The Potential for Direct Foreign Investment

September 18, 2016 John Ryan

 

(Editor’s Note: John Ryan is general manager of the Guam Strategic Development Regional Center [Guam EB5]. This article is adapted from recent remarks he gave to the Rotary Club of Guam.)

The Guam Strategic Development Regional Center, or EB5, is one of the many categories of U.S. employment-based immigration visa options available to foreign nationals who want to become U.S. citizens. EB5 immigrant investors make up about 7% of the thousands of employment-based visas the United States issues each year.

Originally EB5 was established so that foreign nationals with the ways, the means, and the desire to start a business in the U.S could do so, as well as provide a pathway to U.S. citizenship for them while creating new jobs for Americans. The minimum investment was set at $1 million and a corresponding job creation threshold of 10 jobs per unit, or each $1 million of investment. But it’s only a path toward, and not a guarantee of U.S. citizenship. There is actually quite a lot of risk for the investor.

The ins and outs of direct foreign investment in support of development projects that create jobs for U.S. citizens and provide Green Cards for investors are not exactly light reading. There’s an entire industry built upon this particular field of economic development. It employs thousands of lawyers, accountants, financial advisors, marketing and promotion companies, and other specialists both at home and abroad. It is highly regulated, and the various participants work closely with public and private economic development corporations, government agencies, banks, private equity firms, investors, developers, and of course EB5 Regional Centers like ours.

Every arcane detail of direct foreign investment and immigration may only be fully understood by a select group of industry pros. But its potential for communities seeking bona fide opportunities to undertake responsible, sustainable growth and development is great enough that we all have a vested interest in understanding at least some of the basics, most especially what’s at stake for communities that choose to participate, or not, in this 21st century method of funding development projects.

When the hoped-for level of foreign investment failed to materialize, the EB5 Regional Center Program was created. Incentives were added, including the ability to lower the minimum unit investment to $500,000 and to credit investors for indirect as well as direct job creation.

In a nutshell, local developers, landowners, and business owners are encouraged to come up with development projects, and then the federally authorized Regional Centers such as the Guam EB5 (the regional center I lead) match them with qualified foreign immigrant investors who provide a portion of the funding. On Guam this might mean a family that is “land rich but cash poor” can be matched with foreign investment capital that will help them put that land to productive use for current and future generations of their family.  

Or it may mean an existing business that lacks the capital to expand, or that has fallen on tough times but is not ready to close its doors, can get the money it needs to grow and create jobs or stabilize itself and preserve jobs. Governments and not-for-profit NGOs (Non-Governmental Organizations) also turn to EB5 to fund capital improvement and facilities projects.  

Whoever the developer is, Regional Centers serve as a facilitator for them and the investors. We help both sides of the development equation achieve their aims. We form a partnership with the investors for the purpose of funding the developer and manage that partnership on the investors’ behalf so they can focus on immigrating.  The developer, meanwhile, interacts only with the Regional center. Freed from dealing with multiple investors, they can focus on whatever it is they are building, expanding, or preserving. Federal reporting requirements, such as documenting job creation, is also handled by the Regional Center.

A Regional Center can be privately owned as Guam EB5 is, or it can be a public entity or joint public-private enterprise. Guam EB5 is a locally owned, family-owned business.

It was not until the 2008 Financial Crisis and extreme tightening of credit and limitations of TARP, the Troubled Asset Relief Program established by the federal government to strengthen the financial industry and protect the overall economy, that both the private and public sectors fully recognized the potential of EB5, and actively sought out foreign investment capital through the EB5 Regional Center program. When they did, what was once essentially a cottage industry quickly grew into a highly sought after vehicle for both private and public project financing.

Investments made through EB5 Regional Centers are helping create jobs across numerous industries: hospitality, retail, healthcare, education, construction, hi-tech, and manufacturing, just to name a few.

Simply enter “EB5 Projects” in just about any Internet search engine and you’ll find hundreds of actual new construction, upgrade, or rehabilitation projects: hotels and resort developments; entire shopping malls and individual fast food joints; charter schools, housing projects, hospitals, and assisted living facilities; roads, bridges, and utility projects; sports stadiums, performing arts, and convention centers are all examples.

Two, one in New York and one in Hawaii, are textbook cases of how EB5 projects can help build needed projects and bring job-creating foreign investment to communities. In Buffalo, a new hospital was under construction at a cost of $170 million, and all the financing was in place except for $10 million. The developer worked with a local Regional Center to fill that gap with EB5 investor capital that paid for new equipment the hospital needed to open. Closer to home, the University of Hawaii used $18 million in EB5 investment to help fund the cost of expanding its West Oahu campus.

EB5 investments are just one component of the financing package for a development project, not a 100% funding solution. Regional Centers and the investors they bring to the table do not compete with banks or other lenders.  Actually it’s the opposite—financial institutions like having a responsible, trusted, Regional Center as part of a funding equation because it reduces their exposure and overall risk on a project.

EB5 capital can be structured as a loan or equity investment. It is possible to utilize EB5 funds for bridge financing or to pay down more expensive debt. It allows for creativity too. For example, the payback plan for investors in a new Major League Soccer stadium in the state of Florida includes 10 years of club-level season tickets.

As one banker told a reporter last year, the EB5 program “does not make bankable deals bankable,” but what’s important to lenders is “affiliating with a good borrower and a good regional center and a good legal team.”

Both of the Buffalo and Hawaii projects easily satisfied the job creation, ROI, and immigration benchmarks outlined in their respective business plans. The developers got the needed funding at a very attractive rate for projects that were important to the local communities, banks and other lenders took less risk, jobs were created, investors got their money back plus a small amount of interest, and they received a permanent Green Card and eligibility to complete the process of immigrating and becoming U.S. citizens.

The U.S. is a nation of immigrants. For much of the 19th and well into the 20th century, millions of foreigners relocated to North America and went to work building the country. In the 21st century this immigration “business model” has essentially been reversed.  

Today it’s not workers the United States needs, but jobs, as well as the capital investment to create them. Yes, we are still the world’s number-one economy, but we’re also a 240-year-old country that has lost some of its global economic clout and competitiveness. Since a disproportionate share of the world’s wealth and available investment capital is in Asia, this presents Guam, America in Asia, with a unique opportunity to use and benefit from EB5.

Roughly 90% of the 10,000 EB5 investment visas allotted to the Regional Center program each year are going to investors from Mainland China. Literally billions of dollars is leaving China, bypassing Guam, and going to private and public sector projects in stateside communities. The other countries that, together with China, comprise four of the top five immigrant nationalities to utilize EB5 in recent years are Vietnam, Taiwan, and Korea.

My work with Guam EB5 takes me to various gatherings for people interested in becoming investors in the United States. Last October and again in April, I met in Beijing with hundreds of potential investors interested in immigrating to the U.S. on an EB5 investment visa. Once they understood where Guam is, who we are, and the economic opportunity that exists here, they were genuinely excited about the possibility of making an EB5 investment in “America in Asia.”  

In April alone I returned home with a list of 31 potential investors asking to be notified as soon as we have a formal project prospectus to offer. Combined, they represent more than $15 million in capital that could be invested into our local economy.

You might assume that someone from China with half-a-million dollars to invest is extremely rich. More often than not you’d be wrong. Most of the people I met are part of a huge Chinese middle class that works hard, lives below its means, saves aggressively, pays in cash, and carries little or no debt. They are predominantly white-collar office workers, small business owners, professionals, teachers, entrepreneurs, government workers, and retirees. They are not speculators or junk-bond investors looking for high-risk, high-return investments. Their goal is to responsibly invest their life savings and collect a modest return while ultimately becoming US citizens. Their values are much more Main Street than Wall Street. They are like the people profiled in 1996 book by Thomas Stanley and William Danko about wealth in America, THE MILLIONAIRE NEXT DOOR. Only, these next-door millionaires live in Shenyang, Yancheng, Tianjin, and hundreds of other cities across China, Vietnam, Taiwan, and Korea.

In the case of citizens from the People’s Republic of China, while we have spent years trying to convince Washington to grant a visa waiver that will allow them to come here and spend a few days and a few thousand dollars as tourists, they would gladly invest half-a-million dollars in Guam as immigrant investors, no special waiver needed.  

Over the past 16 months I’ve come to believe that Guam is the ideal community for EB5 investors, and now is the ideal time to utilize their capital. Our location, similarities in culture, ethnic diversity, even shared histories make our island more familiar, more appealing especially to those middle-class investors I described. The fact that we are easily accessible by direct flight in a matter of four or hours and only one or two time zones away is also a huge plus for us. All this plus U.S. banking, our legal system, private property rights, and of course, that American passport.

EB5 industry websites have reported on government and private sector efforts to attract new offshore investment to Guam, about record-breaking tourist arrivals and projected growth into the next decade, about tax incentives for new hotel rooms to accommodate these additional visitors, about new airlines serving our island, and other good news.

The incentives to attract the investment needed to achieve our current goals for growth have been in place and publicized abroad for going on two years now, and they have played out in the EB5 universe in two very significant ways: offshore investors with the ways, the means, and the citizenship incentives to partner with Guam to fund our economic ambitions are well aware and very interested in the opportunity; and a number of local developers are well along the planning stages of turning project ideas into reality.

The Guam story is in global EB5 marketplace, including with potential investors and developers. This did not happen overnight. Considerable time and expense, both public and private, were spent to get this far. Foreign investment capital, especially EB5 investments that are tied to immigration and job creation, flows to where it is both needed and welcome, to where there is both a strong business case and community support for it. It will go elsewhere if one or the other is missing.

As much quality foreign investment that we could possibly desire and responsibly utilize to grow, diversify, and strengthen our economy is out there. Furthermore, there’s little restriction on project ideas. So as a community, the ball is in our court.  It’s up to us to plan and decide our next move.

Based on my discussions with agents and other industry professionals, an attractive project in Guam would likely have a total value of $50 million to $100 million with anywhere from 10 to 40 percent of that total provided by EB5 investors. A so-called “mega project” that must create thousands of jobs to obtain the amount of EB5 investment a developer seeks may actually be less desirable for our island than small- and medium-sized projects. In the EB5 universe bigger is not necessarily always better.  

It is common for Regional Centers, including ours, to work with agents who help us package and present projects as investment opportunities in the EB 5 global marketplace. But before accepting and recommending a project to their investor clients, these agents seek to learn everything they possibly can about a project and the community.

Their reputation is on the line too, so they carefully evaluate everything they learn before recommending an investment opportunity to their clients. Agents don’t just want to hear from project developers, economic development authorities, and politicians; they want to learn how the broader community feels about development and investment. The successful attraction of EB5 capital requires a total community effort.

There are many reasons for this, but perhaps the most significant is that in the EB5 industry, monetary return and job creation are not the sole measures of a successful investment. The return on investment is also measured in healthcare, education, safe streets, a clean environment, and economic opportunity. The stronger these community attributes are, the more likely the success of an investment.

So even though EB5 investors are not required to reside where they invest, when they put their life savings at risk it is a vote of confidence for that community. They not only want their investment to do well, but for the community where they put their money to do well too. They become stakeholders.

We are a community where economic and business success is most often framed in the context of how many visitors we welcomed the previous month. We take great community pride in those numbers. If we are going to keep raising the bar, and we want to do so responsibly, there is more than enough quality foreign investment capital to help make that happen.

The nature of our island economy is that even with increasing visitor arrivals it may never be as robust and self-sustaining as we’d like it to be. It’s possible we may always be vulnerable to events, globally or here at home, naturally occurring or man-made, that will disrupt our economy and require a prolonged period of recovery.

We may never be able to fully insulate ourselves from such risk.  But we can use EB5 funding as part of a broader effort to mitigate and manage the risk. This includes efforts to strengthen existing industries that have a track record of economic success; to encourage new industries that will help diversify and expand our economy; to build community consensus on the what, where, how, and when of new development; to pursue development projects that are responsible and sustainable; and to avail ourselves of 21st century ideas and sources of capital, such as contributions from EB5 immigrant investors willing to help us achieve our goals.

Other communities with much less to offer foreign investors than Guam are successfully doing so. We can, too.


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