A $101 million convention hotel in downtown Des Moines promises to bring hundreds of jobs, thousands of visitors and millions of dollars to the city.
It also could provide green cards to 40 wealthy immigrants and their families.
Developers aim to secure $20 million for the hotel project through a federal program known as EB-5. It allows foreign citizens to obtain permanent U.S. residency by investing $500,000, and in some cases $1 million, in a U.S. business that creates at least 10 jobs.
Offering a rare path to U.S. residency — and ultimately citizenship — the program has exploded in popularity, driven largely by investors from China who want their children to grow up in American cities and attend American schools. Their money has helped fund projects like a posh casino on the Las Vegas strip, a Four Seasons hotel in lower Manhattan and an ethanol plant in North Dakota.
But the EB-5 program has been a target of criticism. Several high-profile projects have flopped, and whistleblowers have raised questions about fraud, lack of investment in poor and rural areas, and loopholes that could allow foreign operatives and people with ties to terrorism to settle here.
U.S. Sen. Chuck Grassley, one of EB-5's biggest critics, co-sponsored a bill introduced last month that aims to increase federal oversight of the program. Grassley said the bill would end a practice he called "gerrymandering" that allows developers to build high-end hotels and condos in wealthy neighborhoods with EB-5 money intended for rural and high-unemployment areas.
Despite criticism of the program, state officials hope Des Moines' 330-room hotel, which is scheduled to break ground this spring, will lay a path for more EB-5 projects in Iowa.
"This will open the doors for more people to use it," said Debi Durham, director of the Iowa Economic Development Authority.
She said several Iowa companies and developers are considering using the foreign investment program.
"There's not going to be a floodgate of EB-5 projects," Durham said. "If you even see a dozen projects in the next four to five years, that would be pretty successful to be honest."
EB-5 investment explodes
Created in 1990, the EB-5 program has boomed in recent years.
When the recession hit, it dried up funding for real estate projects so developers turned to the complex, but relatively cheap financing available from EB-5 investors.
Private businesses called regional centers find foreign investors and pool their money for loans to U.S. businesses.
The number of federally registered regional centers has surged from 205 in 2012 to 676 as of June 1, 2015, according to the Department of Homeland Security.
The number of foreign investors looking to use the program to obtain legal residency has exploded as well.
The program is capped at 10,000 visas per year. There were 1,885 issued in 2010. That number had grown to 8,564 in 2013, according a report from the investment firm Savills Studley. In 2014, 10,000 visas were issued by August, a month before the end of the fiscal year. This year, the cap was reached in May.
'It's the cheapest capital available'
EB-5 is popular among real estate developers because it provides relatively cheap capital. Since foreign investors' primary objective is a green card, they aren't necessarily looking for a large payout.
"My clients don't expect a return on investment — actually, they lose a little money," said Pat Hogan, CEO of CMB Regional Centers, a Rock Island, Ill., company that brokers EB-5 investments.
Investors put down about $550,000, including a finder's fee and legal costs, and get about $525,000 back, he said.
Des Moines' convention hotel would pay 5 percent interest on a six-year, $20 million loan. A traditional hotel developer would require a return of at least 20 percent, said Timothy Oswald, a managing director at PiperJaffray, a consulting firm working on the convention hotel project.
"It's the cheapest capital available," he said. EB-5 investors are "taking a modest rate of return in order to get high up in line for their green cards."
For major real estate projects like Des Moines' hotel, EB-5 investments can be the first building block for a complex financial package.
"It's kind of like bringing together financing stone soup," Durham said. "A little bit here and little bit there and after a while you have the project financed and EB-5 can be a part of that."
Criticism mounts over fraud, security concerns
As EB-5 becomes more popular it faces growing criticism.
A 2013 U.S. Immigration and Customs Enforcement memo said the program "may be abused by Iranian operatives to infiltrate the United States." The memo identified possible ties between EB-5 investors and an "Iranian front company suspected of involvement in facilitating terrorism" and Iran's Revolutionary Guard.
It said the program also is vulnerable to fraud by investors and regional centers, and the piracy of U.S. technology.
Even supporters say the program is relatively unregulated and susceptible to unscrupulous businesses seeking funding for projects too risky for banks and other traditional lenders.
In one notable case, a Chicago motel owner hatched a plan to build a $913 million convention center near O'Hare International Airport, aided by nearly $150 million from EB-5 investors. The project never got off the ground and the developer landed in court where he agreed to repay foreign investors.
EB-5 investors in a South Dakota beef packing plant lost at least $60 million when the project went bankrupt and became embroiled in a state government scandal.
Supporters cite job creation
But supporters say the program has its success stories.
CMB Regional Centers — the Rock Island company working to find investors for Des Moines' convention hotel — has turned several closed military bases in California into job-creating retail and distribution centers.
Hogan said CMB has brokered deals for 3,400 foreign investors who have put more than $1.8 billion into U.S. businesses that have created at least 140,000 American jobs.
"These are people who want the American dream, who come here, pay our taxes, pay inheritance tax, start businesses and create more jobs," he said.
Des Moines' convention hotel is expected to create 472 jobs and bring $1.2 billion to the region during its first two decades of operation, according to a consultant's study.
Foreign investors would not be required to move to Iowa or have any connection to the project. Local officials likely would never learn who invested in the hotel or what countries the money came from.
It would be the first non-farm EB-5 project in Iowa.
For years, the state of Iowa's program for fostering EB-5 investment was limited to dairy operations. The goal was to recruit farmers from the Netherlands to move to Iowa and build dairy farms.
At least six Dutch families moved to Iowa and bought herds, but the program faced criticism after some of the dairies went bankrupt.
In 2011 the Iowa Economic Development Authority broadened the scope of the program to allow EB-5 investment in all kinds of businesses.
Hogan said he has looked for other EB-5 projects in Iowa, but it has been difficult because many of the major projects in the state have been built by deep-pocketed agriculture and bio-science companies that don't need financing from EB-5 investors.
Grassley calls for more oversight
Grassley's bill, co-sponsored by Sen. Patrick Leahy, a Vermont Democrat, would require background checks of regional centers. The Department of Homeland Security would vet projects earlier in the process and it would enhance the agency's ability to investigate foreign investors and the sources of their money.
"You can't have a immigration program that lets people who are a national security threat get into the country," Grassley told the Register.
The bill also would increase the minimum investment from $1 million to $1.2 million, or from $500,000 to $800,000 for businesses in rural or high-unemployment areas known as "targeted unemployment areas" or TEAs.
TEAs have been another subject of criticism within the program.
Virtually all investors pay the lower $500,000 amount, even those investing in wealthy urban areas, Hogan said.
Under the current law developers can creatively draw the boundaries for their own targeted employment area. Someone building a high-end hotel in a wealthy Manhattan neighborhood can include poorer nearby neighborhoods to ensure the district meets the standard. Unemployment rates in TEAs must be 1.5 times the national average.
"Most of the investment is going to the coastal cities — New York, Florida, Texas, California," Hogan said. "That's where the money is flowing and it's due to the gerrymandering of the TEAs. The heart of most of our country is not seeing this investment."
Hotel 'dead' under bill
Des Moines' convention hotel would also benefit from creative boundaries. It's slated to be built on the southwest side of the Iowa Events Center.
The unemployment rate downtown is too low qualify as a targeted employment area. Backers of the hotel plan to include poorer neighborhoods to the north and east of the project site to meet the standard.
Grassley's bill would eliminate that option and require Des Moines to find foreign investors willing to contribute $1 million. Most investors aren't willing to do that, Hogan said.
"Under Senator Grassley's bill, Des Moines' hotel is dead," he said. "But that's OK, because it's only a draft."
While Hogan is opposed to the bill's boundary restrictions, he said he supports Grassley's effort to increase oversight of EB-5 investments.
"Regulate us," he said. "Regulate us hard. If you do not, we as a group are committing suicide."
Some critics of the program say it illustrates how the U.S. immigration system is weighted in favor of the wealthy. An EB-5 investor can get a green card in as few as three years.
For most immigrants who don't have family members in the U.S. or half-a-million dollars to invest, there is almost no chance of obtaining legal residency, said Jody Meshak, legal services director for American Friends Service Committee of Iowa, a nonprofit that provides legal services for immigrants and refugees.
"Creating a path to lawful status for wealthy immigrants and not all immigrants is a bit classist and discriminatory in my opinion," she said. "Unfortunately, that's our society. I'd rather see them come up with a lawful path to citizenship for everyone rather than just those who can buy it."
Some immigration advocates, though, say EB-5 isn't the problem.
"The whole idea that EB-5 is jumping ahead of the line is a deep misunderstanding of how immigration works," said Ann Naffier, attorney for Iowa Justice for our Neighbors, a nonprofit that provides free legal counseling for immigrants. "There are a lot of different lines and for many immigrants there is no line at all."
Foreign investors not yet inked for hotel
Convention hotel plans will have to take several steps forward before foreign investors can be brought into the fold.
The $101 million project will rely on $20 million through the federal program.
Foreign investors have not been identified for the project, but there is a pool of immigrants eager to put down cash in exchange for a green card, Hogan said.
He said foreign investors won't sign on until the rest of the financing for the project is secured, a hotel brand is selected and building permits are issued.
Officials hope to have those pieces in place by the end of 2015 or early 2016. They plan to break ground next spring.
What you should know about Des Moines' proposed convention hotel
Cost: $101 million
Hotel brand: Not yet selected
Location: Southwest side of the Iowa Events Center at Park Street and Fifth Avenue
Schedule: Developers hope to break ground in spring 2016 and open in late 2017
Ownership: The hotel is a joint venture of the city, Polk County and local business leaders. The city and county have created a nonprofit that will own the hotel.
Contractor: The hotel nonprofit recently dumped its original contractor, Minneapolis-based Mortenson Construction, and picked Weitz Co. for the job. Weitz is based in Des Moines, but was recently bought by an Egyptian company.
Purpose: Local tourism leaders say a convention hotel is needed to draw more conferences, conventions and sporting events to downtown. They say dozens of events have passed on Des Moines because the Iowa Events Center lacks an attached hotel. They say it will benefit other downtown hotels by attracting more visitors to the area.
Criticism: Downtown hotel owners say the highly subsidized project will take their customers and any added businesses from additional events brought downtown won't make up for the losses. Academic researchers say convention center hotels rarely live up to their promises of bringing more events and visitors to town. They say consultants generally tell cities what they want to hear: that an attached hotel is needed to release an event center's full potential.
EB-5 is a federal program that allows foreign citizens to obtain permanent residency in the United States by investing at least $500,000 in a U.S. business that creates at least 10 jobs. Once seldom-used, the program has exploded in recent years driven by demand from Chinese investors.
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