Latest posts by Dustin Dunham (see all)
- Making the Case for REIT Ownership of Airports: - December 4, 2018
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- 36TH ANNUAL CORNELL REAL ESTATE CONFERENCE – PANEL WRAP UP – WALL STREET AND THE CAPITAL MARKETS - November 6, 2018
Governmental sources of funding are often contentious or controversial in real estate projects, but perhaps none is more politically charged than EB-5 financing. Named after the United States Customs and Immigration program which provides, “employment based” pathways for foreign citizens to gain green cards and, eventually, full citizenship, the program has drawn scrutiny since its inception in the early 1990’s. From failed investments and limited public oversight to outright fraud in the program, EB-5 as a pathway to citizenship is drawing new scrutiny with the growth of nationalist political leanings. The threat of a trade war and economic volatility in emerging markets has put EB-5 more in the public eye. The program has enjoyed bipartisan support in the past because of the potential job and economic growth these projects could create; however, high-profile abuses of the program have called its existence into question. Many countries around the world offer so-called Citizenship by Investment Programs (CIPs) and, although the U.S. has had the EB-5 program for more than 26 years, its future is more uncertain now than ever before.
What is EB-5 financing and how does it work?
The EB-5 program requires a person seeking citizenship to invest $1 million (or $500,000 in some circumstances) into a new commercial enterprise that he or she actively manages in some capacity. The new venture must create and sustain at least ten full-time employees for at least two years in order for the investor seeking citizenship to convert his or her green card into full citizenship2.
While the United States Customs and Immigration (USCIS) Department oversees the administration of EB-5 applications, the actual sourcing and compiling of EB-5 applications occurs within subsidiary branches called “regional centers”. These regional centers are for-profit private companies that broker the relationships between EB-5 applications, USCIS and the businesses seeking capital to fund investments3. Regional centers eliminate the need for foreign investors to start their own enterprises by effectively sponsoring new ventures. This allows investors to deploy capital into projects quickly, get a green card, and begin their path to citizenship without the risks and delays of developing an original business plan.
Regional centers are valuable sources of equity funding for real estate deals. The Related Companies, one of the world’s largest private real estate developers, has created an in-house EB-5 regional center to fund these deals directly, albeit with limited government oversight by employing a team of professionals strictly dedicated to capital raising and administering EB-5 funds into their projects. One such project developed by The Related Companies with EB-5 funds is Hudson Yards, the largest development project in the United States, with over 25 million square feet of space under construction.
Over the last ten years, the EB-5 program has grown in popularity among U.S. real estate developers because it provides easy access to cheap capital. The required rate of return that an EB-5 investor is often an afterthought to the foreign person simply seeking the benefits of United States citizenship5. For real estate developers, EB-5 capital remains among the most sought-after cost of capital7.
To the person seeking citizenship, regional centers are trusted advisors that assist in limiting both financial hazards and application failure risks. The spirit of the program is to allow a path to citizenship while providing a meaningful contribution domestically. Complicated business structures, risky investments and complex reporting hurdles can be a daunting challenge, and the EB-5 financing structure streamlines and abates the process for those looking to purchase citizenship.
What challenges has the program faced?
The existence of the EB-5 regional center program has faced extinction several times in the last five years. The program depends on funding from Congress that was due to expire as recently as September 30th of this year. As is increasingly typical for the program , funding was granted another extension until December 7th after President Donald Trump signed a resolution to continue the program. One incentive for extending funding lies in its domestic benefits: EB-5 has many success stories of job creation and substantial impact to local economies. By one estimate, “$3.8 billion accretion of the GDP, with $532 million paid in Federal taxes, and $371 million in state and local taxes” have resulted from EB-5 investments. Despite those successes, the EB-5 program has historically been marred by failed projects and crime4. Ironically, the president’s son-in-law, Jared Kushner, was subject to an EB-5 investigation regarding efforts to refinance a failing property with Chinese foreign investment9. In recent years, the SEC has regularly levied fines surpassing a billion dollars associated with EB-5 projects. In one case, a Vermont ski resort called Jay Peak was revealed to be a $200 million-dollar Ponzi scheme in which millions of EB-5 funds were misused and stolen6. In another, a Chinese national with ties to the North Korean nuclear program attempted to use the EB-5 program to launder money on behalf of the North Korean government. These high-profile frauds combined with public perception of EB-5 as a shortcut to citizenship for the wealthiest in the world have increased criticism of the EB-5 program and demands for drastic reform.
The political climate has changed, and the country has a renewed focus on immigration policy. The public appetite for a program that allows foreign millionaires quick citizenship has drawn increased ire from the public and even from the governmental organization administering the program. According to the Wall Street Journal, “Director Cissna at the United States Customs and Immigration Department [who] said his agency doesn’t have the authority to curb endemic fraud in the EB-5 program. Mr. Cissna also could not catalog the amount of the fraud. Unless Congress could legislate some reform to the program, he said, it should be allowed to expire.” Strong economic interests and financial incentives have combined to make the EB-5 program a viable source of funding for real estate deals, but program abuses and the evolving political climate has cast doubt on the program’s future. The most recent program extensions expire after mid-term elections1, leaving the program open to the whims of political will. Developers seeking to use EB-5 will certainly be following closely as policy makers continue to shape the potential cost of capital on their projects.
1 U.S. Immigration Fund. (2018, September 28). U.S. Immigration Fund: Washington Update: EB-5 Regional Center Program Reauthorization Extended to December. Retrieved from https://www.prnewswire.com/news-releases/us-immigration-fund-washington-update-eb-5-regional-center-program-reauthorization-extended-to-december-300721146.html
2 EB-5 Investors. (2017, May 8). USCIS. Retrieved from https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/eb-5-investors
3 Immigrant Investor Regional Centers. (2018, September 10). Retrieved from https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/immigrant-investor-regional-centers
4 Kltherealdeal-com. (2018, September 26). EB-5 investors allege fraud in Royal Palm Beach office project. Retrieved from https://therealdeal.com/miami/2018/09/26/eb-5-investors-allege-fraud-in-royal-palm-beach-office-project/
5 Kim, Y. (2018, September 21). Millionaires’ visas give the wealthy an unfair fast track to a green card. Let’s get rid of them. Retrieved from http://www.latimes.com/opinion/op-ed/la-oe-kim-eb5-visas-trump-administration-20180921-story.html
6 SEC.gov | SEC Case Freezes Assets of Ski Resort Steeped in Fraudulent EB-5 Offerings. (2016, April 14). Retrieved from https://www.sec.gov/news/pressrelease/2016-69.html
7 Brown, E. (2014, December 9). Hot Source of Property Financing: Visa Seekers. Retrieved from https://www.wsj.com/articles/hot-source-of-real-estate-financing-green-card-seekers-1418146394?mod=residential_real_estate
8 Viswanatha, A. (2018, January 25). Chinese Man Tied to North Korean Trade Applied for U.S. Investment. Retrieved from https://www.wsj.com/articles/chinese-man-tied-to-north-korean-trade-applied-for-u-s-investment-visa-1516900647
9 Masunaga, S. (2017, May 8). Jared Kushner’s sister puts EB-5 visas back in the spotlight. Here’s what they are – Los Angeles Times. Retrieved from http://www.latimes.com/business/la-fi-kushner-eb5-20170508-htmlstory.html