Bisnow Feature: What The Future Holds For Controversial EB-5 Funding
When an extension of the controversial EB-5 visa program was pushed through Congress in late December without any changes, it came as a surprise to even some of its supporters. EB-5 is unlikely to get off that easy in 2016, according to legal and real estate experts.
The program, which provides Green Cards to immigrants who make job-creating investments of $500k to $1M in the US, has been accused of everything from fraud to facilitating terrorist travel, money laundering and economic espionage.
And while Republicans and Democrats have had trouble agreeing on many things in recent years, a bipartisan consensus seems to be forming around EB-5 that it will not be extended without changes.
“Congress is very serious about making some improvements, and in general the industry supports that effort,” says Michael Homeier of LA-based law firm Homeier & Law. “In the end, this program does too much good to die.”
Not that the EB-5 program hasn’t come close. Last year there were fervent appeals from Sen. Dianne Feinstein (D-CA), whose state is the largest beneficiary of EB-5 investment, for the program to be shuttered permanently. She also labeled the program “a big magnet for fraud.”
Most industry experts expect Congress to opt to fix it because of the substantial amount of new foreign direct investment it now represents—$4.38B in fiscal 2015, according to industry reports, and tens of thousands of jobs created as a result of those investments.
“In December, Congress was very close to getting it done,” says Reid Thomas, executive VP of sales and marketing for San Jose-based NES Financial, a leader in tech solutions for EB-5 projects.
“They just ran out of time. But there was consensus on the compliance and integrity measures, and that’s going to provide the framework for reform moving forward.”
An overhauled EB-5 is likely to set a higher minimum level of investment to participate, up to at least $800k from the current $500k, and require more intense scrutiny of prospective visa candidates.
While there were calls for increasing the number of visas available under the program—currently restricted to 10,000—most EB-5 supporters now don’t expect that to happen until reforms are put in place and tested for a few years.
EB-5 was established in 1990 to help a recession-plagued nation create jobs and raise capital for economic development. The foreign investment must lead to the creation—directly or indirectly—of at least 10 full-time jobs for American workers. Two years after the law passed, a pilot system of regional centers was set up to pool investor funds and connect them with projects.
In the early years, the program remained under the radar, and it rarely came close to giving out its full allotment of visas. That began to change during the 2007-2009 recession, when the program was recognized as a ready source of inexpensive capital by a credit-starved nation.
At the same time, an expanding line of immigrants, predominantly from China, began to step up to take advantage of it. Today, Chinese applicants represent 85% of EB-5 applicants, according to Nicholas Colucci, chief of the US Citizenship and Immigration Services’ (USCIS) Immigrant Investor Program, which administers the EB-5 program.
Another controversial aspect of the EB-5 program involves the designation of targeted employment areas (TEAs), which often pits rural states against urban. The states consuming the most EB-5 investment are California, New York, Texas and Florida.
TEAs are supposed to be areas of poverty and high unemployment that are desperately in need of outside investment. Grassley, Leahy and other members from predominantly rural states criticize Manhattan developers who justify the use of EB-5 money to fund projects in wealthy midtown areas, such as the current Hudson Yards (above) complex, by claiming Harlem and the South Bronx as part of their TEA.
California also runs into similar criticism using EB-5 money, for instance, to build projects like the Century Plaza Hotel in West Los Angeles and the Newport Center Residences in Newport Beach. Currently, the decision as to what constitutes a TEA is left up to state agencies, which are inclined to make decisions that result in more money coming to their states.