A visa-for-sale program has benefitted Milwaukee in the form of millions of dollars in investments from Chinese people, who sink money into developments in exchange for green cards. Here's the inside story of early outreach that keeps paying off, and why the program has met stiff opposition nationally amid reports elsewhere of fraud and abuse.
The reaction was muted but unmistakable. No one in the Beijing ballroom full of wealthy investors wanted Bob Kraft’s hats. He brought some green lids bearing the name of his hometown team, the Milwaukee Bucks, knowing China’s obsession with basketball and expecting to open doors and start relationships with a bit of hometown swag. Kraft, a successful businessman with three decades’ experience around the globe, is used to making connections across cultures thanks to an avuncular nature and a natural gift as a salesman.
Yet after awkward moments of grown men playing a Chinese version of keep away with his hats, a frustrated Kraft finally got taken aside.
In China, a handler told him, a green hat is given to a man to tell him his wife is cheating on him. You might not want to do this in the future, the handler said.
“I was like, ‘All right,’” Kraft says with a you-can’t-make-this-up laugh. “I was so embarrassed. It was quite awhile ago, but there was never a bigger mistake.”
That was 2004 and marked Kraft’s first trip to China. It was before the Beijing Ducks came to play ball with the Milwaukee Bucks, before a flood of Chinese students enrolled in Milwaukee’s universities, before hundreds of Chinese high-school students moved into a Wauwatosa hotel to attend school here, before a Chinese travel blogger told his 55 million followers that Chicago is worth a quick visit when you’re en route to the real city worth visiting 90 miles to the north.
It also came before Kraft and other Milwaukee pioneers put hard-earned early lessons in Chinese diplomacy to use making deals that in recent years have poured millions of Chinese investment dollars into the economies of Milwaukee and Wisconsin.
Investors flush with cash due to China’s ferocious economic rise have put up massive contributions to form the financial scaffolding required to make big developments happen. They’ve done so under a controversial U.S. government program that awards fast-tracked green cards to investors and their families for contributing at least half a million dollars into American development projects, money that pays few dividends to the investors but can reward them with a coveted get-out-of-China-free ticket, an especially enticing lure for families desperate to get their kids into American schools.
Around since 1990, the EB-5 visa program, open to investors from any nation, was tiny and mostly under the radar until twin forces – the U.S. economic calamity brought on by the 2008 Great Recession and China’s sudden, amazing ability to manufacture new millionaires – conspired to put the program on jet fuel.
In 2000, China had just 310,000 millionaires. In 2013, that number had climbed to 2.4 million, a growth of 675 percent that vaulted the country into second place in the world, behind the U.S. The Chinese were virtual nonplayers in the EB-5 visa game as recently as 2006, with just 63 applicants. Now, the program gets its limit of 10,000 applicants a year; in 2015, Chinese investors accounted for 87 percent of them, according to federal government figures.
Across the country, buildings have sprouted and businesses have started due to this infusion of money. Politicians of all stripes have supported the program, which was sponsored originally by Massachusetts Democratic Sen. Ted Kennedy and signed into law, in 1990, by Republican President George Bush. They were as in the dark as everyone else of how it would grow and how China eventually would power its rise. More recently, Wisconsin Republican Gov. Scott Walker and his Democratic predecessor, Jim Doyle, have supported it, as has Milwaukee Mayor Tom Barrett.
It’s not hard to see why. The EB-5 frenzy started when U.S. investment in developments, from both private funders and governments, dried up due to the recession. Developers got to go forward with projects that might otherwise have stalled. Jobs in construction, service and management came with them. Entities called regional centers – agencies, either private or public, formed to sponsor EB-5 investment projects, registered with the federal government and set up to go between the foreign investors and the projects – get a cut of the investments.
In this dash for cash, Milwaukee has emerged as an unlikely winner despite being small and somewhat anonymous.
“It’s not New York or L.A., but I think there’s a lot more EB-5 projects going on than in other cities of its size,” says Stephen Yale-Loehr, a New York lawyer who’s president emeritus of Invest in the USA, a trade group of EB-5 regional centers.
The story of Milwaukee’s recent embrace of the world’s most populous country can be seen in its skyline and lakefront neighborhoods. The chic Aloft Hotel was an early recipient in 2009, winning $3 million in EB-5 investment to help with the roughly $24 million total cost. The Global Water Center in Walker’s Point got $12 million – of a total $22 million project cost – from EB-5 investors to renovate the 107-year-old warehouse into a technology incubator. The newly remodeled Eleven25 student housing complex in a former Pabst bottling plant got $30 million of its $45 million from EB-5 money, one of multiple EB-5 projects in the sprawling Pabst redevelopment. Even a new Hampton Inn in West Allis and an assisted living center in Lake Geneva raked in Chinese investments.
Nationally, the program has come under withering criticism and calls for Congress to end it amid numerous examples – none here – of fraud on the part of both the investors and their American sponsors – plus allegations the program has primarily benefited fat-cat developers, not the low-income communities the investments are designed to help.
Regardless of the program’s future, its impact on Milwaukee has already been significant.
The region’s unlikely success came about largely because locals bothered to show up at the right time. A small group of influential Milwaukeeans, including Kraft, made hundreds of trips to the burgeoning country in the first decade of the 2000s, combing the hotel ballrooms that host investor conferences with the zeal of prospectors, telling all who would listen to sink their newfound fortunes into projects here and learning along the way the mores of a very foreign culture, where successful men smoke as if it’s a 1950s “Mad Men” episode, where chicken’s feet serve as the appetizer at high-society functions and where green hats are a fashion faux-pas, especially on men.
Getting beyond the cultural and language differences, they found plenty they could relate to about China’s new rich: They’re fiercely conservative in their personal habits and financial choices, they see family as most important and look to lock in financial security for generations not yet born, and they value education and a grasp of the English language as the most important ladders to opportunity. This conservative bent among individuals comes amid a backdrop of staggering change to the landscape, which can seem to transform almost completely between visits. Cranes are the national birds as construction sprouts everywhere you look, often planting futuristic glass-walled high-rises next to the tile-roofed pagodas traditionally associated with the country.
“The scale of change is truly amazing, and what the Chinese people and its government have accomplished over the past 20 years is really unprecedented,” says Brett Tucker, a Mequon native who moved to China in 1995 to study the Chinese language and has stayed, rising to his current job as partner with Baird Capital’s China Growth Equity team. “More people have been brought out of poverty in this country over these two decades than any other place or time in history.”
When Tucker first arrived, he took a trip to the Shanghai Stock Exchange. The biggest city in the world’s most populous country had a stock exchange housed in the lobby of an old hotel across from the Russian consulate. There were a few scraps of paper on the wooden floor, a few people, a few computers. A beehive of activity it was not.
Two decades later, the once rinky-dink Shanghai stock exchange has become a major force internationally, ranking as the fifth-largest exchange on earth. If it hiccups, as it did in August 2015, the world’s other markets feel the vibrations.
“It seems almost laughable to think about those early days not long ago,” Tucker says. The stock market maturation has come as the country itself grew from an economic backwater to a juggernaut, finally embracing the rest of the world after nearly a half-century of isolation and harnessing the potential provided by such a massive population and more friendly trade deals, WTO in particular. It’s not hard out there for the Chinese entrepreneur.
The sudden explosion in wealth has left the rest of the world scrambling to capitalize.
Kraft’s Chinese adventures have their roots in past sourcing work for his earlier business ventures that he did in the country, without ever visiting, starting in the late 1980s. A friend of his, Scott Harrison, spent nearly three decades as a high-level CIA official in Asia and then set up a consulting business for American companies looking to expand into China. A longtime entrepreneur and marketing pro who served for a decade on the board of the Metropolitan Milwaukee Association of Commerce, Kraft says he sensed early in the 2000s that China would grow in a fashion similar to 1980s Japan, its Asian neighbor.
“I was thinking, ‘We’ve got to develop some kind of China strategy,’” he says. He and others with MMAC decided that they needed a branding effort for the state and region, which led to the Ducks-Bucks basketball exchange, a prestigious “Forbidden City” exhibit at Milwaukee Art Museum, educational partnerships and the city of Milwaukee’s close relationship with Ningbo, a city in the eastern province of Zhejiang. Once he learned of the EB-5 program, Kraft sensed it would be the right vehicle to connect eager Chinese investors with his hometown. Kraft found help for his venture in Lincoln Stone, a Los Angeles lawyer and EB-5 expert, and Peter Beitzel of the MMAC, who spearheaded the agency’s early efforts at guiding investors’ applications through the thicket of legal and logistical steps required for approval.
In 2007, the Milwaukee Regional Center was approved by the federal government to sponsor EB-5 projects in seven southeastern Wisconsin counties, including Milwaukee, with MMAC as the owner. Beitzel, now retired, served as its executive director. It was Wisconsin’s first approved regional center and just the 21st in the nation. Now, more than 800 regional centers exist nationally, including a handful in Wisconsin. Also in 2007, Kraft separately formed FirstPathway Partners as a private company dedicated to connecting foreign investors to U.S. development projects. Seven years later, FirstPathway opened another regional center approved to sponsor projects across the rest of Wisconsin and Illinois.
Kraft says he figured early on that it would take 100,000 contacts to land the first investor, and it proved accurate before landing his first EB-5 project, the Aloft Hotel, in 2009.
“At the time, people didn’t really know the EB-5 program very well, they didn’t trust it, and they didn’t understand it,” he says. “But they knew they wanted to come to the United States for partially educational purposes – for the children. We spent a lot of money on travel, time and effort. It took us probably five years to get momentum.”
The public-private coordination at play in Wisconsin’s regional centers is somewhat distinctive nationally – most are run by individuals or small private companies – and lends an extra trust factor to differentiate projects here.
“China is a different country than the U.S.,” says Kelvin Ma, a nationally known expert on EB-5 projects. “In China, people value the involvement of the government and the public sector. They have great trust in public institutions. A public-private partnership would make them a lot more comfortable investing here.”
Ma, who grew up in China and went on to graduate from UW-Madison’s law school, has focused his legal practice on representing Chinese EB-5 investors, holding licenses in Shanghai, New York and Wisconsin. His firm has represented more than 300 Chinese investors and, with law degrees from both a Chinese and an American university, he’s a go-to source in navigating the labyrinthine application process required for the EB-5 visa. He says Wisconsin’s relatively early start in the EB-5 venture and its ability, so far, to stay scandal-free has kept its momentum going.
“The track record speaks for itself,” he says. “The investors tell their family and friends to invest here. Chinese society is really focused on relationships, so they rely a lot on their advice.”
In order to lure Chinese investment and cultural exchanges, locals first had to answer the question: What’s a Milwaukee?
In China, smaller cities like ours are as unknown as smaller cities in China are to Americans. They know New York, L.A. and maybe Chicago, just as we know Beijing, Shanghai and maybe Xi’an, home to the terracotta warriors. But Changsha? Or Wuhan? Or Chengdu? They’re Chinese for “Milwaukee.”
Early on, efforts to brand our state were helped by two associations: the University of Wisconsin and ginseng. UW-Madison has more graduates living in China than any other U.S. university, in large part because it was one of just three U.S. universities to normalize relations with China in the late 1970s, after the death of longtime Communist dictator Mao Zedong led to more open policies championed by his successor, Deng Xiaoping. And ginseng plays an integral role in Chinese medicine as an herb considered essential in revitalizing bodily energy, or “chi.” Wisconsin has been growing ginseng for a century, in Marathon County in particular, and produces nearly 90 percent of all U.S. output.
“Wisconsin ginseng is famous in China and is considered some of the best quality,” Tucker says.
Efforts to narrow the focus to Milwaukee came from telling Chinese people about Milwaukee brands familiar to them, particularly Harley-Davidson and Pabst, which are widely known in China but not tied in people’s minds to where they’re made.
Although the Milwaukee Bucks may take a back seat to the Packers and Brewers for local sports fans, they played an outsized role in Milwaukee’s outreach to China, where most American sports mean nothing. Football, what? Baseball, huh? Hockey, who’s that? Basketball alone has captured the imagination, and Ray Allen unintentionally did more than his fair share to give Milwaukee cachet in China. His star turn for the Bucks cemented Milwaukee in the minds of many Chinese: It’s where Ray Allen rains 3-pointers. In 2005, the Bucks welcomed the Beijing Ducks for 12 days of hoops and cultural exchange, a first ever trip outside China for their most visible professional team. In 2007, the Bucks drafted a Chinese player, Yi Jianlian, who lasted only a year on the team but also dramatically improved Milwaukee’s profile, with Bucks’ games regularly broadcast live on Chinese national TV at odd hours – the country is 13 hours ahead of Central time.
More recently, Milwaukee got another unexpected marketing windfall in China through the online stylings of Jun Song. China’s most-followed travel blogger arrived here on a July day in 2015 as part of tour of Midwestern cities. Visit Milwaukee sent staffer Margaret Casey as his guide, sensing an opportunity to get a stronger foothold in China, by far the world’s fastest growing tourist market.
Knowing the Chinese obsession with breakfast, executive chef Aaron Miles at the InterContinental, where Song was staying, took great care to make Song what he’d have at home: a bowl of rice porridge, called congee, topped with pickled bamboo shoots, pickled birds-eye chilis, pork cotton candy, fermented soybean curd, chili paste, scallions, fried garlic and crispy shallots.
“He wolfed it down pretty quick,” Miles says. “He looked at me and gave me two thumbs up.” In doing so, Song also revealed something else: that his English skills, rumored to be limited, were actually closer to nonexistent.
Throughout his whirlwind travels in the city, Casey used her skills as a recovering actor to translate through pantomime. When the blog came out, he effused in Chinese about his Milwaukee trip, clearly preferring it to Chicago. An interview he did with a Chicago Tribune journalist generated a much-circulated story headlined, “Chinese Travel Blogger Likes Chicago But Loves Milwaukee.”
“I said, you’re done for the summer,” Kristin Settle, Visit Milwaukee communications director, says of Casey. “You’ve done your job.”
The explosion in EB-5 visa applicants has created an industry of handlers and go-betweens, as well as a national debate about the wisdom of granting green cards to residents of a nation still plagued by human rights abuses, corruption and fraud.
It hasn’t hurt Milwaukee’s cause in attracting investors that Kelvin Ma has strong connections here. Now one of the foremost authorities on the program’s complicated legal arrangements, Ma arrived at UW-Madison law school in 2004. He was one of just two Chinese students in a class of 270 and became friends with Ying Chan, his countryman. Neither could have known what opportunities would soon open to them bridging their native and adoptive countries.
Working through the U.S. Citizenship and Immigration Services office, investors have to prove not only that they have $500,000 or $1 million to invest, but that the source of their funds is legal and that they hold no ties to a totalitarian party, such as the Communist Party. The latter can get tricky for the Chinese, whose home country has been a Communist state since 1949, and where inclusion in the party is a mark of prestige and a ticket to influence.
The communism practiced there differs greatly from the Cold War version. China’s past collectivist ethos has been replaced by a zeal for individual wealth. The government defines the new reality with the vague slogan, “Socialism with Chinese Characteristics.”
When it comes to EB-5 investors, there is some wiggle room for some Communist Party members, who can proceed if they prove they joined by coercion or that they were low-ranking members.
Another hurdle for the investors: It’s technically illegal to transfer more than $50,000 out of the country for a Chinese citizen. The government seeks to keep its newly minted millionaires, and their money, in the country. But many of the newly rich want out, in large part to provide opportunities for their children to attend high-quality schools and colleges abroad.
To skirt the restriction, Chinese investors tend to get creative. One method is to distribute money among many associates who, quite coincidentally, all move the money – each under the $50,000 limit – out of the country for the investor to re-collect abroad. It’s the friends and family package.
Those restrictions are one reason it has proved nigh impossible to get answers to basic questions about investors in Milwaukee’s projects: Who are they? How did they come into their fortunes? A Milwaukee Magazine request to the federal government for a list of investors in Wisconsin projects languished for five months before a reply came denying it and divulging no names, citing confidentiality. In part, it’s practical. Few of the investors in Milwaukee projects live here. The program requires that investors reside in the U.S., but they can live anywhere. The overwhelming majority, no matter where they invest, choose the more Chinese-friendly coasts.
Critics point to the secrecy as just one of many alarming features.
“While there is broad agreement about the positive effects of foreign investment in general, American officials and the general public remain wary of the impact of investment from China,” wrote the authors of a 2015 report by the National Committee on US-China Relations. “China’s economic and political systems still differ greatly from the realities in advanced economies.”
Sen. Charles Grassley, a Republican from Iowa who chairs the Senate’s Judiciary Committee, put it more bluntly: “This [EB-5]program is plagued with fraud and abuse, but more importantly it poses significant national security risks,” he said last December.
There have been about 50 documented reports of fraud in recent years, the majority in California, Florida and the Northeast. Closer to home, the Securities and Exchange Commission broke up a sham luxury hotel project near O’Hare Airport in Chicago in 2013, finding that an inexperienced, opportunistic young man had brought in $147 million from 300 Chinese investors for a mirage of a project.
In a Fortune magazine story about the case, authors described EB-5 as an unregulated enterprise that “has become a magnet for amateurs, pipe-dreamers and charlatans, who see it as an easy way to score funding for ventures that banks would never touch.”
Since then, the Department of Homeland Security has taken steps to strengthen oversight and regulation. In 2014, the government started disbanding rogue or inactive regional centers, the first time it had done so, with 35 getting shut down so far.
Kraft calls the cases a very, very small percentage of the overall program and says their being caught shows that the law works.
“But, you know, you get a bit of a black eye from them,” he says. He also points out that the applications to be an investor or regional center take up banker’s boxes, and eventually are scrutinized by Interpol, the world’s largest international police organization.
Ying Chan, Ma’s law school classmate, has remained in Wisconsin since the two graduated in 2007 and focuses on attracting EB-5 investors. As president of Blue Ribbon Management, LLC, he’s credited with bringing in significant EB-5 money for the redevelopment of the former Pabst corporate headquarters Downtown. Each of the hundreds of Chinese investors puts up $500,000, the minimum required when the project resides in an economically depressed census tract. The projects also must create at least 10 jobs.
The Pabst project had a leg up with investors to start with because of the strong brand association the beer enjoys in China. It’s believed to be the first American beer to start brewing in China, and many glowing, red-white-and-blue “PBR” signs dot the landscape, even in backwater areas. In China, PBR is drunk without irony.
“The Pabst name is definitely a selling point (with Chinese investors),” says Michael Kelly, executive vice president of Blue Ribbon. “We sell what we have, which is a historic redevelopment of a former major American brewery.”
Even though the U.S. economy has rebounded since the initial EB-5 frenzy, he sees the program continuing to feed money to Milwaukee projects, provided Congress doesn’t shut it down.
Kraft agrees and sees opportunities well beyond China, which makes up 70 percent of his company’s current ventures. FirstPathway now has four offices in mainland China and one in Taiwan. But they just opened another branch in Vietnam, and have an affiliate office in Jakarta, Indonesia. They’re active in 25 countries.
“We’re all over on all the continents now,” he says.
Additional reporting by Emily Anderson, Stephanie Harte, Adam Rogan, Michelle Shin and Elisabeth Wallock.