FORT LAUDERDALE, FL—In this Episode III, we will focus on the third group of Chinese investors: Chinese individuals. Although some Chinese individuals may invest in the United States for diversification purposes, most are seeking an EB-5 visa.

According to the US Department of State's full "Report of the Visa Office 2014," China mainland-born investors constituted 85.4% of all of the EB-5 category visas, which is a 32.4% increase from 2013. Many US developers see the EB-5 program as a great opportunity to obtain funds for their developments. However, it is important for developers to understand the complexity and potential issues of the EB-5 program.

Practical Considerations. Chinese developers commonly qualify projects for EB-5 investors by either creating a new Regional Center or joining an existing Regional Center. In general, a Regional Center is an organization that enables individual foreign investors investing in a specific project to satisfy certain of the EB-5 requirements through his or her association with the Regional Center. Foreign investors are only required to invest $500,000 if done through a Regional Center versus $1 million if the investment is not done through a Regional Center.

Regional Centers use the investor's funds in projects that create and sustain U.S. jobs, as required by the EB-5 program. Regional Centers can include more than one project and "indirect jobs" can be counted towards the employment creation requirement. Indirect jobs include, for example, workers who build a hotel or other project, in addition to the workers who are actually employed at the hotel after it is completed. This generally makes it easier for individual foreign investors to satisfy the EB-5 requirements.

However, establishing a new Regional Center is expensive and time-consuming: the application process may take more than a year, and may involve significant legal and consulting fees. Joining an existing Regional Center therefore often is a more attractive option.

Although typically easier than establishing a new Regional Center, joining an existing Regional Center may also be time consuming. The developer must locate and evaluate available Regional Centers, qualify the project for EB-5 in compliance with the applicable regulations, and recruit individual investors.

To be successful, the developer generally must work with its attorneys at all stages of the process. Regardless of whether the developer establishes a new Regional Center or joins an existing Regional Center, qualifying a project under the EB-5 program requires Chinese developers to comply with additional requirements not faced by developers raising capital from other sources.

Securities Considerations. The Securities and Exchange Commission and state regulators are focusing on EB-5 offerings and have become increasingly active in enforcing violations of the U.S. securities laws, charging persons with fraud and misstatements in the offering materials, the sale of unregistered securities and acting as broker-dealers and investment advisors without proper registration. The SEC is particularly concerned with individuals and their firms, who are located in the United States, soliciting Chinese investors (located in or outside the United States) or providing them assistance and information regarding the Regional Centers and the Regional Center projects, but are not registered as broker-dealers or investment advisors.

When obtaining EB-5 financing, it is very important that the developer work with its attorneys to make sure that the solicitation of Chinese investors has been made in compliance with the US securities laws. Failure to comply can result in investors seeking to rescind their investment and/or enforcement actions against the developer by the Securities and Exchange Commission and state regulators.

Tax Considerations. Among the three groups of Chinese investors—Chinese developers, Chinese investment funds and Chinese individuals—Chinese individuals have the most options when deciding how to structure an investment in a US real estate project. These investors may use a wide variety of structures, typically consisting of a combination of US or foreign corporations, partnerships, or trusts.

The primary, and oftentimes competing, US tax goals of Chinese individual investors are reducing the tax rate on operating income, preserving eligibility for the long-term capital gains rate on the sale of the property and avoiding US estate and gift tax exposure. Choosing the appropriate structure requires consultation with the individual's US and Chinese tax advisors. Depending on the structure ultimately selected, the individual may need to form entities located in China or in tax-favorable jurisdictions such as the British Virgin Islands.

Choosing a structure, forming any required entities, and addressing administrative requirements—e.g., opening US and foreign bank accounts—may be a time-consuming process. However, a well-advised Chinese individual will be sure to establish a suitable structure prior to investing in the U.S. real estate project.

Once the developers overcome the obstacles of the nature of the EB-5 program, dealing with this group of Chinese investors is probably the easiest of the three groups. Chinese individuals are very self-sufficient. They usually settle in an area close to other Chinese immigrants with good schools, excellent Chinese food and a luxury living environment.

As described in our three Episodes, Chinese investors—whether developers, funds, or individuals—face unique considerations and constraints when investing in US projects. US developers and businesses who are able to understand and accommodate these groups of Chinese investors will gain access to a significant, and accelerating, source of capital for their projects. And they may even make a lifelong business partner and friend. The key to overcoming the initial barriers to doing business with Chinese investors is working with someone who can truly bridge the two cultures and bring both sides together.

About the Authors: Holland & Knight attorneys Geneve "Ying" Dubois, Tony Alfonso, Laurie Green and Kevin Hall specialize in areas such as real estate, corporate governance, securities and tax. They are headquartered in the firm's Fort Lauderdale office. The views expressed here the authors' own.

Instant Insights /

Demystifying Chinese Investors. Episode III: Chinese Individuals

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