Wall Street Journal

Chinese-Buffett Deal Food for Thought for Seekers of U.S. Visas

Chinese Investors Fueling U.S. Construction Boom, With Green Card as Payoff

Amerock rendering

An artist’s impression of the Amerock development in Rockford, Ill., which is mostly being funded by EB-5 investors. PHOTO: GORMAN & CO.

By WEI GU, Wall Street Journal, January 29, 2015

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 mega developers. 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.

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“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. Asan 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.

Gary GormanGary Gorman, CEO of Gorman & Co., in the Brewhouse Inn & Suites, a brewery-turned hotel in Milwaukee.  PHOTO: GORMAN & CO.

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.