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Comment: RC Reauthorization Commentaries
For the record, we are publishing our commentaries on reauthorization that we have not published in Immigration Daily before:
Table of Contents:
November 16, 2021 --Reauthorization, Gullibility, Back to China
November 18, 2021 --Chinese Bonanza
December 6, 2021 --Waiting for Godot
December 20, 2021 --RCs May Be Gone Forever
Please find the entire text of the commentaries below:
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Reauthorization, Gullibility, Back to China
November 16, 2021
The December 2021 Visa Bulletin has made Direct EB5 for China current. This is likely the most significant development in the EB5 industry over the last 3 to 5 years. The economic impact to the EB5 industry is likely to be in the mid 9-figures within the next few months. ILW will be sending out a series of emails over the next couple of days exploring different aspects of this momentous development. Today’s email covers below:
1. Impact of the December Visa Bulletin on Reauthorization
2. Greed and Gullibility and
3. a free webinar on December Visa Bulletin
Reauthorization NOW
The December 2021 Visa Bulletin has made Direct EB5 for China current. In doing this, DOS is reacting to the fact that there is a possibility that Congress may not reauthorize the RC program for the near future. If and when USCIS reaches this conclusion, USCIS will likely issue a spate of denials of Regional Center I-526s. This Visa Bulletin development is notice served by the executive branch to the legislative branch that time is running out for the RC program.
Denials of RC I-526s by USCIS would be a catastrophic result for all of the EB5 industry. The time for playing chicken between the Urban and Rural lobbies has passed (expansion of EB5 quota is not realistic if the hope to hoodwink the progressive wing of the Democratic party all of whose immigration priorities have gone nowhere in this Congress to date). We urge industry players to bear in mind that the effort required to stop a bill in Congress is 1000 times less than enacting a law. The industry should be prepared at this stage to accept ANY reauthorization it can obtain, including kicking the can down the road, with or without integrity measures. We encourage all industry players to take the Visa Bulletin seriously and work with Congress to get the RC program reauthorized.
Greed and Gullibility
The December 2021 Visa Bulletin has made Direct EB5 for China current. This has opened up the mother of all EB5 opportunities. However, there are important negative factors to keep in mind some of which we explore below.
The EB5 market in China today is different from 2012-2016. Big agents are out of the EB5 market, they have changed their focus to things such as Turkish and Portuguese residency programs which are very lucrative for them. The bigger Chinese agents will likely see this Visa Bulletin as a small and fleeting opportunity. Furthermore, agents who choose to jump into this new EB5 opportunity at this time have experienced many large projects renege on promised tail payments, so they may be reluctant to be so trusting this time around.
The obligation to create 10 actual W-2 jobs is a significant challenge. For projects with 100 investors, we are looking at 1000 jobs which is not easy to do. Most direct projects are small with a small number of investors--they are not worth the attention of large Chinese agents. Almost all medium sized direct projects with some track record are already oversubscribed, with no room for additional investors from China. We suspect that mega projects will be created within the next month or so, some of which may be outright frauds--it is very hard to create projects with a large number of investors because it requires too many direct jobs. Another important consideration, is that to sell the securities, projects will need to travel to China, running gauntlets of quarantines in China in hotels selected by the government--often with no internet. Spending 2 weeks in quarantine and isolation is not worth it for many projects.
Because of the past history of getting their fingers burnt by rosy promises by unscrupulous agents, Chinese investors are likely to be more cautious this time. In spite of the above, many desperate and gullible Chinese investors will fall for the unscrupulous tactics of greedy agents in China. Also, since a RC reauthorization will make this opportunity vanish as quickly as it arose, anybody seeking Chinese investors needs to plan for 17 years of redeployment, which may be a tall challenge.
While it will may make sense for many projects to pursue the enormous EB5 opportunities opened up by the DOS December Visa Bulletin, to many other projects, there will be no sense to pursuing Chinese investors for the reasons delineated above. Its a case by case decision, and no one size will fit all. We encourage all to proceed with due caution.
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Chinese Bonanza
November 18, 2021
We expect EB5 investment from China to roar up from $10 Million per month to $100+ Million per month in December 2021 before running at high speed into reauthorization early in 2022. Many EB5 direct raises will not be completed since new raises entering the market will do so too slowly in view of the increasing pressure on Congress to reauthorize RCs, and will be only partially complete when RC reauthorization eventually occurs.
To understand how the Chinese are likely to act in face of the December Visa Bulletin, we must understand the situation in China. We think the following factors are relevant:
· China is 50% wealthier now than the height of Chinese EB5, as during the intervening years, China's economy has grown
· Evergrande, the largest Chinese real estate company, which at one time had tens of billions of dollars on its balance sheet, went bankrupt a few weeks ago. Given the hierarchical structure of Chinese industry, one would expect bankruptcy of smaller players in Chinese real estate to follow. Chinese investors have large savings (unlike US investors), and these are mostly kept in real estate--so this is a major blow to the economic future of Chinese investors. Unlike US investors, real estate is often the only viable asset open to the vast majority of Chinese investors, since Chinese public equity/bond markets are non-transparent and considerably more volatile
· Average Chinese have less hope to stay in China, both for domestic reasons due to continued corruption and international reasons as China is involved in serious disputes with many of its neighbors
Given the above, having some money parked outside of China is a great value to Chinese investors, regardless of return and regardless of immigration benefits
Without considering how big the Chinese investment flowing in gets - whether it is $100million per month, $200million per month, or higher, it will simply make the imbalance between supply and demand even worse than it already is. Indian investors on H1B eager to get EB5 who are already investing in droves remain the birds in hand for EB5 projects. Chinese investors lured by Direct EB5 being current who carry with them the liability of lawsuits or a fleeting time-frame are birds in the bush--and a thorny one at that. Anyone who chooses to accept Chinese investment in a Direct EB5 project should be giving an explicit written and spoken disclaimer to each investor personally (NOT through agents) and in Mandarin (NOT in English) about the 17 year potential wait once RC reauthorization occurs (absent this, project principals and attorneys involved may well have personal securities liability).
ILW is probably the only non-Chinese company that conducted online webinars for Chinese agents in 2021 (we did so recently, in September). It is possible that a private equity offering with an EB5 sweetener may be a potential way of positioning a offering for the Chinese market. Chinese investors who are most likely to be tempted are Chinese Students or H1Bs already in the US, because for them it would be an option to speed up the GC and even if the bet does not pan out, the investment will just become a savings asset for the family. (ILW has conducted over three dozen US-based investment events for the Chinese community in the USA in the last 9 years.)
In summary, the return of Chinese investors in volume to the EB5 market will turbo charge the Direct EB5 market beyond anyone's wildest dreams prior to the December Visa Bulletin. Those who are not just agile, but really fast, stand to benefit from this windfall. Those whose documents may not be ready till January 1st may well miss out on this investment bonanza.
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Waiting for Godot
December 6, 2021
· News: Congressional Action & Reauthorization
· Analysis: Drinking the Kool-Aid
· Real World Impact: RC Industry Disintegrating on Five Fronts
News: Congressional Action & Reauthorization
· As we predicted, Congress has passed a continuing resolution till February 18 without RC reauthorization. The RC industry's strenuous insistence in 2021 that reauthorization is around the corner has once again failed to materialize.
· We expect RC reauthorization in DHS appropriations, which is the last of the appropriations bills, and is expected in March 2022.
· As pooled direct EB5 expands, the reasons for Congress to reauthorize diminish--There is a 10% chance that RC reauthorization does not happen at all.
Analysis: Drinking the Kool-Aid
· We used to think that the RC industry was out of touch with reality: The RC industry does not have the influence it thinks it has in Congress. They build a consensus in a small pond, but the US government, US economy and political structure are many times larger and move to an independent tune which the RC industry does not understand.
· Actions and words: Most of the top RC players have been dramatically cutting sales forces and overhead in the last few months while saying that reauthorization was imminent. Their actions and words are pointing in different directions.
Real World Implications: RC Industry Disintegrating on Five Fronts
· The core business of the RC industry was to give loans to developers. The same developers are now flush with money at dirt cheap prices. EB5 is no longer attractive to them and is too much hassle.
· The RC industry cannot control its overseas agents: Agents need to pay salaries, for which they need to keep making commissions. Agents are selling whatever they can (Turkey, Granada, Direct EB5) drifting away from the RC industry.
· The RC industry is cutting sales staff, marketing staff, and making across the board cuts. Some of the staff are leaving for greener pastures, and some are being involuntarily terminated.
· The RC industry is under Attack by USCIS & Congress: USCIS does not trust the industry, and Congress is skeptical about its claims and has been ignoring the RC industry.
· Massive Litigation coming: We will likely see gigantic failures of RC projects in 2022. 2022 will be a year of litigation--5 to 10 times greater than before--engulfing everyone in the industry
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RCs May Be Gone Forever
December 20, 2021
Table of Contents
· Massive Pileup in the Senate
· RCs may be gone permanently
· Direct EB5 is Politically Photogenic
· Post-Script: Grandfathering RC Investors
· Massive Pileup in the Senate: President Biden’s signature legislative priorities are in jeopardy. The Build Back Better (BBB) bill is in serious trouble. Mr. Biden is growing increasingly desperate to secure legislation crucial to his base because the 2022 midterm elections are looming and he stands to lose both House and Senate making him a lame duck president for the rest of his term. The Senate is particularly important to Democrats in 2022, because they know that the Senate map in 2024 is stacked against them. Given this situation, Senate Majority Leader Schumer has vowed to bring BBB and Voting Rights bills to the Senate floor in January. In addition, the Senate is backed up in confirming President Biden’s nominees, and on top of that the Senate is behind on passing appropriations bills some of which have already been voted on in the House. The omicron tsunami looms over this entire backed up schedule, and may completely up-end all plans in Congress in January. With all the above factors, wrapping up appropriations by February 18th is pure fantasy. We expect another continuing resolution till March 31–give or take 2 weeks. The RC program will remain lapsed at least until Appropriations for FY 2022 are wrapped up.
· RCs may be gone permanently: We are getting surprising information about reauthorization. It looks like the RC industry shot its last bolt on December 3rd. Congress is upset with 5 years of infighting within the RC industry–unnecessarily pitching the rural and urban Senators against each other for so small an issue as the RC program, when both have much larger fish to fry. The current truce between rural and urban lobbies seems to have been too little too late to undo the damage caused by years of sniping at each other. The expressed confidence by the RC industry about reauthorization appears to be based on a misreading of Congress’s patience. This puts the RC industry in a fight for survival, with the outcome quite uncertain.
· Direct EB5 is Politically Photogenic: Political viability of the Direct EB5 program is strong, given the direct W-2 jobs with associated actual human faces that benefit directly from any particular EB5 project. Direct EB5 with the smiling faces of constituents with a job in a particular EB5 project is politically more photogenic than jobs based on an abstract mathematical calculation. At this point, RC authorization is no longer about “WHEN” it will happen, but about “IF” it will happen.
· Post-Script: Grandfathering RC Investors: What to do about the tens of thousands of investors who have invested in the RC program? This issue is legally, politically and Congressionally disconnected from RC reauthorization. Bills like FIFPA can easily take care of all the investors without necessarily re-authorizing RCs. Congress can use grandfathering–a long established legal and political mechanism with overwhelming bipartisan support to set things right for anyone who acted fully in accordance with an existing law when they acted. This could happen anytime in June, July or August entirely independent of RC reauthorization. In the meantime, the Golden Era of Pooled Direct only gets better and better …
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