EB-5: Ambitious China City Project Sits in Limbo


The Catskills region, an area sometimes referred to as “the Borscht Belt,” might seem an unlikely site for a development called China City of America. But the sprawling, and controversial, proposed project—think a Chinese Disneyland, but with gambling—is planned for the area nonetheless.

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The $6 billion development is being spearheaded by a Long Island-based businesswoman named Sherri Li, a Chinese émigré, and, according to its first proposed plans, would spread over as much as 2,300 acres.

Aimed towards Chinese-speaking patrons, the initial proposal for China City called for a for-profit college, 400 hotel rooms, an amusement park and a casino with 4,000 slot machines.

“We can kind of view it as a Chinese concept of Disney,” the project’s lead investor and China City of America’s CEO, Ms. Li, said at the public unveiling before the Town of Thompson, in Sullivan County, in May of 2013.

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To finance the ambitious plan, Ms. Li looked to the increasingly popular EB-5 immigrant investor program. The program, which allows foreign investors to receive green cards in exchange for job-creating investments of at least $500,000 in the U.S., has gained ascendance as a financing tool for commercial real estate projects since credit tightened during the recession.

The original plan was submitted to U.S. Citizenship and Immigration Services in December of 2011, with 39 percent of the capital stack for its first of three phases of construction set to come from foreign investors through EB-5.

Alas, the application is still pending and the scope of the project seems to continuously, and mysteriously, shrink. The notorious project has come to represent the pitfalls of using EB-5 in the New York development world, sources told Mortgage Observer.

Concerns about compliance with state environmental laws have also slowed progress on the proposed project. Additionally, locals and other observers who follow the EB-5 program have scrutinized China City’s bookkeeping. And some have said the $65,000 non- refundable deposit required from each EB-5 investor in the project is unreasonable.

While, of course, any large new project can be plagued by local approvals, the particularly fervent opposition may have to do with skepticism about the influx of foreign capital.

In January of this year, Ms. Li’s plan, initially set to sprawl over three parcels of land straddling the jurisdictions of the Towns of Thompson, Mamakating and Fallsburg, got a lot smaller—1,176 acres smaller. The project’s footprint was reduced to 570 swampy acres in an isolated area almost entirely within the borders of Thompson.

The most recent incarnation of the plan also nixed the amusement park and many other features, and made the for-profit college, called the Thompson Learning Center, its centerpiece. If built, the revised proposal would include 75 single-family homes and 25 homes for investors to buy, about 660 attached townhouse dorm buildings, a conference center, and a daycare center. No revised cost figures have been presented, it would seem.

…But Does it Have the Jobs?
EB-5 projects should have a “cushion” in the number of jobs created—typically about 20 percent more than the number of EB-5 investors required by USCIS.

Since an EB-5 project typically takes several years from concept to completion, market dynamics like the cost of land acquisition, building materials and capital should be expected to fluctuate such that the funds raised through EB-5 won’t always be sufficient to create the required number of jobs.

“If the only thing you do is recommend projects to investors you’re only as good as your last deal, so you have to get this stuff right and you can’t risk not meeting your job count,” said Morris Betesh of Massey Knakal, who has worked with clients using EB-5 funds. “A project that isn’t structured in this way will be a big red flag to most EB-5 investors.”

TEA Party
Building in a Targeted Employment Area means it must raise $500,000 per investor, instead of the $1 million required outside of a TEA. Since most EB-5 investments offer a very low rate of return (typically under 5 percent), the lower minimum makes the program far more attractive to many investors, according to Bill Whalen, a former EB-5 adjudicator for USCIS.

“Being in a TEA makes it easier to find investors, no question,” he said, especially Chinese investors, who provide the lion’s share of EB-5 money and are often more interested in attaining a visa than in the outcome of a given project.But the exact borders and definition of a TEA vary greatly, even by project, Mr. Whalen said. Typically, any rural area outside a major metropolitan statistical area, or any area with at least 150 percent of the national average unemployment rate, counts as a TEA. Within New York, smaller areas—such as a particular ZIP code or census tract—could qualify as a TEA. However, USCIS does not discuss what geographical parameters any project has used to qualify as a TEA as a matter of policy, a rep told MO.

A World Away
The most obvious but pervasive issue that arises when developers use EB-5 financing to finance a project is simply the geographical hurdle.

“The influx of EB-5 is affecting our closings,” said Rich Nardi, a partner with Loeb & Loeb LLP, who says about 75 percent of deals he has worked on recently have included EB-5 funds somewhere in the capital stack. “I have had a deal change because of the unavailability of someone who needed to sign a document in China.” Plus, EB-5 marries a developer to a deal. “Once you have EB-5 you are committed to stay with [the project] for a five-year period,” said Mr. Polivy of Akerman, who has worked on the George Washington Bridge bus terminal project, which was financed partially with EB-5. “They chose EB-5 because, at the time, credit was not available for institutional lenders. Now, they’ve gone back and gotten additional mezzanine financing,” but are required to finish the project no matter how high costs go or what difficulties they encounter filling out the stack.

“I can only surmise that they didn’t want to deal with a multi-town project,” Bill Rieber, town Supervisor of Thompson, told Mortgage Observer. But what has delayed the project and what the developer hopes to do remain a mystery to residents and observers—observers who are curious how the use of this novel financing scheme will play out in a development whose backers have attached to it a large price tag but scant specifics.

With the scale of the project a continual point of contention, whether it will provide the required 10 permanent full-time jobs for every $500,000 invested through EB-5 remains another unsettled question.

A document released in May 2012 by China City put the number of jobs the project would create at 2,850. But that number was released before the plan was scaled back.

“I don’t see how they’re going to get the required number of jobs the way they’re going about this,” said a lawyer who lives in the area and is familiar with the development but asked to remain anonymous. “The whole thing seemed to many of us, from the outset, to lack legitimacy.”

Local opposition as proposals went public in the summer and fall of 2013 was led by environmental activists unhappy with the project’s placement near protected lakes and wetlands.

Paula Medley, President of the Basha Kill Association, a local group that works to preserve the area’s wetlands, estimated that between 250 and 300 local residents packed into a town planning meeting in Mamakating, N.Y., to oppose the project when plans were first announced.

Ms. Medley also pointed out that the newest version of the plan would be limited to 422 buildable acres, since New York state law prohibits high-density development within 100 feet of protected wetlands, meaning the project would have to be considerably smaller than what Ms. Li has pitched.

“There’s no way,” Ms. Medley said. “It’s not possible to fit everything they want to fit on that land.”

Ms. Li did not return repeated requests for comment for this story. The project’s EB-5 lawyer, Larry Behar, and its local counsel, Jacob Billing, declined to comment.

Several people familiar with the proposed project say there is reason to suspect that one of its legal vulnerabilities is segmentation—essentially, dividing the land used for a development into different sections to create the impression that each section is unrelated to the others so that an environmental review can proceed with minimal scrutiny.

The division of the original China City plan into several distinct pieces of land, along with a lack of clarity from the developer on the scale of the project have led some to suspect segmentation, according to an attorney with knowledge of the project and of environmental law in New York state.

“You often don’t find proof that segmentation is happening. But there are a lot of indicators that way,” this person said. “And if there weren’t, why would they be making contradictory statements?”

Those contradictory statements came in an article in the Associated Press dated Jan. 19 of this year, which contained a quote from Ms. Li, saying she did not intend to scale the project down, despite the newly scaled-back public proposal. Several days later, a public meeting called a scoping session at which Ms. Li’s team was to present specific plans for the scaled-back version of the project, was canceled by Mr. Rieber.

“My reaction was to cancel the scoping session until we get the truth,” Mr. Rieber said. “There’s a big difference between developing 570 acres and developing over 2,000 acres, so to say that they’re going to build on less land when they’re really going to build on more is segmentation. It appeared that they misstated their intentions, and we didn’t take kindly to that.”

And other mysterious circumstances swirl around the proposed project.

In their promotional materials, the developers have published the I-797C form they filed with USCIS. This was done in order to give the impression that the project has been approved by the Department of Homeland Security, according to David North, a fellow at the Center for Immigration studies. However, that form simply means the application to form a “regional center” (an entity that can legally receive EB-5 funds from abroad) was filed, not approved. As of this writing, USCIS does not list China City of America as an approved EB-5 regional center.

And while no information is available about whether China City of America has so far collected any money from investors, the $65,000 non-refundable deposit each investor must contribute has raised some eyebrows. For some historical perspective on what such fees can lead to, one might turn to the SEC complaint in the largest case of EB-5 fraud in the history of the program. The official complaint, lodged in February of 2013 against the lead investor of a doomed proposal to build a convention center in Chicago, repeatedly names a similar “administrative fee” of only $41,500 for each investor. The final judgment in that case resulted in the freezing of assets belonging to the project’s lead investor, $3.9 million in civil penalties, and a $1 million fine against the project’s lead investor, court documents show.

Steven Polivy, chair of the economic development practice Akerman LLP, pointed out that the fee covers marketing and administrative costs, which might vary. “I would say that $65,000 is not an extremely high number for the expenses,” he said.

But, as with the project as a whole, so little is known at the moment that its hard to make heads or tails of the grandiose proposal. Since it was first proposed, the project has essentially lain dormant for three years, with no formal movement from relevant federal or municipal officials.

“It’s a huge project,” Mr. Polivy said. “There may be some projects that are too large for EB-5.”

—Additional reporting by Guelda Voien