Shah & Associates in New York City (as well as a fellow alumnus of Beijing Foreign Studies University) explained this to me in a conversation after the conference, “Other countries have not used up the maximum number of visas available. The rule is the unused numbers from other countries will be allotted for China. The investors from China have used approximately 8,500 visas each year.”

This indicates a more realistic approach by USCIS to the policy than one of objective fairness. The demand exists in China in a much bigger way than it does anywhere else.

The 7% figure that I mentioned earlier is estimated at around 700 people each year. That means that the Chinese EB-5 market has been benefitting to the tune of 7,800 extra investors each year. Imagine being a part of a cell phone family plan, but the four other members of your family combined are only using 15% of the allotted minutes. China’s been benefitting from a rollover of 1100%.

If the program is intended to continue under the existing regulations, that means that competition for other nation’s investors is bound to increase.

While the limit has been reached for this fiscal year, you can breathe easy. The time period will be restarted on October 1, 2014. As far as planning ahead, there are two ways to read into what has happened. First, that EB-5 is spreading in popularity and those involved in the investor end of the program are going to be more cognizant of timelines if they want to work in China. Second, a proverbial “wild west” of investors in other nations exists and will be easier to capitalize on if Regional Centers and law firms are willing to take the risk of working with migration agents in South Korea, Iran and Mexico.

Furthermore, USCIS may be taking a new approach to this issue. Charles Oppenheim, who is the Chief of Immigrant Visa Control and Reporting Division for the U.S. Department of State, also announced that he anticipated a specific cut-off date for China that will be announced for the next fiscal year. This would be put in place to help regulate the flow of investors who are given the “rollover” visa spots.

In the meantime, this shouldn’t affect Chinese investors in any stage of their EB-5 process. Robert Gaffney explained that he does “not expect to see a dramatic slowdown in demand for EB-5 visas by Chinese applicants.”

Gaffney, who is a Certified Specialist in Immigration and Nationality Law and founder of the Law Offices of Robert P. Gaffney & Associates (as well as a fellow alumnus of the University of Michigan) has been working in immigration law for over twenty years. He brought up an interesting parallel to the backlog.

“Those familiar with the Canadian investment visa program will know that for as long as that program was in existence, Chinese applicants were willing to get in line for visas even when the wait was 4 or 5 years long.”

As far as exploring other countries for investors, Gaffney adds, “Investment immigration from countries like South Korea and Mexico is driven by domestic factors in those countries and not what happens to China EB-5 numbers.” However he also expects Regional Centers to start developing strategies that include other countries.

There is a third strategy that might become a possibility for Regional Centers: changing the law. The oft tread topic that EB-5 is depicted as a controversial program in the public realm (here is a recent example) when in reality it successfully generates jobs without using one cent of tax payer money was brought up at the conference during most of the panels. Panelists encouraged the immigration lawyer community to write their congressmen and try to have the laws changed.

I asked past AILA President Bernard P. Wolfsdorf what members of the EB-5 community could do to change the regulations. “Encourage the White House to count investors, not family.” Though this is a topic I will delve into more deeply in the future, it is important to understand that of the 10,000 EB-5 visas that are issued this year, most of them belong to the spouses and children of the actual investor. Spouses and children under 21 are permitted to get visas along with the grantee. On the one hand, this clogs the channels of investment. On the other, it provides the ever important driver of American education for parents seeking to offer better options for their children.

Brian Su, president of Artisan Business Group, summarized this point nicely during a panel in 2012, “Basically the decision making involves the entire family… the husband, the wife and their children. Typically the wife and the kids make the key decision.”

So cutting family out completely is not a feasible option. There are very few visa programs without country specific limitations but a change to the law could mean that families are counted in some other way.

I mentioned this in my last article, but the more I speak with newcomers to EB-5 in the U.S., I realize that they don’t understand that the typical Chinese investor is not concerned with their return on investment. It may sound crazy to you, but miniscule to nonexistent returns are the norm. They are driven by their families.

Yi Song commented on this very topic, “The Chinese investors do not invest in the program for the sake of investment per se. I would say 80% of Chinese investors invest in EB-5 projects for their children to receive a better education in the US. Their top consideration is the permanent residence in the US.”

She added, “Most investors do not receive any return on their investment.”

Considering the level of importance that families and education play in the mind of an investor, any new solutions will have to continue the policy of allowing family members to receive visas as well. Whether these will continue to be counted among the 10,000 in future years is unknown. Few long term visas are granted without some kind of country specific limitations.

Interview With Stephen Yale-Loehr

Prof. Yale-Loehr is one of the nation's preeminent authorities on U.S. immigration and asylum law. Aside from teaching immigration and asylum law at Cornell Law School, he is also of counsel at Miller Mayer, LLP in Ithaca, New York.  He has presented on these subjects at national conferences as well as authoring and co-authoring four standard reference works on the subject. Since 1996 he has served as chair, co-chair and member for the EB-5 Investor Committee of the American Immigration Lawyer Association (AILA). He is the 2001 recipient of the American Immigration Lawyers Association (AILA)'s Elmer Fried Award for Excellence in Teaching and the 2004 recipient of AILA's Edith Lowenstein Award for excellence in advancing the practice of immigration law. read Stephen’s full bio

In my interview with Stephen, we discuss the virtues of the EB-5 program, how new jobs are counted and his upcoming panel seat at the 2014 EB-5 Investor and Regional Center Conference in Chicago.

 EB-5 is a four-way win.  But it is a very complicated program because it combines immigration law, securities law, economic methodologies, and investment decisions.  It is like a Rubik’s cube: Everything has to line up just right - Stephen Yale-Loehr

Guanxi Consultants: Introduce yourself. Who are you and what is your history with immigrant visa programs?

Stephen Yale-Loehr: I am co-author of Immigration Law and Procedure, the leading immigration law treatise, published by LexisNexis Matthew Bender. I also teach immigration law at Cornell University Law School, and am of counsel at Miller Mayer in Ithaca, NY. I am a member of the American Immigration Lawyers Association (AILA)’s Business Immigration Committee. I graduated from Cornell Law School in 1981 cum laude, where I was Editor-in-Chief of the Cornell International Law Journal.  I received AILA’s Elmer Fried award for excellence in teaching in 2001, and AILA’s Edith Lowenstein award for excellence in the practice of immigration law in 2004. Specifically, with respect to the EB-5 immigrant investor program, I was chair, co-chair, or a member of the EB-5 Investors Committee of the American Immigration Lawyers Association (AILA) for over 10 years. I set up an EB-5 listserv through AILA. I regularly speak on EB-5 issues at various immigration conferences around the country. I also founded the Invest In the USA (IIUSA) trade association to promote the EB-5 program and to liaise with the immigration agency.  I also testified at a July 2009 U.S. Senate hearing about the EB-5 program (read about his testimony here).

GXC: You’ve written on different issues arising in immigration law in a post 911 America. Do you think that investor visa programs fall more into the category of “problems” or “solutions”? Please explain.

SYL: Done correctly, the U.S. EB-5 program is a four-way win: (1) a win for a project developer because he or she gets capital to start or finish a project;  (2) a win for US workers because jobs are created; (3) a win for US taxpayers, because the EB-5 program doesn’t cost anything to them; and (4) a win for EB-5 investors, who hopefully will get a green card at the end of the process if all works out well.  However, like all immigration programs, the EB-5 program is very complex.

GXC: What do you think is the biggest asset of the EB-5 program?

SYL: The EB-5 program has several assets.  It draws foreign investors to the U.S.  In addition to the money they invest in EB-5 projects, they also buy homes and send their children to U.S. schools.  A comprehensive peer-reviewed economic study found that during fiscal year 2012, investments made through the EB-5 program contributed $3.39 billion to the U.S. economy and supported over 42,000 U.S. jobs.

GXC: What do you think is the biggest drawback? Are there unknown costs that people aren’t considering when they chose to channel EB-5 investment into their projects?

SYL: One drawback to the EB-5 program is its complexity.  Another drawback is long immigration processing times.  It can take two years from the time an investor first decides to invest in an EB-5 project until they actually get their temporary Green Card to come to America.

In addition to the $500,000 an EB-5 investor must invest, there are other additional costs.  For example, EB-5 investors pay an administrative fee to the regional center that is sponsoring the project.  That fee is frequently about $50,000.  They must also pay an immigration attorney’s legal fees.  And they may have to pay an agent in their home country that helps them through the process.

GXC: Would you mind briefly explaining the issues that arose in 2012 regarding “tenant-occupancy”? SYL: In 2012 the U.S. immigration agency changed its thinking about whether tenants moving into office buildings can count as new jobs for EB-5 purposes.  The USCIS stated that many times, tenants are not really new; they are just moving from one building to another.

GXC: Is tenant occupancy still acceptable at all for Regional Center jobs?

SYL: The USCIS now accepts jobs created by tenants in certain circumstances.  The USCIS makes this determination on a case-by-case basis.  In general, the USCIS will allow tenant jobs if the project will fill an existing investment void in that area to generate new demand for the tenant business.

GXC: When using a Regional Center to structure investment, USCIS counts “indirect” jobs as well as “direct” ones. Are there any statistics that show that indirect jobs counted by Regional Centers are having the desired effect on the economy?

SYL: No definitive study has measured the economic impact of indirect jobs created through the EB-5 program.  However, indirect job counting is standard economic methodology used in many government programs.  And as stated above, a comprehensive peer-reviewed economic study found that during fiscal year 2012, investments made through the EB-5 program contributed $3.39 billion to the U.S. economy and supported over 42,000 U.S. jobs that year alone.  Many of those jobs were indirect jobs.

GXC: What types of firms have been responsible for “counting” indirect jobs?

SYL: Many economic methodologies exist to measure indirect jobs.  They go by acronyms such as RIMS II, IMPLAN, and REDYNE.  Such methodologies exist for many government programs, not just EB-5.  Most good economists can use these methodologies to estimate the number of indirect jobs an EB-5 project will create.

GXC: What topics are you hoping to address at this year’s AILA EB-5 Investors & Regional Centers Conference? What presentations are you looking forward to hearing?

SYL: I will moderate the first panel, which is called EB-5 101. We will educate attendees about the fundamentals of the EB-5 program.  Later panels will address more detailed topics such as securities law compliance and ethics.

GXC: Thank you for your time. Are there any final remarks about EB-5 and its future that you’d like to add?

SYL: As stated above, done correctly, EB-5 is a four-way win.  But it is a very complicated program because it combines immigration law, securities law, economic methodologies, and investment decisions.  It is like a Rubik’s cube: Everything has to line up just right, and in the right order and at the right time, for an EB-5 investment to work. EB-5 investors need experienced immigration lawyers and financial advisers to properly advise them.

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David Guastella is an EB-5 consultant for Guanxi Consultants based out of Chicago, IL. More information on David and Guanxi Consultants can be found here.

Where Do EB-5 Investors Come From?

One trend with EB-5 that is interesting to note is the country of origin for visa applicants. The most recent data, from 2011, indicated that the top nations were China, S. Korea, Iran, Taiwan and Mexico.

Of the five largest contributors of investors, three are in Asia and two speak Mandarin as their national language. All five rank low on the Quality of Life Index for 2014 see here. All rank in the top 25 nations for nominal GDP (though Taiwan is counted as a part of China). All have established immigrant communities in the US (measured by citizens with origin of birth in other nations). They represent a variety of income inequalities, major industries and national history with the US.

They all have one important thing in common: a lot of rich people that want to come to the United States.

If you are familiar with EB-5, it should come as no surprise to you that China is the no. 1 place that investor applicants come from. The first time I heard about EB-5 it was from a Chinese real estate developer looking to build in Detroit, which at the time had an unemployment % that met the TEA requirements (1.5 times the national average). When he pitched it to us, he described it as a Chinese program. It wasn't until I did some research that I discovered that investors could come from anywhere.

There are a couple of items to note about the Chinese investors. First, they are repeatedly the largest group, far outstripping any other nation. Second, Chinese investors chose the Regional Center option 90-95% of the time. The best way to explain this at a glance is to compare the rising wealth amongst China's richest citizens set against the low quality of life. A Peking University study this year found that the wealth gap in China has spiked rapidly in recent years. 1% of the nation now controls 30% of the wealth, while the poorest 25% only holds 1% See the results here. There are more rich people in China than ever before but the quality of life has been improving slowly. This may incentivize many investors to move to another country (forget for a moment that it is also a nation with a very recent history of being hostile to the wealthy).

Another reason for the popularity of the program might also be the American university system and its popularity amongst Chinese students. Students and parents recognize the value of an American degree, to the point that "brand" names like Harvard and Berkeley are fetishized in the same way China's nouveau riche do to the black Audi  (I'm completely serious).

Chinese students want to attend American colleges. More importantly, Chinese students' parents want them to attend American colleges (Further reading).

These parents want their kids to get an excellent education, and even by the rankings created by a Chinese university and backed by their own government, China doesn't even have a single one of the best 100 colleges in the world. On the other hand, the list is full of American colleges (rounding out with Georgia Tech at #99).

I bring this up to show how powerful of an incentive education is to EB-5 investment.

Students that want to stay in the US after college typically apply for a H-1B visa. However, getting approved for the H-1B is difficult: a random selection process that admits about 50% of applicants. Then take into consideration how many applicants China must produce every year (given its population and previous information) and all of a sudden $500,000 from an affluent family seems like a viable option.

In my experience, Chinese investors with children soon to turn 14 are a popular group to invest. These investors typically ask about the colleges and the high schools in the area that they are planning on moving to. Its a no brainer - if you wanted to send your son to an American university, you could save money by meeting certain state's residency requirements by having graduated from high school in that state. Furthermore, your chances of getting in are at least perceived as being higher when you've graduated from an American high school. Then take into consideration the value of the immersion process. Then multiply that by 2 or 3 for each kid. $500,000 isn't exactly a drop in the bucket, but it begins to makes financial sense.

The other figure, that most Chinese investors go with Regional Centers, I think is a matter of "guanxi". The Chinese custom of relationship building and networking (and the name of this blog) is built around the idea that an interpersonal network is the supreme way to approach any business decision. For example, if one investor had a good experience with an agent in Shanghai that is contracted out by a Regional Center in the US, then that investor is likely to recommend that agent to his friend if the friend wants an EB-5 deal. If you notice how marketing for EB-5 opportunities is done in China vs. the Middle East, you'll see this process in play. Meetings in China are small, if they even happen. It's rare to see an advertisement in a magazine or at an expo. Conversely, in the Middle East there are agents touring large facilities, preaching the good word of Green Cards and Regional Centers.

Chinese investors seem to be more shrewd. Online American forums make them seem like rare white elk. Peruse any open forum or LinkedIn group and you're bound to see a post that says something like "How do you find Chinese investors?" or "Who did you connect with over in China?" It's a mystery to any American without an overseas connection.

Heading over to the Middle East there are groups from the US that are sending pitch men (think Billy Mays in a $5000 suit). These investors are sold on the concept and it doesn't matter as much who is selling it. In China, a local contact is essential. Judging by the percentage of Chinese applicants, clearly the guanxi model & Regional Center models are working for that market.

This does leave a big question in my mind: since Chinese investors are going more by personal contacts, how well are they vetting opportunities? Are they comparing services and fees among Regional Centers? Or are they going with who they know and relaying on a personal relationship to keep them from getting a raw deal?

The Regional Center model is ideal for guanxi because it allows one contact to pursue a lot of investors. However I'm sure there are conversations being had from Monterey Park to New Jersey, where one investor has just learned he paid twice as much to get half the services that his neighbor got. 读万卷书不如行万里路!

David Guastella is an EB-5 consultant for Guanxi Consultants based out of Chicago, IL.