An increasingly popular and controversial program that trades green cards for foreign investment in U.S. real estate is set to expire this week, and billions of dollars for potential commercial development are at stake.
The EB-5 "Immigrant Investor" program, originally designed to spur job growth, has come under fire due to several cases of fraud and misuse of funds. Many U.S. developers and foreign investors have lost. Still the program has also fueled hundreds of projects that are revitalizing neighborhoods across the nation.
Congress first passed EB-5 in 1990 as part of new immigration standards. A foreign investor could obtain a U.S. visa by investing $1 million in a project which created at least 10 jobs. The program was later modified to allow an investor to spend $500,000 in a rural or high-unemployment area.
The expiring program has already been extended once and could be again, without reforms, depending on the outcome of the Congressional budget negotiations.
The program was not very popular at first, so Congress created the "regional center" part of the program. Developers could apply to be part of a "center," so foreign investors could then pool money for much larger projects. The centers were supposed to identify "targeted employment areas," where jobs were needed most.
The 2.5 acre Uline Arena is located in DC's trendy NOMA neighborhood. The project struggled with initial funding.
This last part is what has come under fire because some contend that "regional center" projects can be jiggered around with, allowing developers to build swank new projects in wealthy areas, using EB-5 money. New York City's Hudson Yards, being developed by Related Cos., and San Francisco's Hunters Point Shipyard, developed by Miami-based Lennar, are examples cited by critics. Related and Lennar did not immediately respond to requests for comment.
"Some of the new projects, for example, in New York are in areas that look like they're super rich, wealthy areas that couldn't possibly have high unemployment, and it's the case that those areas are defined within a bigger area of high unemployment and so they qualify," said Audrey Singer, a senior fellow at Brookings who studies immigration. "Other places that are in rural areas or in localities that don't have the resources and the cache that a New York project would are not going to be able to see as many investors coming to those areas."
EB-5, which caps the number of foreign visas at 10,000 per year, was barely a blip on the radar, until the financial crisis hit and commercial lending dried up. The program hit its visa limit in 2013 for the first time; compare that to just 700 visas issued in 2007, according to the U.S. Citizenship and Immigration Service. The USCIS estimates the program has brought in more than $10 billion and created more than 77,000 jobs, but others have estimated far less.
The vast majority of foreign investors using EB-5 are Chinese, more than 85 percent in 2014. They largely go through the regional centers to pool money for larger development projects. Not only are the visas issued to the investor, but also to two family members. They are included in the 10,000 cap.
The concern is that there is fraud on both sides of the equation. This week the U.S. Securities and Exchange Commission announced a series of enforcement actions against lawyers nationwide, charging them with defrauding investors. A developer in Redlands, California, was also charged by the SEC with using $6 million from Chinese investors to convert a building two years ago — a project that has still never happened, according to the Los Angeles Times.
U.S. Sen. Diane Feinstein, D-Calif., has called for an end to the regional center program. In an open letter to Roll Call, Feinstein wrote, "I believe the program is deeply unfair, sends the wrong message about this country's values, and is prone to fraud and abuse."
On the other side of the tracks, literally, behind Washington, D.C.'s Union Station, bulldozers and cranes have descended upon what used to be the Uline Arena. In the 1950s it was a sports arena and even hosted the Beatles back in 1964. By 1994 it was a trash transfer station, covered in graffiti and a blight in an already struggling neighborhood. With the help of EB-5 money, it is now being converted into a center housing offices and retail, part of the rehabilitation of the entire area.
"This is a transitioning neighborhood. If you look across the tracks, you see a Class A office that's like K Street, but if you look on this side of the tracks, you don't see it. It's not here," said Angelique Brunner, president of EB5 Capital, a regional center the works with investors on projects across the District of Columbia. "It's $18 million that's going into this project, and really what that is — it's really gap financing. It's the financing that a developer Is looking for that might be what's needed to make them make the decision to start the development."
Seven years after the crisis in U.S. financial markets, banks today are still highly risk averse when it comes to investing in real estate. While capital markets are starting to ease slightly, cash is far harder to get for major projects.
"Banks look at a project like this, and their first answer is, 'No.' Their second answer is, 'maybe,' and their last answer is, 'OK, we'll give you some of the money,'" Brunner said.
She admits the EB-5 program needs more regulation and says she and her company have lobbied for it. Brunner wants to see more oversight of the targeted employment areas.
Singer wants regional economic development agencies to have a say in project funding.
"I think if the program is going to live on it should really be more focused on its primary goal, and that is bringing jobs and economic development to distressed areas," she said.
A new bipartisan proposal in the Senate, spearheaded Judiciary Committee Chairman Chuck Grassley, R-Iowa, and Ranking Member Patrick Leahy, D-N.H., would increase the minimum investment in rural and high-unemployment areas to $800,000 and would set aside 4,000 of the 10,000 EB-5 visas annually for rural and high-unemployment areas. It would also increase oversight in the process.