EB-5 Is Here To Stay, Despite Criticism And Continued Talk Of Reform

Last September, Congress voted to renew EB-5 investment. While the program is safe until its next expiration date, reform discussions remain on the table. 

Kushner Cos.' alleged misuse of the program to fund a New Jersey development and the belief that foreign investment does not lead to measurable job growth have helped cast doubt on the impact EB-5 has on stimulating the U.S. economy. Sens. Dianne Feinstein of California and Chuck Grassley of Iowa have been two outspoken voices against an initiative that they argue sells U.S. residency to the wealthy.

Developers who depend on these forms of alternative financing to complete their capital stacks are confident EB-5 will stay. Baker Tilly Capital partner Michael Fitzpatrick and principal Aaron Goforth have seen this teetering before with EB-5, as well as with other incentive programs.

Congress launched the EB-5 program in the 1990s as a way to raise foreign capital by offering investors permanent residence visas for investments in U.S. commercial enterprises that support the creation of 10 or more U.S jobs. Capital flows through regional centers regulated under United States Citizenship and Immigration Services. The centers help foreign investors find qualifying projects that fit their investment objectives.

Minimum capital investment starts at $1M, but the funding threshold is $500K in a Targeted Employment Area, rural regions or locations where unemployment is greater than 150% of the national average.   

Requirements are broad and cover more than commercial real estate developments. 

“There are other requirements, but if you are creating or retaining 10 U.S. jobs, it is EB-5 eligible,” Goforth said.

EB-5 grew in popularity following the 2008 financial crisis and has since fueled more than $18B in U.S. business development. According to Fitzpatrick, the expansion of China’s middle class happened at the same time, encouraging individuals seeking an American lifestyle and education to invest in U.S. projects to obtain a visa. The proportion of Chinese investors in the EB-5 program has grown to approximately 85%.

Projects in gateway cities like New York and Los Angeles tend to attract more foreign investors, as do TEAs. Some developers have come under fire for manipulating census tracts to tie their developments to communities with higher unemployment.

“The most marketable projects are located in a targeted employment area,” Fitzpatrick said. "Someone would rather risk $500K on a project than $1M."

Investors also prefer to have a cushion of job growth to meet the minimum requirement for the visa. Working through a regional center, investors have access to economists who determine not only the direct job output but also the indirect jobs created as a result of the investment.

According to Fitzpatrick, other incentives programs, like The New Market Tax Credits program, have also survived solely on extensions.

“The NMTC survived for a 10-year stretch on annual extensions where [Congress] added the program to the annual tax extender bill to keep it alive,” Fitzpatrick said. “People in the industry eventually got comfortable with the fact that it’s going to be renewed.”

Changes that would spread the wealth of EB-5 or increase investment thresholds are likely. Last January, the Department of Homeland Security proposed raising the minimum capital requirement to $1.35M for TEAs and $1.8M for non-TEAs. Another proposed change would take TEA determination to the federal level, standardizing the process. The deadline for raising the minimum investment has been extended to Jan. 19. 

Programs like NMTC allocate a certain percentage of projects to be in underserved areas, like rural communities. Similar requirements could work under EB-5, shifting some investor attention from major markets like Manhattan to a small town in rural Arkansas. Fitzpatrick said the goal is not to eliminate the program, but to find ways in which it can be fair and balanced throughout the country. 

“The pressures are real and changes are happening, but people should not be paralyzed by legislation or regulatory changes," Goforth said. "It has been the same discussion for three years."

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