Huge Chicago EB-5 Multi-Hotel Project Under Scrutiny by Investors
Several Chinese agents and investors are calling into question the claims being made by a new EB-5 Visa Regional Center, The Intercontinental Regional Center Trust of Chicago.
Many are calling this project the new Atlantic Yards due to the extremely large size of the offering ($249.5 million) and the claims being made by its promoters and migration agents in China. The agents need to heavily promote issues of this magnitude in order to raise such an exceptionally large offering (most EB-5 visa project offerings are under $50 million) in a very short period of time.
In order to raise this much capital from an extremely large number of investors (499), the migration agencies in China and elsewhere often make exaggerated claims to meet their quota. If successful, they can earn well over $100,000 - $150,000+ for each investor ($45,000 from the subscription fee plus a percentage of the loan collected by the General Partners).
The Chinese investors are not aware that these agents are collecting such large fees. It is not disclosed to them, and most foreign investors believe that these migration agents are paid only a very small amount ($5,000) and are working on investors' behalf.
Not all agents and agencies in China operate this way, however, and several agents who we've spoken with are extremely concerned about projects of this size and the claims being made in order to convince so many Chinese citizens to invest in potentially risky projects without full disclosure of the fees being paid to them by promoters in the U.S. These large offerings have a secondary effect of squeezing out smaller scale projects which may have a higher probability of success when it comes to job creation and return principal but cannot compete with the resources of larger, better funded regional centers that pay higher fees in the overseas market for investors.
This trend is conditioning the overseas market to promote only larger projects in order to justify the expense and effort necessary to promote offerings of this size and to collect the larger finder's fees. Large projects do not necessarily have a higher rate of failure if they're well capitalized, managed, and structured, but the issue is that potential investors may not be presented with the smaller scale investment opportunities if the EB-5 regional centers with smaller projects cannot justify the large upfront expenses and high investor acquisition costs necessary to raise capital overseas for their smaller offerings.
The proposed project, to be known as the Chicago Convention Center, will be the first Zero Carbon Platinum LEED accredited and 100% allergen-free convention center complex in the world. All guest rooms will be improved with state-of-the-art technology.
The center will include five upper/up-scale hotel brands in three towers. The first tower is a 17-story Starwood Element, which will contain 321 guest suites plus 15 conference suites for a total of 336 rooms. The second tower is comprised of a 19-story, 209-room IHG Hotel Indigo and 154-suite Staybridge Suites. The 14-story third tower will contain a Hyatt Place with 148 rooms and a Hyatt Summerfield Suites with 148 rooms.
The property will include four floors of convention space with a total of 290,000 square feet, all of which will be connected across the lower levels of all three towers. A total of 55,000 square feet will be allocated for restaurants, lounges, and bars throughout the complex. A 1,720-space automatic robotic parking structure will lie below the convention center/hotel complex aligned beneath the second tower. The development will also feature the largest guest accessible hotel green-roof complex in the country, containing almost an acre allocated for a spa, a yoga studio, a bar/lounge area, and a miniature golf course. A total of 995 rooms are proposed, of which 786 will be suites.
Completion of the project is scheduled for January 2014 and ownership forecasts that stabilized occupancy valuation will occur as of January 1, 2018.
This "Investment Analysis" PDF provides even more details.
The proposed convention center/hotel complex will sit on land consisting of three contiguous sites situated at 8161, 8171 and 8211 West Higgins Road in Chicago’s O’Hare Airport submarket. The sites are zoned for hotel use and have been approved for a total maximum of 995 guest units (rooms/suites). Lot 1, situated at 8161 West Higgins Road, contains 41,224 square feet; Lot 2, situated at 8171 West Higgins Road, contains 38,961 square feet; and Lot 3, situated at 8211 West Higgins Road, contains 41,906 square feet. The total land area is 122,091 square feet, or 2.80 acres.
The Principals and the Deal (Part 1)
Although the personal Website belonging to Anshoo Sethi, the 28-year-old regional center principal, states that he comes from a "three-decade-old family business of hotel development," Crain's Real Estate Daily reported in 2009 that the family has "never developed a hotel."
The Crain's article also states that Sethi was "in final negotiations with a lender to finance the first phase of the project" back in 2009. Now he's planning to use EB-5 capital.
Documentation from Starwood Hotels, IHG Intercontinental Hotels Group, and Hyatt confirm Sethi's intention to develop the property.
China and the Deal (Part 2)
The following translations are very rough, so make of them what you will. This one, which comes from USTinfo, states the following:
EB-5 investors are offered a fixed return of 1% per year total $ 25,000, but also can participate in the hotel business after the completion of 3 years and 5 years of dividend income after equity value-added benefits.
Conference Center consists of five international luxury hotel brand to enter, to share their brand's global customer base! When the hotel room occupancy rate of 42% can be profitable, a conservative estimate, the conference center is completed, the occupancy rate of 80% over three earnings are tax-free.
Every five years the average middle-aged investors an average return of 10.5% investment return.
Security I: This project re-financing capacity, lower cost of capital finance, the top hotel brand to join, low cost, zero carbon hotel and O'Hare Airport completed After steady growth in the expansion of high-end tourists combination of factors, such as the refinancing of the project greatly enhanced the ability of public financing;
Security II: 100% of the shares pledged developers for the first principal repayment of EB-5 investors and dividend income and the developer several times with EB-5 investor equity pledge to protect investors be repaid principal and return on equity;
Protection III: $ 1.19 billion valuation of all assets as collateral. The valuation of the largest commercial real estate company by the United States to assess IRR, also won the Illinois state government and the Chinese Embassy's certification.
Advantage 4: --- 3-year repayment guarantee repayment starting in the EB-5 investment projects were approved by the USCIS received I-829 permanent green card status for 100 days, will receive 50 million investment in 10% of paragraph (5 million U.S. dollars) of principal returned the following year received the same day a further 10% of investment fund ($ 50,000) principal amount of the return, the remaining 80% of the principal ($ 400,000) will return the same day the first five years (investors can choose to continue to hold shares)
And if you understand Chinese, here's a promotional video for the project on YouKu, China's version of YouTube. The regional center has also published projected returns on investment and job creation numbers for its Chinese audience.
Promotion in China
Several agencies are promoting this project in China. Worldway, The Shanghai International Service Trade Group Overseas Affairs, and Asia, The United States, and Europe are but a few.
The Governor of Illinois, Pat Quinn (above on right), and other representatives from the State of Illinois (pictured below) are also helping promote the project.
Viewpoints from Prospective Chinese Investors
Here's what one Chinese investor had to say about the project (rough translation):
The project is very big risk and unsafe; excellent location in the current Chicago's McCormick Convention Center Rosemont near the international airport and convention center business is tepid, the last two years many large-scale exhibition to give up all the Chicago market, as convention centers must arrangements with trade unions and workers exhibit all the museum, the cost is very high, the Chicago conference market is very low, the hotel occupancy rate is low; and then build a new convention center is more blind; location of the project is not satisfactory, do not rely on the airport, do not suffer city, if people came to Chicago will be very aware of its real location, the name of the Chicago Convention Centre fool nothing good sign. The consular certification and state Office of Secretary of State Jesse White's certification documents can only be true or false only, can not explain other problems, spend money to do, and very, very simple, only flicker of China's nothing stupid investors. This is a very large project, the name of government-backed signs, but the risk is high and the reality derail the project. Illinois state government brink of financial crisis, Gov. Pat Quin last week laid off one thousand state government has threatened civil servants, was the largest civil service union AFSME (U.S. federal, state and municipal civil service trade unions) strongly opposed, how can his effort to this project Tim Jin Jiawa it?)
Loop Capital appears to be the lead investment bank/advisory firm involved with this development. We sent several messages to them asking for information on the offering. None were returned.
Many of the agents in China are promoting a 50% ROI, and that seems excessive. We're not sure whether that was a misunderstanding on the agent's part or if it was projected from the offering or marketing materials.
As in most EB-5 visa projects, obtaining factual information from the U.S. operators is difficult, while getting potentially misleading information from the overseas agents is prolific. If we can get accurate information from the developers, underwriters, or State of Illinois on this project, we will pass this along to our readers to help them perform their own due diligence on the merits of this investment.