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Down the rabbit hole: federal agency says immigrant investors in EB-5 program can get credit for all the jobs created or saved; critic suggests most EB-5 investments "are of much lower quality"

I'm still waiting for more media outlets to latch on to the absurdity of the federal EB-5 program, which is exploding as immigrants seeking to buy their way into the country hook up with entrepreneurs who devise plans that aim to meet the letter, if not the spirit, of a vaguely defined law.

Remember, the $500,000 from each immigrant investor, which gains green cards for the investor and his/her family, is supposed to generate ten jobs.

In the case of Atlantic Yards, no new jobs would be created, but Forest City Ratner's raising $249 million from 498 investors who've been told, misleadingly, that they're investing in an arena.

Most people, learning that wealthy foreigners can buy their way into the country, are taken aback that the program even exists. I focus on whether the letter and spirit of the law are being followed, and whether there's sufficient oversight.

And, as noted below, critic David North suggests that most EB-5 investments are of lower quality than other deals on the open market, which makes sense, since the lure is not financial return but green cards.

Credit for all jobs?

At a 6/30/11 Stakeholder Meeting on EB-5 issues held by the United States Citizenship and Immigration Services (USCIS), one question went to the heart of the public policy issue: whether immigrant investors in Atlantic Yards should get credit for jobs that would have been created, state officials admit, with or without their participation.

(That question has provoked a certain amount of confusion, according to EB5Info.com. The Q&A notes are provided via the Law Offices of Rajiv S. Khanna, and embedded below.)

The question:
15. Credit for All Jobs Saved or Created

It is our understanding that when EB-5 investor money provides some of the funds for a business, the EB-5 investors get credit for all the jobs saved or created. Is this true?

Response: Yes. The establishment of a new commercial enterprise may be used as the basis of a petition for classification as an alien entrepreneur by more than one investor, provided each petitioning investor has invested or is actively in the process of investing the required amount for the area in which the new commercial enterprise is principally doing business, and provided each individual investment results in the creation of at least 10 full-time positions for qualifying employees. The establishment of a new commercial enterprise may be used as the basis of a petition for classification as an alien entrepreneur even though there are several owners of the enterprise, including persons who are not seeking classification under section 203(b)(5) of the Act and non-natural persons, both foreign and domestic, provided that the source(s) of all capital invested is identified and all invested capital has been derived by lawful means. See 8 CFR 204.6(g).
What?

How can they get credit for "all the jobs saved or created" as long as "each individual investment results in the creation of at least 10 full-time positions"?

(Emphases added)

The EB-5 community thought the question wasn't fully answered. Comments EB5Info (echoing attorney Jose Latour), "A lot of regional center principals would love to know whether saved jobs '"count'." 


The justification of the EB-5 program is to create jobs. If developers and other entrepreneurs simply bootstrap some immigrant investor funds to lower their costs, as with Atlantic Yards, they're not creating jobs. They're creating profits.

Why "all" jobs?

The policy is even more bizarre. More crucially, why should investors get credit for all jobs?

Forest City Ratner and its ally, the New York City Regional Center, with the support of the Empire State Development Corporation, have packaged the $249 million investment opportunity as part of the $1.448 billion "Brooklyn Arena and Infrastructure Project," an entity previously unknown.

Why should immigrant investors get credit for jobs created by bondholders and public subsidies supporting an already-funded arena?

Paying off a loan?

I'd highlight an additional issue, which leaves some ambiguity regarding Atlantic Yards:
4. Uses of Capital
Some within USCIS seem to think that all EB-5 funds must be used directly to create jobs, almost as if it is put into a trust fund from which only wages can be paid. In reality, capital may very likely more efficiently create more jobs by putting it into capital improvements, equipment etc. or even to pay off old high interest loans or to buy out owners who are standing in the way of more efficient operation. All that should matter is that the invested capital is spent in such a way that the business plan projects enough jobs to satisfy the EB-5 requirements and that ultimately those jobs are in fact created. Is this correct?

Response: USCIS will determine whether the funds must be used to directly create jobs based upon the economic model and business plan submitted and approved with the petition. The capital investment must be fully infused into the job creating enterprise most closely responsible for the capital investment activities that will create the jobs. The approved business plan guides the expenditure of these funds which could include purchases of items such as property, inventory, equipment, office supplies, wages, etc. From an economic perspective, these purchases generate further indirect and induced job creation.
Well, Forest City Ratner apparently aims to replace a higher-cost land loan with low- or no-interest funds from Chinese and South Korean investors.

It sure would be interesting to see the business plan that projects how jobs would be created.

A critic's take: program too lax

David North, a thoughtful immigration hawk at the Center for Immigration Studies (CIS), has previously argued that the cost to immigrants be raised. (CIS calls itself a "pro-immigrant, low-immigration think-tank which seeks fewer immigrants but a warmer welcome for those admitted.)

North, in a 7/12/11 CIS post headlined USCIS Hails More Permissive Handling of EB-5 Alien Investor Program, contrasted the lax U.S. program, in which investors often can get out shortly after parking their money for two years, with rival immigrant magnets:
Other nations, such as Canada and Australia have demanded that the immigrant investor actually operate a company that hires real people – but not the U.S. The use of a contrived, indirect job-creation formula is all that is needed. The EB-5 investor need not even visit the state where the two-year investment is located, much less actually manage a business; all he has to do is send a check.
I'm not sure that's so; Canada requires that the money be deposited with the government, which, while not the same as operating a company direction, does suggest more safeguarding of the public interest.

Low-quality investment

North suggests that, from a business perspective, this program is unwise:
Clearly, there are a lot of unacceptable proposals, probably even some trashy ones, despite USCIS efforts to encourage applications and to help applicants. Maybe USCIS should simply realize that it has an unpopular, difficult program on its hands and stop promoting it.

On the second point, regarding the financial objectives of the EB-5 program, my strong sense after following this program for a couple of years is that EB-5 investments are of much lower quality than most of investments on the broader market – the lure, after all, is the bunch of green cards for the family, not the financial return. So marginal entrepreneurs with questionable deals turn to the prospect of EB-5 money only after they cannot find money anywhere else. Maybe that's why the visas are underused.
I'm not sure it's that they can't find money anywhere else; it's more likely, as in the case of Forest City Ratner, that they can't find money at such a low cost.

But it's still a questionable deal.

Who invests?

North continues:
Looking at this from another angle, let's step back for a moment and ask what kind of serious venture capitalist seeks funding in half million dollar chunks, investments that can be withdrawn after 24 months?

My venture capitalist stepson, with a Harvard MBA piled on top of a PhD in chemical engineering and a decade of experience in the field, would laugh at the thought.

As a result, EB-5 money does not seem to be going primarily into promising start-ups or into Silicon Valley; it is more likely to show up in decaying ski resorts in Vermont (beloved to Sen. Leahy (D VT), head of the Judiciary Committee), in an uneconomical sewage treatment plant in the Mojave desert and in a questionable effort to revive the Watergate Hotel in Washington, D.C., and in similar ventures.
Or, I'd add, an arena project whose proponents calculate benefits and costs very carefully.

North concludes:
Classic conservative economic theory is that government should not pick winners and losers in the marketplace; I do not necessarily accept that thought, but if a government agency gets to play that role, I would prefer it would be one experienced in finance (such as Treasury or Commerce) not one whose expertise is in immigration.
Indeed, the latter agency lets questionable outfits like the New York City Regional Center package projects for potential investors.

EBinfo.com, while critical of North's overall argument, acknowledged that it was "arguably, thoughtful" for him to point out that program funds can end up in "less-than-promising ventures."
EB-5 Stakeholder Meeting June 30, 2011

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