If no one else will pay for it, maybe the Chinese will.
That was the financing vehicle of choice for the star-crossed Lawrence Downs Casino and Racing Resort, a proposed $225 million track near New Castle, Lawrence County. Plans to build that track blew up on Monday when the two development partners, Philadelphia investment group Endeka Entertainment and U.S. casino giant Penn National Gaming, sued each other.
Penn National, in filing its lawsuit, withdrew from the project, leaving the racetrack — which has been on the drawing board since 2003 — once again in limbo, unable to secure the financial commitments needed in order to push ahead with construction.
Buried in each of those lawsuits is a detailed history of the various financing arrangements conceived by the two parties.
Both companies sought to utilize a federal borrowing fund known as the Immigrant Investor Program, which confers EB-5 immigration visas to foreigners who have at least $500,000 to spend on U.S. business or new projects that create 10 or more jobs.
Endeka, in its lawsuit, said it had secured a $60 million loan through CanAm Enterprises, a New York-based financier that bundles investments from would-be immigrants who want green cards for themselves and their families.
Penn National, too, tried the EB-5 investor route, after signing on to manage the racino project in June 2013. The Reading-based company turned to the Maryland Center for Foreign Investment, because Penn National didn’t like the terms of the credit line offered through CanAm.
In the end, neither investment line will be tapped — but the funds’ willingness to put money into a long-stalled racetrack venture illustrates both the strengths and weaknesses of the little-known, and sometimes controversial, Immigrant Investor Program.
Critics say that the program is tantamount to selling a green card to rich folks, and say the program isn’t dutifully regulated, pointing to a high-profile Chicago scam in which a small-time businessman managed to dupe the federal government, and 290 investors, out of $160 million.
For those investing in the program, usually Chinese nationals, “there are two levels of risk,” said H. Ronald Klasko, founder at Klasko Immigration and Nationality Law firm in Philadelphia. “One level of risk is that they make the wrong investment” and don’t make a return on their money.
And the second level of risk is that, by virtue of their bad investment, they don’t get their permanent green card, either.
There are two types of EB-5 visas. The first is more direct line to a U.S. business: A foreign national invests $1 million or more, and as a result the company hires 10 more new U.S. employees. The investor must agree to an active business management role before he or she receives a visa.
The second type of EB-5 visa, and the more common one, is received after a would-be immigrant invests $500,000 with a “regional center,” an organization that packages loans. Those centers, in turn, find capital projects or existing businesses on behalf of the foreign financier, and the jobs are supposed to materialize in rural or high-poverty areas.
Investors in those bundled loan packages don’t have to manage the company or project in any way — they hand over their money and, as long as they pass background check conducted by U.S. Citizenship and Immigration Services, they get green cards it return.
Any foreign investor who isn’t otherwise able to gain entry into America is eligible for the program, but it is overwhelmingly used by the Chinese. In 2014, according to the U.S. Department of State, there were 10,692 EB-5 visas issued, and 9,128 of them (85 percent) came from China.
“They’re starting to run into the quota for Chinese investors,” said Joel Pfeffer, an immigration and corporate attorney with Meyer, Unkovic & Scott, Downtown. The Department of State hit the quota last year, and a backlog is expected for fiscal year 2015, as well, for Chinese investors. They can still apply for their visas, and regional centers will still take their money, but the green card window won’t start ticking until the backlog clears.
Some of that Chinese investment ends up in Pittsburgh. The EB-5 program, via the Pittsburgh Regional Investment Center, has steered $70 million to the UPMC East hospital construction project, $30 million to Bakery Square, and is now soliciting investors who want to put $30 million into the Newbury Complex, a shopping center in South Fayette.
While the Pittsburgh center focuses on regional projects, the projects themselves can shop around to out-of-state investment groups — today, there about 600 such groups, some more effective, and with longer track records, than others.
CanAm, the investment center tapped by Endeka, is one of the biggest. It started out as a financier for Canadian projects, but in 2002, CanAm moved into the U.S. and has been active in the Philadelphia area. Through the EB-5 program, CanAm has raised international funds for the Pennsylvania Convention Center ($122 million), Southeastern Pennsylvania Transit Authority ($175 million) and the Valley Forge Convention Center ($40 million).
For the borrowers, it’s a great deal — they can save thousands, or even millions, on borrowing costs. And for the investors, they get to jump the line and get themselves, or their families, into America faster than would otherwise be possible. The green cards are conditional, and can become permanent after two years once the project is executed and the jobs are created.
While the lending and visa program became law in 1990, its utilization has increased dramatically since 2008 — during the Great Recession, when commercial lending was at a stand-still, and hospitality venues and hotel chains needed capital flow. And while some borrowers are looking for better borrowing rates on capital, others are looking for any capital they can find, because banks won’t touch their projects.
For the Lawrence Downs Casino and Racing Resort project, EB-5 investors were asked to kick in $60 million. That was more than Endeka was willing to put up ($10 million), and more than Lawrence County commissioners were set to invest via a government bond ($50 million). Penn National also agreed to a $15 million loan to Endeka, and agreed, in principle, to a $100 million property purchase and lease-back arrangement.
Mr. Klasko, the Philadelphia law attorney, said investors generally look for projects where they can act as “bridge” funders, rather than the main source of ground-level, catalytic funding.
Even so, some projects — like the Lawrence County casino — are bigger gambles than others. Once the project gets to the point where it must be blessed, or spiked, by the federal government, about eight in 10 survive. And some, like the Lawrence Downs, collapse under their own weight.
“EB-5 offerings are subject to the same problems that plague other investment vehicles — bad luck, poor planning or execution, and, in some circumstances, misrepresentation,” wrote Robert C. Divine, an immigration attorney at Baker Donelson Bearman Caldwell & Berkowitz, of Tennessee.
Source: Post-Gazette