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Is America’s EB-5 Program a Boon to Development or an Opportunity for Deception?

High rise buildings_US flagThe House Judiciary Committee held a hearing earlier this month to review the performance of the EB-5 Immigrant Investor Program. Congress created the EB-5 visa program in 1990 as a tool to stimulate the U.S. economy by encouraging foreign capital investments and job creation. The EB-5 program makes immigrant visas and subsequent “green cards” available to foreign nationals who invest at least $1 million in a new commercial enterprise that will create or preserve at least 10 full-time jobs in the U. S. A foreign national may invest only $500,000 if the investment is in a targeted employment area (“TEA”), defined to include certain rural areas and areas of high unemployment. A considerable amount of foreign capital invested through the EB-5 program has been invested in domestic real estate development projects.

Since the tightening of real estate lending criteria by American banks after the Great Recession of ’08 to ’11, development loans have been smaller and more difficult to obtain. Banks require developers to have more equity in their projects, and loan a smaller fraction of development costs. Net worth requirements have skyrocketed. As a result, it has gotten tougher for less well capitalized developers to build, and more important to find new sources of development capital. The EB-5 program has helped many developers address this capital shortfall by providing a strong immigration incentive for foreign nationals to invest in American real estate projects, benefitting both the sponsors and the community.

According to the testimony of Nicholas Colucci, Chief of the Immigrant Investor Program of the U.S. Customs and Immigration Service (USCIS) before the Judiciary Committee, at least $8.7 billion has been invested in the U.S. economy through the EB-5 program since October 1, 2012. In terms of job creation, based on the number of approvals of Form I-829 to remove conditions on permanent residence since October 1, 2012, it is estimated that an aggregate total of an estimated 35,140 jobs have been created for U.S. workers through foreign investment via the EB-5 program. If the calculation is based on the initial I-526 applications, the number of new jobs created for FY 2013, 2014 and 2015 would total 173,800. In other words, the program has reaped substantial benefits for the American economy in terms of job creation as well as investment in American infrastructure.

What are the risks of the EB-5 program?

But the picture is not all positive. Scandals involving alleged fraudulent behavior and Securities law violations have circulated in the news. In the Pacific Northwest, this past August, the SEC brought a civil fraud lawsuit alleging a local Regional Center and its CEO siphoned off millions of dollars of EB-5 investors’ funds for personal use and commingled funds from different developments. The two Seattle area real estate projects involved, both of which were under construction, are now managed by a court-appointed receiver. There is a danger that the EB-5 investments may be compromised and that the visa applications would be disallowed. Apparently there are 250 EB-5 investors in these projects.

There is an inherently greater risk that a foreign investor, with little knowledge of the American real estate market and investment standards, guided by an overseas agent hungry for a fat commission, could be misled than could otherwise occur with someone local, who would at least have greater knowledge of the territory and American business mores. Also, because the primary motivation for the investment is the lure of the green card, investor scrutiny of the economics of the deal may be less rigorous. It is also harder for someone overseas to seek recovery from an unscrupulous promoter located across international borders.

Some in Congress also complain that the EB-5 program does not do enough to screen the investors who are awarded “green cards,” and that individuals who pose potential security threats may be granted residency without enough scrutiny. At present, the USCIS requires visa applicants to provide proof that the money invested comes from legitimate sources. Presumably, potential terrorists could find less expensive visa options for coming to America than a $500,000 EB-5 investment.

Another criticism is that the TEA designation, which allows only $500,000 (versus $1 million) to be invested for a visa, has been manipulated to channel investment away from the most needy areas. It’s argued that Regional Centers gerrymander the census tracts used to allow projects in more prosperous areas to be considered part of a TEA. For example, some high profile projects, such as the Brooklyn’s Barclays Center in the trendy Park Slope neighborhood of Brooklyn, qualified for TEA status, as was the Hudson Yards development on the west side of Manhattan. In Seattle, the development abutting CenturyLink Field’s north parking lot in Pioneer Square qualified as part of a TEA. None of these areas seem impoverished. Congress is looking at ways to more effectively direct investment, and the resulting jobs to the areas that need them most.

Furthermore, it has been 24 years since the EB-5 program began in 1992, and the investment levels required for visa applicants has remained at $500,000 and $1 million. It is long past time when these financial requirements are revised upwards, if only to keep pace with inflation. Proposals have been circulated in Congress to do just that.

One problem with the EB-5 program is that its future is uncertain, which makes it difficult to count on as a capital source for a project years in the planning. The EB-5 enabling legislation has had a sunset every three years and has had to be renewed by Congress in order to continue. The program’s last three year sunset was September 30, 2015. However, Congress couldn’t or wouldn’t address the issues raised, and simply extended the program, as is, to September 30, 2016.

What does the future hold for the EB-5 program?

I believe there’s a consensus in Congress that the Immigrant Investor Program does more good than harm, but that its weaknesses need to be addressed. What will happen next September? My guess is that nothing important will happen, just before the presidential and congressional elections, and that the status quo will continue into the following year. Eventually, however, more USCIS resources need to be devoted to screening visa applicants, and that regional centers need to be more carefully monitored to prevent fraud. I wouldn’t be surprised if promoter’s business plans would also receive some level of advance scrutiny to discourage dishonesty. TEA designations will be fine-tuned to insure that the poorest areas of the country receive more of the program benefits. In addition, the entrance fee will be raised above the current $500,000 and $1 million investment levels, which will yield even more domestic stimulus per visa applicant. But with investors around the world clamoring to buy their way to America, proven job creation in congressional districts around the country and the real estate and other industries eager to use the capital, the EB-5 program will endure for decades to come.

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