The Office of Management and Budget in the United States is close to revising regulations that govern the EB-5 (visa program). The proposal is expected to increase the minimum investment that is required and transfer responsibility (from local to federal entities) regarding the designation of areas as suitable for investment. Uncertainty prevails in the real estate industry in understanding how such a move would impact the flow of investment capital – based on the program.
The revision might imply serious harm (or catalyze) the failure or downfall of the program. In the last few years, the program has experienced several challenges. EB-5s have dogged lawsuits as well as fraud and abuse cases. Further, the program has been subjected to significant criticism from Congress. The EB-5 could lose its prestige, and instead of attracting billions of dollars (in foreign investment) as it does at the moment, it would become smaller (as a program) and be of very little value.
However, some actors in the real estate industry feel that the revisions will not cause enthusiasm among foreign investors (who desire to get green cards) to dampen. The argument provided is that adjustment of investment levels is necessary to ensure competitiveness is upheld in the program and investments continue to flow into areas where it is needed. However, such adjustments in investment levels should be within ranges that are reasonably bearable by the foreign investment market.
DHS Proposed EB-5 Revisions
The Department of Homeland Security (‘DHS’) in the country proposed the revisions (formally referred to as the ‘EB-5 Immigrant Investor Program Modernization’) during the final days of the Obama administration. It is expected that a final version – that is founded on a preliminary version that received close to 850 comments might become available very soon.
A statement provided in the Federal Register by the DHS indicated that thee had been no revisions on the EB-5 regulations since their publication in the early 1990s. The statement made also highlighted that the DHS had the intention of proposing changes to some sections of the EB-5 program – the ones that require reform as well as clarification of particular policies. In the ten years following the recession, the plan by the EB-5 was to stimulate the creation of jobs in the U.S., and the program has provided the commercial real estate with the capital in a relatively inexpensive fashion. That has especially been prevalent following the realization by the government in 2009 that the creation of construction jobs falls within the purposes of the visa.
EB-5 Funding for low-income areas
While EB-5 funding is targeted at low-income areas, there have been some real estate developments in high-profile areas that have utilized the program to access capital. An example is Skyrise Miami which received EB-5 financing in the total of $258 million, and in exchange, approximately 500 investors (as well as their families) received visas. The Century Plaza Hotel in Los Angeles raised capital from EB-5 totalling $450 million.
The revisions proposed for EB-5 have raised concerns in CRE although a different perspective might show an upside – a major increase in minimum capital amounts required for an EB-5 investment to be made. It would be essential for investors to place a minimum of $1.3 million for projects in areas where unemployment is very high. That is $800K more than the current requirement – $500K. For ordinary projects, the minimum capital amounts would be increased from $1 million (the current requirement) to $1.8 million.
A majority of professionals in the commercial real estate industry generally have no opposition towards changes in minimum capital amounts. A statement made by Withers partner Raez Jafri (a representative – on immigration matters – of entrepreneurs, foreign investors as well as individuals whose net worth is particularly high) illustrates that opposition towards change in minimums is not high among the stated group. Jafri indicated that a fair assessment reveals that every party (including attorneys, developers, investors, agents and promoters) that are engaged in the EB-5 business is aware that presently the number (minimum capital amount) is low and increasing it might be beneficial.
According to DHS, increasing the minimum capital amounts would signify that an adjustment for inflation has been made about the 1990s business context. A statement by Coleen Danaher (the Financial Vice President at NES and a specialist in EB-5) indicated that since 1990 when the program was incepted, the requirement has remained constant and it is the time that it got increased. Further, she indicated that taking into consideration inflation would mean that the increases (that have been proposed) are not nearly as high in nominal terms.
EB-5 purchasing power increase
$500K (that was set out in 1990’s requirements) has to experience an increase in purchasing power to approximately $967K in the current market. The purchasing power of $1 million in 1990 is presently around $1.9 million. Consequently, for ordinary projects, the increase in minimum capital amounts is slightly less than the rate of inflation, but for projects in areas where employment is high, the increase is more than the inflation rate. The change is considered by critics to be too dramatic.
Open letter about new EB-5 amounts
The stated investment amounts are extremely high that only a few (if any) investors would have the willingness to engage in the program. In an open letter recently sent by Bernard Wolfsdorf (the Managing Partner at Wolfdorf Rosenthal as well as former president of AILA – American Immigration Lawyers Association) to President Donald Trump regarding the revision, Wolfsdorf was more adamant.
He stated that the regulations that had been proposed would certainly have a severe negative impact on the EB-5 industry. Essentially, the number of investors who could (or would) pay the stipulated amount of money – and then wait for numerous years before immigrating – is very low. There are several factors that influence the length of time that is taken for one to obtain an EB-5 visa including the degree to which the program is backlogged at any one time.
Conditional Green Card
Simply entering into the U.S. could take a year or two but initially, the green card that the immigrant gets is temporary or conditional. It then takes an additional status for the conditional status to be removed and applying for citizenship would take even longer. There are some critics of the revision who argue that the increased minimum amounts would result in the program becoming less competitive compared to visa programs like BE-5 in other nations.
Interest among investors may decline and be directed to other nations that have immigrant investor programs. Investors would associate the higher minimum amounts with more expenses concerning currency exchanges as well as wire transfers to send money out of the U.S. Regulators should take into consideration the availability of numerous other immigration programs (that are investment-based) around the world and that such programs represent competitors for the U.S. investment-based immigration program.
U.S. Residency Investment Amount relatively low
Nations (both small and large) including Saint Kitts and Nevis, Austria, Canada, Portugal, Antigua and Barbuda and the UK have competing programs. In comparison with the stated countries, the threshold in the U.S. (at $500K) is relatively low. In the UK, the investment required is approximately $2.6 million while in Singapore and Malta it is $1.6 million and $1.3 million respectively. The minimum amount in the visa investment program in Canada is almost similar to the one in the U.S. Regardless; it is tricky to measure competitiveness among such programs (visa programs) because motivations of immigrant investors differ significantly.
Consider the case of Chinese investors who perceive a U.S. green card to be a means of accessing better educational as well as employment opportunities for an individual’s children. However, a visa to reside in Malta does not necessarily have similar appeal.
Targeted Employment Areas
Also, the revision on EB-5 would centralization the decision regarding ‘Targeted Employment Areas’ (areas when investment capital would be directed) to the DHS. Critics feel that the change is equally worrisome. Presently, TEAs are designated by states pending approval by the Citizenship and Immigration Services (an agency within the DHS) in the country.
The revisions that have been proposed to leave out States from providing input regarding the geographical areas (in their State) that qualify for and should be targeted for economic development. The inference that critics make is that such a change would result in decision-making being bogged down causing people to wait for rulings by the Homeland Security.
Increase in number of Green Cards?
The program would hence become more unpredictable. An additional fault found by critics is an omission in the revisions. Since EB-5 has high demand and is highly beneficial to the U.S. economy, it would be appropriate for the total number of green cards (based on EB-5) to be increased by Congress from the current number to match the increasing demand in a world that is filled with uncertainty. Approximately 10,000 visas under the EB-5 program are issued annually based on 2011 statistics and after years characterized by a half-hearted interest in the program. However, the number of investors who receive green cards annually is only 3,000. The remaining 7,000 visas are issued to the investors’ family members.
A challenge experienced in the EB-5 program is application backlog. The agency (the Investor Program Office) that has the responsibility of processing applications, though, is expected to have caught up by the end of 2019 (the fiscal year). While Wolfsdorf and Danaher are not in agreement regarding the impact that the regulation revision will have, they both concur that it is necessary to raise the number of visas. Extensions of the EB-5 program have been signed by President Donald Trump, but the president has not stipulated that he supports the expansion of the program.
The EB-5 program would only experience true reform if the changes proposed would ensure that 10,000 investor families (as originally intended by Congress) are admitted and not the estimated 3,000 investor families who are currently being admitted under an interpretation that is both erroneous and restrictive.
Since EB-5 offers the U.S. great value at a minimal cost and foreign investors demand it highly, it is appropriate to allow a higher number of investors to participate. Basically, for each extra dollar that is invested under EB-5, more U.S. jobs become created. To show the impact that EB-5 has on the economy, the hypothetical investment example using a Los Angeles hotel development is presented by Cora Barnhart and Scott (both are economists).
The economists postulated that investing $500K through EB-5 would contribute (directly and indirectly) more than 1.4 million to GDP and taxes totalling more than $348K. 14 jobs would also be created covering diverse sectors including a hotel restaurant, construction and hotel operations. The changes that have been proposed come during a period when Indians, as well as Vietnamese investors, are expressing greater interest in the program.
Increase in Indian Applicants
Between the 2017 and 2018 fiscal years, EB-r visas issued to Indian citizens increased four times from 174 to 585 raising their rank to the third-largest market (about EB-5s) following consideration of other options including increased difficulty among skilled workers to obtain H1-B. In the 2018 fiscal year, 6.1% of the EB-5 visas that were issued went to Indian citizens.
The percentage was higher for Vietnamese citizens in the same year at 7.2%, and it represented steady growth for the previous four years when they accounted for only 1% of the awarded visas (under EB-5).
The largest market about EB-5 years is still China whose citizens account for 48.5 of the awarded visas in 2018 although that is major decline compared to the 75% that was recorded in the 2017 fiscal year. You can see the total amount of EB-5 investors for 2018 by country here.