Friday, April 24, 2015

As EB-5 regional center program faces renewal vote, questions of reform (or should it just be killed)

I'm catching up on a lot of news related to the EB-5 program, which has helped the developers of Atlantic Yards/Pacific Park raise $477 million in cheap capital, with another $100 million to go. Perhaps the clearest summary of the lure and sketchiness of the program came in a February 2012 quote from an EB-5 fundraiser to The Daily:“It’s just a way of being able to get free money, basically, to build all sorts of projects.”

Source: Brookings Institution, February 2013.
The number is now 646!
Numerous real estate developers and other entrepreneurs have figured out that the path to cheap capital is the EB-5 program, particularly via regional centers, private (in almost all cases) investment pools federally authorized to raise funds overseas.

They compete especially in China, where millionaires eager to get their children into American schools or to get a stable foothold in the United States prize getting the green card and are willing to accept low interest rates. 

Meanwhile, regional centers can count temporary construction jobs as part of the required ten jobs per $500,000 investment, and can calculate the jobs based not merely on the immigrants' funds but the entire project budget.

No wonder the number of regional centers has boomed, from a mere handful as of 2007 up to more than 200 by February 2013 and now an astonishing 646. They're competing for only 10,000 visas under EB-5, so many of them are dormant--or waiting for an expansion of the program.

Given the enormous profit potential--the regional centers can charge fees to the investors and keep a portion of the interest rate spread--backers are keen to maintain the advantage.

Renewal pending

The enormously popular regional center component of EB-5 is technically a pilot, having been renewed every three years. It expires on September 30, 2015, and it faces questions over its renewal and the terms thereof, such as raising the minimum investment from $500,000 to $800,000--which still may be too low.

Defenders of the program say that the problems with EB-5 are the result of a few bad apples. But some federal reports criticize the fundamental design of the program, including the inability to truly count jobs--which can be credited to an economist's estimate--and the abuse of Targeted Employment Areas (TEAs), which are supposed to define an area of high unemployment but are often gerrymandered.

As I've written, some of that is in the hands of EB-5 skeptic Sen. Charles Grassley (R-IA), who seems most concerned about national security issues.

To some degree the legislation should be shaped by upcoming reports by the Government Accountability Office, the Securities and Exchange Commission, and the Department of Commerce.

Three that didn't pass

On 8/13/14, EB Investors Magazine reported on four bills affecting EB-5, none of which passed last year.

The Border Security, Economic Opportunity, and Immigration Modernization Act (S. 744), the Senate immigration bill, passed the Senate but not the House. An amendment from Sen. Patrick Leahy (D-VT), a huge supporter of EB-5, proposed "a myriad of reforms meant to streamline the program, but also protect against fraud and security concerns," according to the publication. It would have gently adjusted the minimum investment by the consumer price index.

Another immigration bill—the SKILLS Visa Act—didn't pass the House. It would have created a new category, EB-8, with 10,000 green cards (as described)  for "entrepreneurs who raise $500,000 (inflation-indexed) capital investment and create 5 U.S. jobs within 2 years." It would have tightened the definition of a TEA, not letting states gerrymander.

The very simple EB-5 Regional Center Extension Act didn't pass either, but it would have made the program permanent, with no reforms. Fun fact: the main sponsor was Rep. Aaron Schock (R-IL), who has since stepped down in a bit of a scandal.

The main bill pending

The American Entrepreneurship and Investment Act of 2014, introduced by Rep. Jared Polis (D-CO), didn't pass, but has been replaced by The American Entrepreneurship and Investment Act of 2015.

Yes, it would improve compliance with securities laws, and bar individuals convicted of certain crimes, including fraud, being part of regional centers, but it's mostly an industry wish list, since it would:
  • make the EB-5 regional center program permanent
  • let states designate TEAs (the 2014 version was more stringent)
  • set aside 5,000 visas for investors who invest in TEAs
  • speed processing and approval
  • require deference for all prior-approved documents
  • eliminating the per-country cap for visas, notably helping Chinese immigrants
  • allow the Department of Homeland Security to delegate evaluation of employment creation to the Department of Commerce
The 2015 version, unlike the 2014 version, does not require the investment to be adjusted upward for inflation, nor does it request allow up to four years (rather than two) to calculate job creation.

But presumably there will be more adjustments, and perhaps more bills.

Rep. Polis and the patriotic spirit

Polis wrote a sunnily unskeptical 8/11/4 op-ed in EB5 Investors magazine:
The individuals who come to the United States through EB-5 exemplify the American Dream.
By providing capital at a time when American financial institutions have been hesitant to lend, EB-5 investors are filling a crucial hole, helping to accelerate our economic recovery, creating jobs and spurring development. They are rebuilding Main Streets and refining our most advanced technologies. The individuals who come to the United States through EB-5 exemplify the American Dream. They have the option to go anywhere in the world, but they choose to come here. They want to be American. They want their children to be American. And they want to invest right here in America.
They choose to come here because we're selling residency cheap!

In January, Polis and Rep. Mark Amodei (R-NV) introduced the 2015 version of the bill. “This bi-partisan, pro-investment, pro-growth and pro-jobs bill is one piece of the legislative solution to reform legal immigration,” Amodei declared.

Last May, a group of more than 30 U.S. commercial, residential, hospitality, retail and other real estate organizations wrote a letter supporting the Polis/Amodei bill.

A contrary view


As I wrote in January 2014, Grassley released an internal memo from Homeland Security Investigations (HSI), the investigative arm of U.S. Immigration and Customs Enforcement, an agency within the Department of Homeland Security, which also houses USCIS.

HSI proposed major policy changes, including doubling the minimum investment amount from $500,00 to $1,000,000, and recommended that the program be limited to only active investors involved in managing and directing a business--again, a huge change, given that the program allows investors to live anywhere in the country.

It also recommended that "induced jobs"--resulting from workers' spending in the local economy--be eliminated from the job creation calculations. And it recommended that "the Regional Center Model be allowed to sunset, as HSI maintains there are no safeguards that can be put in place that will ensure the integrity of the RC model.”

HSI concluded, based on its own research, that it has has "reason to believe that the RCs [regional centers] are greatly exaggerating their indirect and induced job creation figures. By not having to provide evidence of jobs directly created, the RC inherently creates an opportunity for fraud, where the business goal can be initiating projects that give the appearance of creating job growth, with the sole intent to meet USCIS criteria rather than produce jobs."

New framing

EB-5 attorney Mona Shah, quoting Polis at a January 2015 conference, noted that the messaging around EB-5 is that it's about business, not immigration, and supports job creation. Thus, Shah wrote, "To support EB-5 is 'pro-business' and to support job creation. The notion of 'pro-business' will make some politicians in both parties more comfortable than saying 'pro-immigration.'

Polis wrote a 3/23/15 op-ed for Roll Call, headlined Bipartisan Immigration Program We Need to Pass Now:
Luckily, we have a program in place to help meet the needs of visionary entrepreneurs and developers: the EB-5 visa program. It’s one of the best ways we can attract foreign investments to support and grow our economy and create jobs for Americans. This innovative program was first created by Congress in 1990 to spur investments in the United States and it has been a critical tool since then to supplement our capital markets during the economic downturn.
Note the critical comment from Mohammed Shaikh, who recruits investors for EB-5 direct investment projects, thus a competitor with regional centers:
I'm a Certified Fraud Examiner and have an MBA in Accounting, and can state with 100% confidence that this bill needs to be blocked as regional centers not only violate securities laws to illegally market and sell their securities in China without first obtaining CSRC [China Securities Regulatory Commission] approval, but also go ahead and commit securities fraud by failing to disclose material facts to investors. They knowingly receive illegally laundered funds and actually engage in massive conflict of interest.
This bill does not do anything meaningful to protect EB-5 visa investors and ICE-HSI actually recommended that regional centers be shut down, while this bill is trying to permanently authorize the regional center program in the EB-5 visa category even though ICE has strongly recommended shutting down regional centers. See ICE memo at http://www.smartbusinessbroker...
Another industry perspective

On 9/18/13, Michael J. Petrucelli, a former acting director of USCIS, wrote an essay for Roll Call, EB-5 Investor Visa Program Needs Better Oversight, Regulation, supporting Leahy's bill,  which would "require stronger oversight and reporting, strengthen anti-fraud efforts and establish more flexible job creation methodologies."

Petrucelli also said "Congress should raise the qualification bar for EB-5 regional center applicants," "establish expedited processing for regional centers" with big projects, speed processing time, and "require that all existing and future EB-5 regional centers be fully compliant with applicable U.S. securities law and U.S. Securities and Exchange Commission regulation."

Those are reforms, but Petrucelli also agreed that Congress should defer to states on TEAs. "State and local governments need to be a part of this process, and they are better-positioned to know the situation on the ground than a federal level agency," he writes. (Alternatively, they are more likely to be captured by local interests.)

Should we be surprised that Petrucelli works in the EB-5 business?

Campaign contributions

I did a little checking, and it's unsurprising: Polis and other Congressional sponsors of EB-5 legislation like Rep. Bob Goodlatte (R-VA), have gotten regular contributions from EB-5 practitioners, notably regional center principals and attorneys.

Perhaps the largest contributor is Nicholas Mastroianni, subject of a critical Fortune profile, who just happens to be the guy behind the last two rounds of Atlantic Yards fundraising, as well as current Nassau Coliseum fundraising.


Here's another major contributor:

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