By Wei Gu
What was once the only skyscraper in Rockford, Ill., is getting
an overhaul under an urban-renewal program that is bringing
together Warren Buffett and Chinese investors looking for a U.S.
visa.
The plans to turn the 13-story Amerock building, in this
declining former industrial city, into a $66 million hotel and
convention center is the latest example of how Chinese have fueled
a construction boom in the U.S. via the EB-5 cash-for-immigration
program.
A subsidiary of Berkshire Hathaway Inc., owned by Mr. Buffett,
is in talks to provide equity for the project, which also includes
a new train station, a sports center and a park. The debt financing
is expected to come from 92 foreign investors, mostly from China.
By investing $500,000 each, these foreigners hope to fulfill their
American dream by obtaining U.S. permanent residency.
For U.S. developers and investors, such investments make for a
cheap source of credit, while immigrant hopefuls need projects that
can help them qualify for EB-5 visas by investing at least $500,000
in projects that create at least 10 jobs in the U.S. Chinese
nationals accounted for 85% of the EB-5 visas issued in fiscal
2014.
EB-5 investments have gone from small hotels and strip malls to
projects run by megadevelopers. Related Cos. said $600 million from
1,200 Chinese families will help it build the foundation of three
skyscrapers at Hudson Yards, New York's biggest real-estate project
in a generation. In San Francisco, home builder Lennar Corp. has
raised about $200 million through the visa program for projects
that include more than 12,000 housing units on a former naval
shipyard. In lower Manhattan, World Trade Center developer Larry
Silverstein is trying to raise about $250 million for a 937-foot
Four Seasons hotel and condominium property.
"Every day we get information about several new EB-5 projects.
It seems that there are more projects than clients," said Forra
Luo, owner of Canway Investment Consulting Service Co. in Shenzhen,
in southern China.
It helps to have a celebrity associated with it: The Sage of
Omaha is a trusted name in China. That works out to a deal that has
many advantages for Mr. Buffett, including tax credits, while for
the EB-5 investors, who are funding 70% of the Amerock project, the
selling point is mainly the prospect of a U.S. green card.
They will receive an annual interest rate of just 0.5%, compared
with the typical 5.5% a year for similar projects, according to
Gary Gorman, CEO of Gorman & Co., the developer of the Amerock
project. If the project fails to create the necessary jobs, they
won't get their visas.
"It appears that EB-5 investors assume most of the risks in this
project, " said Ms. Luo, who has reviewed the deal's details and
says she hasn't decided on whether to recommend it or not.
Mr. Buffett, reached by phone, said he doesn't keep track of
individual projects such as the Amerock investment, which is being
run by Berkshire's Affordable Housing Partners. However, he said,
Berkshire has invested in dozens of affordable-housing projects
over the years in return for tax credits under a 1986 federal
low-income housing tax-credit program. Such investments are popular
with U.S. banks and other corporations.
The federal government encourages the preservation and reuse of
historic properties by offering tax credits, representing a
dollar-for-dollar reduction of federal taxes owed. As an equity
investor, Berkshire Hathaway's subsidiary expects to invest $17.9
million of its own money on top of the foreign investors'
financing. It expects to receive a total tax credit of $21.6
million, in addition to a 99% stake in the project, according to a
letter of intent reviewed by The Wall Street Journal.
Berkshire is protecting its downside. If the actual amount of
tax credits is reduced, AHP's capital contribution will also be
reduced, the letter said.
The project-selling document cautions that if things don't go
well, the foreign investors can lose all of, or a substantial
portion of, their investment, though Mr. Gorman argues that it is
highly unlikely. The EB-5 investors will get paid when the project
refinances itself after five years, he said.
"I can tell you Buffett's company is very thorough at conducting
due diligence about the developer and project," Mr. Gorman
said.
Some Chinese investors feel such conditions are well worth it.
Jack Sun, who recently immigrated to the U.S. under the EB-5
program, said he wanted U.S. residency for his children's education
and didn't expect to necessarily make money from the investment. He
didn't want to lose it, of course: To reduce risks, he used Google
maps to check individual projects and carefully read business plans
before investing.
Immigration lawyers advise clients to be careful about projects
that rely too much on foreigners' money. "We advise our clients to
steer away from projects where EB-5 becomes the chief financing
source," said Jean François Harvey, managing partner at Harvey Law
Corp. in Hong Kong who advises EB-5 applicants.
Anupreeta Das contributed to this article.
Write to Wei Gu at wei.gu@wsj.com
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