Wednesday, April 22, 2015

Lawyer: because "the heart" of EB-5 is job creation, it's fine for foreign (government) developers to trade U.S. green cards for cheap capital

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.”

Does it make a difference if American entrepreneurs seeking cheap capital from immigrant investors (who want green cards) take on foreign partners, or even foreign-government owned partners?

I've suggested that, in the case of the Greenland Group and Atlantic Yards/Pacific Park, the situation sounds like something out of The Onion: the Chinese government--Greenland is majority owned by the government of Shanghai--would profit by marketing a precious national asset (U.S. green cards) to Chinese immigrants.

The purported justification is job creation, but that's very fuzzy.

The EB-5 industry, unsurprisingly, disagrees. EB-5 attorney Victor Shum on 1/15/15 wrote Welcome International Developers to the EB-5 Project Marketplace for EB5 INVESTORS MAGAZINE:
Over the past few years, international developers have entered the United States market and launched development projects that incorporate EB-5 funding as part of the project's capital stack. This past February, Shanghai-based Greenland Group broke ground on its mixed-use Metropolis project in downtown Los Angeles. And in Oakland, the Brooklyn Basin Project is a more recently announced joint venture between Signature Development Group of Oakland and Zarsion Holdings Group Co. Ltd of Beijing, China—both with EB-5 offerings.
Greenland, of course, is also using EB-5 for Atlantic Yards/Pacific Park along with Forest City Ratner, raising $249 million and now in the process of raising $100 million. (Forest City raised the first $228 million before its partnership with Greenland emerged.

A new boost?

Writes Shum:
As a result of this beneficial arrangement, many projects that have languished for years due to lack of funding are suddenly greenlighted for development. Communities that have long-suffered from a deficiency in domestic investment have the opportunity to become revitalized with foreign investor funds—only a small portion of which may expressly be from EB-5 investors. Judging by the number of trade missions made to China by local and state leaders seeking foreign direct investment for their communities, our elected officials would appear to agree.
He portrays it as a win-win, with the Chinese development groups "achieving portfolio diversification in the United States," while U.S.-based developers not only "gain access to cheaper capital" but also--as I've noted--gain "a strong local partner to market EB-5 investments in China."

It's more than that. It's enhancing developer profits, by substituting cheap capital for existing capital, substituting for bridge financing.

No formal bar

For investors, Shum notes, there's little difference between this and other EB-5 projects, since the same requirements and paperwork apply.

Shum notes that the federal agency overseeing the program, the United States Citizenship and Immigration Services (USCIS) "neither expressly nor implicitly precludes a foreign-owned company from participating in the EB-5 program, nor should they."

His rationale is that the "the heart of the EB-5 program is job creation in America for American workers." Based on that, the more players, the better. His conclusion:
Far from being a cause of concern, international developers investing money and developing U.S.-based projects is a vote of confidence in the United States. As Senator Patrick Leahy noted, "[a]t a time when so much American investment is incentivized off shore, isn’t it nice to see a government program [EB-5] that brings foreign investment onshore?"
Let me suggest another perspective. The heart of the EB-5 program is not job creation. The heart is selling visas cheap, providing profits for the developer/entrepreneur, and all the middlemen involved.

Yes, the Atlantic Yards EB-5 projects include public funding, and that is part of the sum used by an economist to magically calculate job creation.

If the heart actually were job creation, then there'd be a far more stringent way of measuring it, and--for example--immigrant investors wouldn't gain job-creation credit based on the entire pot of money, just their contribution. And maybe the government would require the investment be in government bonds, rather than allow a Rube Goldberg scheme in which the profits go to clever developers.

Leahy, a champion of EB-5, has gotten regular campaign contributions from the big EB-5 developer in Vermont.

Greenland on EB-5

As I wrote last November,  Crain's New York Business published an unsurprisingly gentle interview with I-Fei Chang, who leads Greenland USA, the U.S. arm of Greenland Holdings.

The closing passage:
What are your thoughts on the EB-5 program, which offers a U.S. visa to overseas investors?I think it's now become almost a conventional way [to raise capital] for large-scale developers in America. They utilize EB-5 because it is quick money, and it improves the employment rate. For the L.A. project and also Pacific Park, we used that method. EB-5 investors, especially some of the 2 million customers who already buy from us in China, know our brand. So they are very confident we will deliver.
As I wrote, it has become almost conventional because it's such a great deal. EB-5, however, does not "improve the employment rate." To quote Fortune:
A December 2013 study by the Department of Homeland Security’s inspector general found that the government “cannot demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens.” A February 2014 paper by the Brookings-Rockefeller Project on State and Metropolitan Innovation concluded that “knowledge of the program’s true economic impact is elusive at best.”
There are two reasons for that. First, the government is exceedingly generous in its employment tally. It gives EB-5 investors credit for all the jobs theoretically spawned by a project even when EB-5 money represents only a sliver of its financing. Second, for many mainstream ventures, EB-5 money isn’t really creating jobs—it’s merely saving developers money for projects that would be financed anyway.
But Chang did affirm that a Chinese company has an edge in marketing an EB-5 project to Chinese investors.

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