Patrick Hogan, CEO of CMB Regional Centers, speaks with David Sudeck, senior member of JMBM’s Global Hospitality Group® at JMBM’s 2016 Meet the Money® – the national hotel finance and investment conference. They discuss the evolution of the EB-5 Immigrant Investment Visa Program, indirect jobs, completion guarantees, and taking care of the investor.
A transcript follows the video. See other videos in this series on the Jeffer Mangels YouTube channel.
David Sudeck: Hi, I’m David Sudeck, I’m here at the 26th annual Meet the Money® Conference with Pat Hogan, CEO of CMB Regional Centers. Welcome Pat. And thanks again for participating this year. You were on stage earlier on the CEO panel and you did a fantastic job.
Patrick Hogan: Well thank you, I’m pretty excited to be here. It’s an interesting group of people.
David Sudeck: EB-5 is hot right now. I was wondering if you could tell us a little bit about the roots of CMB, how things have changed from the 1990s to today, and what you see as your current platform.
Patrick Hogan: We started in 1994, before regional centers were ever involved.
The EB-5 program is actually a permanent program. Most people don’t know that because everybody does business with the regional center. But I started in 1997, getting my first regional center, and we actually got an approval in the year 2000. But as you know, fraud crept into that particular program and I just couldn’t take it anymore. It wasn’t really a business at that point in time. So I just said, “Okay, I quit, and until Congress can put some reforms through, I don’t want to do it anymore.”
David Sudeck: So you were pushing for regulation?
Patrick Hogan: Yes, even back then. So, fast forward to today – and we’ve been rocked with all kinds of scandals and things like that within EB-5 – which you would expect. Because if you go back to 2007 there were eleven regional centers, and maybe five of us doing something. And then to go to today where you have 800 regional centers – there’s bound to be some individuals that don’t have a clue.
David Sudeck: Do you have any sense as to how many of those 800 actually do business of any kind?
Patrick Hogan: I would venture to guess that there are less than a hundred regional centers that are really active. I would also venture to guess there’re probably 50 projects out there that people have started and just can’t get traction on. So that’s where our Omaha project came from – where we went into it, and they contacted us – it was another regional center. They had two investors after a year and a half of trying to raise money for this hotel project, and we ended up buying the regional center out so that we could actually take over their geographic scope. I think we raised the money in less than two months, once we got our approvals and all.
David Sudeck: You guys are clearly the leaders in the industry; it’s very impressive. I know on Century Plaza you raised $450 million dollars.
Patrick Hogan: Yeah, we did that in less than seven months and truthfully it was a herculean feat. I don’t think I could do that today. It took everything we had to do that. Not only did we raise the money – and we’re talking cash in – we also had every single application on file which I think was a greater feat. We were all trying to beat that deadline of the program expiring.
David Sudeck: Which we’re facing again.
Patrick Hogan: It’s an ongoing thing. If only regulation and straight lines and bright lines were there for all of us… there’s just a lack of instruction whether it’s the USCIS, or whether it’s coming from the SEC. They don’t hold seminars and sessions to say, “This is what you should do.” So you really have to be a student of the enforcement actions or the denials or the NOIDs or the RFEs that are issued, to try to understand what you’re supposed to do. And that’s why we’re very active in attending many of these types of events because we’re gleaning information about how we’re supposed to do it in the right way.
David Sudeck: I can tell you from my experience working with CMB on the opposite side that it’s been really a pleasure. Your team is incredibly conversant with the most recent rulings of USCIS and your structuring is what makes the difference in terms of the success of your project.
Patrick Hogan: What is interesting about our structuring is that it’s never changed. Our partnership agreement in our very first project is really structured similarly to the one today. It’s amazing it’s stood the test of time with so many changes in EB-5. For instance, now where the USCIS said if they pay us back, we can’t pay the investors back because they haven’t gotten their I-829s – what do you do with the money? Well, the USCIS has now made the statement that you must redeploy the funds. Well, we’ve been doing that already; it was built into our partnership agreement. So, the point is that we knew we had to keep the money at risk. We knew that we had to keep the money flowing. And also we didn’t want the investor to not have his income that he does have. The model of CMB is simply take care of the customer and we’re going to make money.
David Sudeck: How have your projects changed over the last 20 something years? CMB stands for California Military Base?
Patrick Hogan: Yes, we started out at first, let me see, two plus, with different 6a, 6b, 6c… I’ll never do that again. The USCIS had just said, “Hey, if you’re going to do a big project, break it up.” So we broke it up into 6a, b and c and it was a disaster. Because they didn’t understand – they thought we would be double counting jobs in each one of them.
And I wanted to send them a picture of an apple and then cut it in three parts, and show them there are three distinct parts and when you put it together, it’s a large project. “But I followed your advice and now you don’t understand it.” So that was quite a learning experience as we went along. But that’s the thing: the new regional centers don’t have that background of what you have to do to get something through. I think the record I’m most proud of about CMB is we have over 550 I-829s, and as you know that’s the final approval for the investor and we have never, ever, ever got an RFE.
David Sudeck: Amazing. How many jobs do you think you’ve created over this period of time?
Patrick Hogan: Well, technically what we report to the USCIS and what we really think we raise are two different things. We were the first ones to come out and use indirect and induced jobs only, and threw out the direct jobs, simply because we were afraid the USCIS would tell us, “Oh, you’ve got to have I-9s, W2s and citizenship papers on every worker.” Which they did. So, we were, again, a pioneer there. And everybody thought we were crazy. “Well, you’re not going to get an I-526.” Well, we got one. “Oh, you’re not going to get an I-829.” Well, we got one. And then AAOS over the last few years has been saying, “Only use indirect and induced.”
So the whole idea is, we don’t count the direct. But if we went back and did – I’ll give you two … well, four – examples. We’ve done four Amazon fulfillment centers. 1.1 million square foot buildings and we didn’t claim a single employee in any one of those.
David Sudeck: Wow.
Patrick Hogan: Each one of those buildings employs 2500 workers. There are 10,000 workers that we have never claimed that we helped create. And they all are new jobs. Amazon didn’t have a single employee in the state of California when we set up. So those are certainly unqualified new jobs, but we just didn’t claim them because we didn’t want to get into the argument with the USCIS about citizenship papers and W2s and the rest of it.
David Sudeck: So you think you’ve created far more jobs than you’ve reported.
Patrick Hogan: Sure. To the USCIS I think we’re pretty close to 150,000 but I would suggest that the statistics are really well past 200,000.
David Sudeck: That’s a testament to your company and your long track record.
Patrick Hogan: It’s truly a testament to the program. That’s what it was designed to do. If the program is run properly and the people that are in it are honorable and try to take care of the client, we’ll have that kind of result. It’s when they try to cheat the program… I’ll give you an interesting factoid: there were three regional centers in 1997 – the very first three. One was Golden Rainbow Freedom Fund which is now called American Life. And then the other one is Vermont. And then the other one is CMB.
David Sudeck: And CMB kept its name from the 1990s.
Patrick Hogan: Well, I didn’t have to change my name, let me just say that. But I will say this, that’s eighteen years ago or so? Out of those three, only one of them paid anybody back, and that’s CMB. I mean a whole project. You know, I understand that American Life has paid individuals back, but they have never paid off a whole project. I think it’s really the difference between an equity model and a loan model, and we were again the pioneers in that. We were the ones that established the loan model in the 1990s.
David Sudeck: So you’re giving your investors priority repayment over common equity.
Patrick Hogan: Absolutely.
David Sudeck: Which is the safest place to be.
Patrick Hogan: Seriously, and that’s what you have to look at. If there’s enough equity in the project itself and you’re dealing with quality developers and the rest of it, as long as you monitor the projects you are probably going to be okay. As long as you get guaranteed minimum pricing on the project, that you maybe have subguard insurance, which not too many people know about. But it really ends up being a project guarantee, to some extent, that it will be completed. You can, and some of our projects do, have completion guarantees.
So I know one thing – I won’t say it to the investors, and I probably could – but with a completion guarantee you know one thing: the jobs are going to be created, therefore the visas are going to be there. So in most of my projects, I would say that I don’t lose any sleep about us getting a visa for them, because of having those types of things. Even if the developer fails, we’re going to have a project guarantee. And the project is going get done and the jobs are going to be created and they’re going to get their visas. We’ll worry about the money, that’s secondary.
David Sudeck: You mentioned Amazon fulfillment centers. What percentage of your projects at this point are hotel versus non-hotel?
Patrick Hogan: As a percentage it’s quite interesting, because the Century Plaza being $450 million really jumped that percentage. And I was trying to figure that out as I was looking at the paper today, but I think in hospitality we’re somewhere in the neighborhood of $800 million that would have been invested out of $2.4 billion.
David Sudeck: It really is an unbelievable statistic. Tell me about your platform, how it’s changed. I know $450 million was a herculean raise. Now I’m working on several projects with you and we’re in the 40s, 50s, 60 million – is that a change in your platform?
Patrick Hogan: It’s a change, frankly because we’re not sure what the law is going to be. Again – take care of the client. If I tried to enter into a project that says I’m going to raise $200 million or $300 million and I don’t make it before the new change, whatever happens – then I’ve failed both the developer and the client. So we’ve decided that this year we’re going to do smaller projects so that as we approach that deadline, we know that we can fill the project before the deadline comes.
And it’s not about the money anymore, it’s really about doing it right. We’ve also retooled ourselves and want to make sure that we comply with SEC. For instance – no other regional center has done this – it’s taken us almost 9 months now, but with 50 projects and 63 loans, we had BKD (it’s been going on for almost 8 months) do an audit from day one, all the way up through 2014. And every single audit came back unqualified. At first I thought – unqualified, what does that mean? That sounds bad. But it’s actually good – that means that all the money is there and everything is where it’s supposed to be.
So, we’re trying to set a new standard and saying, “Hey, look, you should show everybody you’re doing the right thing.” But we also audited our EB-5 statistics. Because a lot of people stretch the truth about what they’ve attained and how many jobs they’ve done, how many EB-5 investments they’ve done. We had BKD audit our EB-5 statistics, too. Because I always say to people that are investors, “Make us prove what we say.” And for years I always thought – how can I make myself prove that? I’d have to show them all the approvals and the rest of it. So this seemed to be a way to prove what I’d been preaching for all these years. Just don’t listen to what somebody says – make them prove what they say.
David Sudeck: You’re holding yourself accountable.
Patrick Hogan: Yeah, and I think it also says to the world that nobody is going to have any pity for CMB if they ever got in trouble. We’re too big a company now. We should know better. And so we’ve got to take a higher road, and again be that person that leads the way. So let’s see how many regional centers now follow us when we can be overseas and telling the individuals – all of our 50 projects have been audited. And we will do another audit in 2015 as soon as I get a little rest from doing this one from the beginning from 2014. But we will do the 2015 audit and we will continue to turn out audits each and every year on every single project from now on, so that the whole world knows that every dollar is there. Because as we’ve seen in recent events, the dollars aren’t there in some of these other projects. And, if we set that standard now, it will be a standard that will have to be upheld, or you won’t be able to sell.
David Sudeck: You’re leading by example, which I respect tremendously.
Patrick Hogan: I always think of the EB-5 program as “my” program because I went through the wars (laughter). I went through all of the wars of the early ’90s and the rest of it, and to have the record that we have today. And we listen, we’re constantly listening. You know, I don’t necessarily agree with the SEC and their regulation, because who’s your daddy? I mean, we’re supposed to be listening to the USCIS telling us what to do but the SEC is also giving us guidelines and it’s becoming a very confusing marketplace, because in some cases there’s an overlap. If we follow the SEC rules, well we’re not going to be in compliance with EB-5. If we follow the EB-5, we may not be in compliance with SEC. And I’ve put forward some thoughts that I’d love to see. You know, we have Reg S, we have Reg D – wouldn’t it be cool to have Reg. EB-5?
Where the SEC says, “Okay, this is how EB-5 exists in a regulatory environment today.”
David Sudeck: Right, you’d have clarity.
Patrick Hogan: It would give us some guidance and the rest of it, because it becomes very confusing in how we operate.
David Sudeck: What’s competition like in China? I know you’re in over 80 countries, is that right?
Patrick Hogan: 82 different countries so far. There’s a lot of projects [in China], and last year we had 200 people on a waiting list that wanted to join a CMB project. But, we didn’t have one. But they knew CMB. So the word is out: who CMB is, what we do and how we operate. And the reason we didn’t have a project is that I couldn’t find one that met the characteristics that we want. We’re very tough.
You know, our due diligence team is extremely tough. So getting a project that actually fits what we want to do and be able to take care of the client is not an easy task. And we’re staying more with the very large traditional developers so that we can certainly turn out a loan agreement because, as you know, the Century Plaza Loan Agreement I think was 416 pages.
David Sudeck: Yes, thank you for that.
Patrick Hogan: Oh, thank you (laughter). That was an interesting meeting, if you recall, getting the lawyers together from both teams. And, you know, I felt like, “Can we all get along on this one to try to make it happen?” But we did, we made it happen and we got it done. I think it’s a good deal for both parties. If you don’t take care of the investors, you don’t give them some type of recourse, then you’re not doing your job. Although the law says the money has to be fully at risk, it doesn’t have to be foolish.
David Sudeck: Right. Every project that I’ve worked on with you has had a very high quality sponsor. In the marketplace in general I’ve heard that the quality of sponsorship is going up, the quality of projects is improving – is that your experience?
Patrick Hogan: I think we’re driving that. Other companies are driving that, that have the success that we have. But you know for so long, that Northeast Regional Center was thought of as the poster child of EB-5 – and now we find out it was not so from the very beginning. But there are signs when you see that stuff. What’s the exit strategy? When no one can tell you how to get out, that’s a problem. And there were signs in that particular project – and the fact that the government officials went over there doesn’t mean anything. I mean, you have a name like the Vermont Regional Center or you have a name like the South Dakota Regional Center or you have a New Orleans Regional Center – it sounds very official and very officious but those were where most of these problems have occurred, with these umbrella regional centers where there really isn’t that checks and balances.
When you’re a regional center you have to apply, and you’re answerable to the USCIS. That’s one of my complaints, and I gave testimony in 2011 – it’s kind of interesting to read it to today. Actually, I sent it to both Chairmen and the ranking members of both houses of the Senate and Judiciary and I said, “Why didn’t you listen?” Because I really laid out what was happening today, back in 2011, because I could see it. I’ve been through the wars, and I don’t have a problem, if I see somebody doing something wrong, to mention it. Because if we don’t, we’re going to lose this program.
David Sudeck: Yeah, thanks for setting a good example and thank you for participating in this Meet the Money® Conference.
Patrick Hogan: I’d like to keep what I do to a small core of developers. And a small core of lawyers that I work with. Because it’s so much easier now. They understand it and, as you know, turning a regular loan into an EB-5 loan is not an easy task. So, I thank you and your law firm for all the support that you gave us through the largest project we ever did.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who's your hotel lawyer?
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