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Real Estate
Funding U.S. Builders: Visa Seekers
From the Wall Street Journal of Wed, 10 Dec 2014 01:28:33 EST

The giant trucks pumping concrete in Hudson Yards, New York’s biggest real-estate project in a generation, are being financed by an unlikely source: about 1,200 Chinese families in search of U.S. visas.

Developer Related Cos. says it has raised roughly $600 million from the families to build the foundation for three skyscrapers at the West Side project, a 17-million-square-foot colossus of office, retail and residential space set to open over the next decade.

To finance the concrete-steel platform, Related tapped a little-known and at times controversial federal visa program known as EB-5, which offers green cards to foreign families who invest at least $500,000 in U.S. projects that create at least 10 jobs per investor.

The amount brought in so far, which privately held Related hasn’t previously disclosed, is a record for the cash-for-visa program.

Related’s success shows how the once-obscure federal program has grown in popularity among developers and foreign investors since the recession.

In San Francisco, home builder Lennar Corp. has raised about $200 million through the program for projects that include more than 12,000 housing units on a former naval shipyard. Developer Forest City Ratner Cos. has taken in more than $475 million for the real-estate project connected to Brooklyn’s Barclays Center. In lower Manhattan, World Trade Center developer Larry Silverstein is trying to raise about $250 million for a hotel and condominium.

In all, 10,928 foreign investors applied to invest through the program in the fiscal year ended Sept. 30, up from 6,346 a year earlier and 486 in 2006, according to U.S. Citizenship and Immigration Services, the program’s administrator. Most projects have been real-estate developments.

More than four-fifths of applicants typically win approval and become eligible for a temporary visa, the data show, suggesting the investors who applied this year would fund nearly $4 billion in investment if all of the projects go forward. If the project is found to have produced the pledged 10 jobs per investor, the investors and their immediate families become eligible for green cards.

The growing popularity has made for lengthy processing times for investors and developers. But Related successfully urged the federal government to declare the development a project of such national importance that it deserved expedited approval.

Raising the money through traditional means would have been difficult because of the yearslong gap between when the platform over the 13-acre train yard is started and when the buildings are completed and income starts rolling in, said Related Chief Executive Jeff Blau.

“It was a very critical part of the puzzle,” said Mr. Blau, who expects to rake in hundreds of millions of dollars more from Chinese and other foreign investors as the project progresses.

In all, the project’s tab is expected to top $20 billion. Related plans to fund much of that through traditional debt and equity investments, Mr. Blau said, and the developer has invested equity in the platform alongside the EB-5 money. But he expects the $40 million to $50 million the firm is raising each month in EB-5 money to continue to play a major role. The company recently won broker-dealer status in the U.S., helping it to maintain this pace.

“It’s so big there’s not enough capital from any one traditional source,” he said.

Chinese nationals are the biggest source of EB-5 funds, making up more than 85% of visas approved in the 12 months ended in September. Many are investing for their children rather than for themselves, said Kenneth Li, a Houston real-estate broker who has offered advice to Chinese investing in EB-5 projects.

“For many of them, it’s for the next generation,” he said.

Congress created the EB-5 program in 1990 to spur job creation through foreign investment. It was used infrequently for years.

Administrators in 2009 clarified a rule to allow temporary construction jobs to be counted toward the 10-jobs-per-investor requirement, sparking more activity.

The recession, meanwhile, led banks to pull back drastically from funding new projects, leaving developers to scour for nontraditional sources of financing. The EB-5 program caps the number of visas allowed per year at 10,000; within that total, the number from individual countries also is capped.

At times the program has invited scrutiny. The U.S. Securities and Exchange Commission last year warned of “fraudulent securities offerings” related to the EB-5 program, in which investors put money into nonexistent projects.

The program also has come under fire because it can be difficult for investors overseas to discern safe investments from risky ones, and if the investment fails to create the required jobs, they don’t get a green card. In addition, claims of jobs created are difficult to verify and the program administrator has been criticized for not having an effective system for doing so.

Developers are embracing the program largely because it provides low-cost capital. Money borrowed through the EB-5 program carries much lower interest rates, sometimes half of what companies typically pay, executives said. That is because investors are primarily seeking green cards, not a profit, and generally are willing to accept low returns, EB-5 advisers said.

The Durst Organization, a family-owned Manhattan developer, used the EB-5 program to raise $260 million in 2013 and 2014 for two apartment towers, about 15% of the total construction cost.

Durst lawyer Gary Rosenberg said the EB-5 loans generally carried an annual interest rate of 5% to 8% paid by the developer to the investors. Such loans are considered mezzanine, a riskier form of debt; traditional mezzanine financing would have had an interest rate seven or eight percentage points higher, he said.

Earlier this year, Durst executives flew to China to pitch their projects to investors. On a flight to Beijing and then again in the lobby of a Shanghai office tower, they ran into a Related executive who runs the Hudson Yards project.

“I thought China was a pretty big place,” said Jordan Barowitz, a Durst spokesman, who was on the trip. “Apparently not.”

—Esther Fung and Wei Gu contributed to this article.

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