Chinese developers have primarily focused on projects in large metropolitan areas that attract individual Chinese buyers such as Los Angeles, New York City and Boston. Due to the "ghost cities" in China which resulted from large real estate projects being developed without tangible buyers, Chinese developers perceive that the most secure investments are in these three metropolitan areas. Chinese developers have been reluctant to invest in smaller metropolitan areas due to the perceived risk in investing in cities which are more difficult to market to individual Chinese buyers.

Chinese developers must engage in a different decision-making process from their US counterparts to address the unique challenges that they face, including issues related to their cross-border investment (including currency fluctuations), the Chinese government's policies, unique corporate and tax structure considerations for foreigner investors, and limited funding alternatives in the United States. Chinese developers must evaluate investment in a US project by not only comparing the project to other US projects, but also with other projects around the globe. They have to consider the currencies and foreign policies of each individual country in addition to the specific details of a particular project.

Perhaps most importantly, Chinese developers must comply with the Chinese government's policies and approval processes for foreign investments. The requirements that must be satisfied to transfer money out of China to invest in a US project are challenging and often time-consuming for Chinese investors.

Tax Considerations. Tax planning frequently is a key driver of complexity for Chinese and other foreign developers investing in US real estate. During the initial stages of a project, Chinese developers consult their Chinese and US tax advisors to determine the most tax efficient structure. The structure employed depends on a number of factors, including the expected income streams from the project, the developer's intended use of the proceeds from the project and the financing of the project. After considering their options, Chinese developers may invest directly in the project or may form special-purpose entities to make the investment.

For example, Chinese developers may form an offshore holding company—frequently organized in a tax-favorable jurisdiction such as Bermuda or the Cayman Islands—that will wholly own a domestic entity (e.g., a Delaware corporation), which makes the actual investment in the project. Although this structure is common, it requires additional time and planning, particularly for the Chinese developer's first US project. Future projects may replicate or reuse existing structures in order to expedite the process.

The EB-5 Program. Although the driving force behind Chinese developers investing in the United States is not immigration, many of them explore the possibility of raising funding through the EB-5 program. After all, they already have the network in China to attract individual EB-5 investors. Complying with the EB-5 qualification requirements adds an additional layer of complexity.

Conclusion. Since most Chinese developers recently began their expansion into the United States, they may only have limited resources on the ground in the United States to deal with all of these challenges. The representatives based in the United States usually do not have any decision-making authority, and their role is limited to communicating facts to the headquarters in China and waiting for management's approval and direction. As you can imagine, addressing all of the potential issues and challenges facing a Chinese developer in investing in a US project can be time consuming.

Although working with Chinese developers requires overcoming obstacles, a greater understanding of the challenges that Chinese developers face will facilitate a long-term mutually beneficial relationship. The key to success is to have at least one person on the US side who understands and can communicate effectively with the Chinese developers to manage expectations and effectively conclude the transactions.

About the Authors: Holland & Knight attorneys Geneve "Ying" Dubois, Tony Alfonso, Laurie Green and Kevin Hall specialize in areas such as real estate, corporate governance, securities and tax. They are headquartered in the firm's Fort Lauderdale office. The views expressed here the authors' own.