Tuesday, February 07, 2012

As EB-5 goes mainstream, association presents options to financial agencies; head of Vermont regional center says program crucial to state

The Council of Development Finance Agencies (CDFA), a national association of state, county and municipal agencies, on 1/17/12 sponsored a webcast introducing EB-5 investment immigration to its members.

The speakers were David Andersson, President, Association to Invest In USA, and James Candido, Director, Vermont EB-5 Regional Center.

Andersson noted that the trend these days among regional centers to cover several jurisdictions or even a full state, though the regional center he manages in northwest Washington, the Whatcom Opportunities Regional Center, covers just one county.

When the WORC was designated in 2006, he said, there were only about 14 regional centers. Now there are more than 208.

In fact, not until November 2010 did prospect regional centers have to actually pay a filing fee to achieve federal designations. At that point, the United States Citizenship and Immigration Services (USCIS) introduced the I-924 form, which comes with a $6230 filing fee to get designated or to have a designation amended.

"There is a move afoot," Andersson said, to get USCIS to offer "pre-approval of projects," which, I might add, is what promoters of the Atlantic Yards project promised investors. "This preapproval has not yet been perfected."

What investors want

What does the typical EB-5 investor hope for? Andersson said the investor expects a modest return on investment, but wants to make sure he gets his money back.

The investor wants a clear business plan, which demonstrates how the required jobs will be create, and then a clear exit strategy, so they can understand how to leave the deal down the road.

I'll not that the exit strategy with Atlantic Yards is pretty murky.

Andersson suggested that the issue of designation a Targeted Employment Area (TEA) was "not overly complicated... Most regional centers use a census tract as a basic political sub-unit, and most regional centers aggregate a number of census tracts."

Unmentioned: the issue of gerrymandering. But it's crucial to ensure that a TEA--either a rural area or one in which the unemployment rate is 150% of the national average--is achieved, because only a TEA is the minimum investment $500,000. "There is no appreciable marketplace for a $1M investment," he said.

In 2011, he said, $1.25 billion from investors was pooled, but the number will be even greater in 2012.

The view from Vermont

Candido talked about the unique situation in Vermont, home to the only government-run regional center.

Projects apply first to the Vermont Regional Center before going to the USCIS. The state regional center offers both oversight and assistance.

Real estate projects, he said, were the easiest for investors to grasp, but there are several active projects within the state. (The first manufacturer in the state to use EB-5 capital involves Country Home Products and DR Power.)

Size of the market

Candido noted that, in FY 2010, the number of applications via the Vermont Regional Center represented 18% of the national EB-5 market.

In the first three quarters of FY 2011, the number represented 14% of the market. So Vermont, Candido said, "is a fairly sizable chunk of the marketplace."

If so, then an even larger chunk is occupied by the New York City Regional Center (NYCRC), which marketed EB-5 investments to 498 investors for Atlantic Yards. It also marketed several other projects to investors, thus becoming the busiest regional center in the China market last year.]

What it costs

"If you have 5% financing from a bank, don't do EB-5," Candido said.

Why? Because there are lots of potential project costs, as described in the graphic at left.

"Sourcing investors is very difficult," he said, pointing to the cost of marketing projects overseas.

"It's not a quick process, it takes patient money," Candido said, pointing to the timeline in the graphic below. "You're dealing with a lot of documentation, not just the project but also the investor."

More from Candido

I also interviewed Candido directly a few weeks earlier. He said that, while the regional center was approved back in 1997, it was difficult to use until the middle of the last decade, and Jay Peak Ski Report, the most prominent project, didn't start getting investors until 2008.The Tram Haus Lodge at Jay Peak, Phase 1, opened in December 2009.

So it's too soon to tell if the investors will get their money back after five years and, Candido said, it's not the government's job.

"Everything points to them getting their investment back," he said, but the government's job, running the regional center, is to make sure there are legitimate calculations of the required indirect job creation.
He said the regional center does review marketing materials to ensure, for example, that there are no guarantees about investment success, which is forbidden. Unlike other regional centers, created to make money for its operators, the Vermont regional center is a tool to develop the state.

More than $200 million has been raised for Jay Peak, the Sugarbush ski project, as well as manufacturing projects.

"Unless it's a large real estate development done by developers with a pretty significant track record, or it's a longstanding manufacturing or production company that has a long record of success," he said, "I've found that it's very difficult or impossible to get EB-5 investors. Start-up companies don't do very well."

The TEA issue

While Candido was quoted in the New York Times as saying some projects seem to have questionable TEAs, he told me he wasn't targeting any specific projects.

While most of the state is rural, and thus qualifies for a TEA, he said it's been difficult to get some projects in the city of Burlington qualified, with the required unemployment rate of 150%. One project, he said, was adjacent to a poor section of the city, but it was impossible tot draw a TEA.

"This may be where we are separated from other regional centers," he said. "They [TEAs] have to make sense. You can't have amoebas bulbous in one area and skinny where the project is."

The question of controversy

"While I understand there's some concern about all of this, as far as I'm concerned, even two jobs being created, we spend no money as a state, it's created thousands of jobs for us," he said. About half the jobs are directly created, the other half indirect.

"If you have a project not creating jobs and jerry-rigged a TEA, i certainly don't think it's acceptable," he said, but that's a reason to fix some rules rather than blow up the program.

"For us, it's been an incredibly important program," he said. "We've had construction companies working on Jay Peak that say they'd probably be out of business if it weren't for that construction. Right now Jay Peak is the biggest construction job in the state."

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