Catching China’s attention

Hawaii jumped early on attracting Chinese investment dollars, but those dollars are now flowing past the islands and on to the Mainland.

The state tax map records do not reflect more than around five or so property sales to Chinese national buyers in the past year, said Winnie Lu, a Realtor with Prudential All Star Realty in Kapaa. Some use a corporate address and are not identified in the reports but Realtors usually know who is buying a big property, she added.

“In business, I don’t see as many Chinese on Kauai, and there are very few investing in the outer islands,” Lu said.

The condominium and single-family residence sales to Chinese buyers are comparatively low and Oahu has the advantage. The majority of Chinese travelers are coming from major cities like Shanghai, Beijing and Guangzhou and are drawn to Honolulu and Chinatown for the people, stores and restaurants, she said.

The ripple effect for Kauai is that when a Chinese buyer spends $2.5 million for a home on Oahu, the previous owner will sometimes retire to a home on Kauai, she said. The Chinese are spending billions on investments around the world and it is pushing up housing prices everywhere, she added.

Barinna Poon, president of the Hong Kong Business Association of Hawaii, co-sponsored a workshop earlier this month in Honolulu that focused on helping Hawaii capture some of the $175 billion that Chinese nationals are expected to spend on properties around the world in coming years. They are using subsidiary consulting offices locally that do the homework for them.

“The Chinese are looking but there are not really any big buyers yet and I see them coming later on,” said Poon, who is also a commercial real estate broker. “The Chinese are more skeptical. They like bargains and will not just buy at any price.”

International investment on the Neighbor Islands is slower, she said, but the real factors are about industry potential, profit and risk, she said. What would help most is to make it easier for Chinese to travel to Hawaii, by granting the same visa waivers that has led to more Japanese, Korean and Taiwanese visitors.

This opens the door to business and investment opportunities, Poon said. Not having to wait months to visit Hawaii would encourage repeat visits for recreation, second homes and the mobility needed to oversee investments.

“The first thing we need are direct flights to everywhere in China, or at least one to the north and the south,” Poon said. “A visa waiver will also help a lot.”

County Director of Finance Steven Hunt said Kauai is a second-home market that is driven by external sales. The market is trending upward but the landmark properties are unique sales such as a $20 million property that recently sold to a Russian investor.

“That is a different market with the recession-proof buyers and sellers of trophy properties and long-term land banking,” Hunt said.

Paul Kyno, an associate with Sleeping Giant Sotheby’s International Realty in Lihue, is currently showing Kauai and Oahu properties to four Chinese buyers. The $6 million to $40 million projects include a golf course and a retirement high-rise project.

“They haven’t bought anything yet but they are absolutely looking,” Kyno said.

EB-5 program

As a small business partner, Kyon has also sought to partner with international investors using the EB-5 Immigrant Investor program. It was created by Congress to stimulate the U.S. economy by allowing investments on projects that create jobs in exchange for green card visas to foreign national investors.

The investment applies to new or existing businesses that create a 40-percent increase in net worth or add 10 direct or indirect full-time jobs for U.S. workers within two years. Kyon is seeking EB-5 partners for his Kapaa restaurant and a new Hawaiian bottled water company.

“It’s at least a one-and-a-half to two-year process, and eight months of that is just completing the regional center stuff,” he said. “It is a good program and I think if it was made a little easier then it would be more helpful to businesses that need it,” he said.

The small business owner doesn’t have the time and needs an immigration attorney and an economist to complete the regional center application. Other investors take a minor ownership percentage in a large project but the risk of having no recourse to recapture lost funds if the project fails is a concern, Kyno said.

Investors who are not interested in a green card already have access to the outside world and know where to find good investments, he said. They are looking at the multi-million dollar projects.

Regional centers have changed greatly over the years. The current Immigrant Investor Pilot Program provides oversight of investment activities according to type of industry to ensure compliance with the U.S. Citizenship and Immigration Services. The regional center may amend their qualification to add another category.

The minimum EB-5 capital investment for an approved commercial enterprise is $1 million for Oahu, and $500,000 within a Targeted Employment Area that is determined by population and unemployment factors. Kauai qualifies as a TEA.

Projects in Kauai

Brent Herrington, president of Kukuiula Development in Lihue, said they have a 10-home project with one Chinese national adding a small investment in the $700,000 development.

“It is not an EB-5,” Herrington said. “It is just a one-off investment from a Chinese gentleman who visited and expressed interest.”

Chinese currency laws allow $50,000 U.S. dollars per person, per year to go out of the country legally, said Honolulu immigration attorney Alan Ma. This  makes qualifying for the minimum EB-5 impossible, unless you understand laws regarding multiple family members, escrow accounts and limited partnership agreements.

The regional centers today collect investments from foreign applicants, and then lend it to the developer, he said. They make money on the interest, which is very different than what Congress set up 20 years ago.

“The regional center acts as a bank,” Ma said. “It has become an industry.”

Ma established the nation’s first statewide regional center in Hawaii around 1993 under the Department of Business and Economic Development. No one was ready to invest abroad at the time when the Chinese market was still maturing.

Over the past 20 years Ma has helped many developers find EB-5 money. His first project was on Kauai in 1998, with the Whaler’s Brew Pub mini brewery that closed after Hurricane Iniki.

“In the 1990s Hawaii was the front runner with the EB-5 but that is no longer true today for various reasons,” Ma said, who only encourages them as a last resort to clients seeking green cards.

“I personally would try to shy away from the regional centers,” Ma said. “There are many reasons why, but I have structured projects on purpose to shy away from them because it is a lengthy and difficult process toward immigration.”

Push factors

David McCauley, a Honolulu immigration attorney, said the number of regional centers nationally has grown from 40 to 300 in just a few years. Only a handful of them have a track record of success.

“The others are all too new,” McCauley said.

Ma said the EB-5 will likely evolve into something bigger with immigration reform legislation looming. It is impossible to forecast given all the changes that happen along the way to passing laws, he added.

“Push factors” help to understand investor intentions and the nature of their interest in a project or property. Without it, Ma said it is difficult to protect against unwanted immigrant tax consequences on foreign assets and titles.

“This is true not only for substantial investments but even for a small piece of property,” Ma said. “If the investment is structured wrong there are tremendous tax consequences.”

The foreign investor is no less vulnerable or more protected than an American citizen, Ma said. A prudent investor has an understanding of economic forecasts, project structures, location, industry and the United States as a whole.

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