Wednesday, February 10, 2016

At Senate EB-5 hearing, criticism of gerrymandering and job-creation calculations; federal official doesn't know if foreign governments benefit (but they do)

In December, Congress reauthorized the EB-5 immigrant investor program for one year with no reforms, despite significant consensus regarding the need to crack down on fraud and to limit gerrymandering of purported high-unemployment districts that nonetheless contain projects in places like glitzy Midtown Manhattan.

Under EB-5, which has raised more than $500 million for Atlantic Yards/Pacific Park, immigrant investors (mostly from China) get visas for themselves and their families if they park $500,000 in an investment that purportedly creates 10 jobs.

They eschew market-rate interest and get their money back in five to seven years, as the visas are the carrot. The intermediaries and recipient of the loans make big profits, but the public does not necessarily gain, as often the money merely substitutes for a high-interest loan, and job creation is merely estimated, and calculated not merely on the immigrant investors' funds but the entire pot of money.

If the EB-5 money were truly seed money, it might be justifiable, but in a large majority of cases, it's just added profits. But Senators like Chuck Schumer of New York wanted to keep the money flowing to favored projects, such as those from the developer Related.

Two hearings

On Tuesday, 2/2/16, the Senate Judiciary Committee held a hearing, The Failures and Future of the EB-5 Regional Center Program: Can it be Fixed?, which significantly articulated the critique of reformers from rural states.

They don't so much want to kill the program--I believe it needs a total re-think--but to ensure that the gravy train goes beyond the big cities, to crack down on abuses, and to raise the minimum investment, which has been stagnant for 25 years (and thus hardly keeping up with inflation).

Only one Senator on the Committee, Sen. Dianne Feinstein (D-CA), suggested killing it.

Tomorrow, the House Judiciary Committee holds a hearing at 2 pm, IS THE INVESTOR VISA PROGRAM AN UNDERPERFORMING ASSET?, which again hints at reforms but hardly a total rethink.

House Judiciary Committee Chairman Bob Goodlatte (R-VA) said in a press release:
 “While I support the overall goal of the EB-5 investor visa program, it is currently riddled with fraud and abuse and has strayed further and further away from the program Congress envisioned when creating the program a quarter century ago. The facts make it clear that this program is in desperate need of statutory and regulatory reform. At the minimum, the investment amount should be increased, gerrymandering should be curtailed, and national security concerns should be addressed in order to reform this troubled program.
Grassley dismayed

Sen. Chuck Grassley (R-IA) chaired the hearing, urging "as much reform and enforcement as can get done," saying the law was supposed to create employment and infuse new capital into the country, "not to provide immigrant visas to wealthy individuals."

Well, actually, it was both, but Grassley's right in that the use of regional centers--investment pools that lend money to projects--has veered away from Congressional intent. Probably because everyone, including Congress, is susceptible to rhetoric about "job-creating investments" and have not looked closely.

But Grassley was forceful, saying EB-5 was "widely acknowledged[to be] riddled with flaws and corruption," citing the use of "indirect" jobs--estimated by a paid economist"--and job-creation calculations based on the total investment. 

He said "investment funds are not adequately vetted," "gifts and loans are acceptable," that there's no prohibition against foreign governments owning regional centers or projects, and that every TEA is "rubber stamped by the agencies."

The TEA issue

"How many more projects in Midtown Manhattan at the expense of Rural America need to be highlighted?" Grassley asked rhetorically.

He asked witness Nicholas Colucci, Chief, Immigrant Investor Program of U.S. Citizenship and Immigration Services (USCIS), why the agency has rubber-stamped state and local designations of TEAs. 
(He later noted the obvious: its in the interest of states to draw TEAs to attract investment to local projects.)

Colucci smoothly said the USCIS regulations defer to the states, but noted that Department of Homeland Security Secretary Jeh Johnson has proposed "limiting TEAs to a specified number of contiguous census tracts."

Grassley said he thought the agency should be more aggressive.

Schumer defended the status quo against a "rural model" for EB-5. "People in the South Bronx travel across several census districts to sell food or clean or build an office tower," he said. Just as EB-5 might help "a ski resort in Vermont or a big manufacturing plant in Iowa," he said, it was unfair to limit EB-5 money in densely populated New York.

Of course, there's no proof that a significant amount of EB-5 money in New York actually goes to residents of the city's poorer neighborhoods. He noted that he and Sen. John Cornyn (R-TX) had proposed a "rural set-aside" of visas.

"We need jobs in America," Schumer rhapsodized. "We need good paying jobs. We need to lift poor people out of poverty... We don't have that many tools." He suggested that, while EB-5 could be reformed, it would be unwise to eliminate it, "at a time when we're desperate to get people into the middle class, or to stay in the middle class."

Under questioning from Sen. Thom Tillis (R-NC), Colucci acknowledged that he didn't have statistics about the location of EB-5 investments, but suggested that New York, California, Florida, and Texas probably received the most. He agreed that there should be more guidance regarding TEAs.


Sen. Jeff Sessions (R-AL) asked about raising the minimum investment, and Colucci noted that an increase--unspecified--was in Johnson's letter and can be part of a regulatory action.

"Is there more we can do to track the jobs that are created?" asked Sen. Amy Klobuchar (D-MN). Colucci said the Department of Commerce was doing "a more precise study for us."


Getting a fair share

Sen. Pat Leahy (D-VT) said, "I'm not trying to keep rich neighborhoods in New York and Texas from getting access to EB-5, but they shouldn't get it all, and they shouldn't get it at a discount." 

What he meant was that the statutory minimum is $1 million, but TEAs--rural areas and zones of high unemployment--the minimum is $500,000. Thanks to gerrymandering, areas like Prospect Heights are connected to poorer areas, and--voila!--the overall unemployment rate exceeds 150%.


"Atlantic Yards III," involving Shanghai government-owned Greenland
Leahy was pugnacious, saying "the regional center program too often serves as a corporate subsidy to megadevelopers," citing reports in the Wall Street Journal and the Seattle Times. 

Asked if gerrymandering was appropriate, Colucci said the USCIS does not now "second-guess areas that they designate," but added that the agency could bring more consistency through regulation.

The role of foreign governments

"Can you say with certainty today that no foreign government owns a regional center or doesn't invest in a regional center or its affiliated enterprises?" Grassley asked at 1:56 of the hearing.


"I do not believe that is the case," Colucci responded, promising to consult with staff. Grassley asked for a submission in writing.

That's just not true. 

There have been three rounds of EB-5 fundraising for the Atlantic Yards project, renamed Pacific Park Brooklyn in 2014. The first round, $228 million, was done on behalf of original developer Forest City Ratner.

The second round of Atlantic Yards EB-5 fundraising suggested the role of incoming partner Greenland Holding Co., which is owned and controlled by the government of Shanghai and now owns 70% of the project, excepting the Barclays Center arena and one of 16 towers. The joint venture was not signed when the marketing occurred, though the joint venture surely benefits from the $249 million raised.

After the joint venture was signed, the third round of EB-5 fundraising, Atlantic Yards III, highlighted the role of Greenland and Chief Executive Zhang Yuliang, in the effort to raise another $100 million. See screenshot above right. 

Ironically enough, while Greenland Forest City Partners renamed the project Pacific Park Brooklyn, the old name, Atlantic Yards, is still used in EB-5 fundraising.

All told, the project developers have raised some $577 million at below-market interest rates, with $349 million benefiting the joint venture. That's tens of millions of dollars is savings. And, as I wrote, a foreign government is profiting by marketing a scarce U.S. public resource--green card slots under the EB-5 program--to its own citizens.

Counting the jobs

Asked about the distinction between direct and indirect jobs, Colucci said he didn't have numbers.

Asked if USCIS would terminate policy allowing investors to count all jobs toward job-creation even when EB-5 money accounts for only a fraction of total investment, or if it would consider putting a cap on percentage of jobs credited to non-EB-5 funds, Colucci said the agency made a policy choice to count all jobs. 

He  said several industries, including manufacturing, in which the job-creation numbers just wouldn't work if the job-creation calculations were limited to EB05 money. He added that the presence of third-party financing adds solidity to a project.

Unmentioned was that a significant increase in the minimum investment should be linked to more jobs.

Coverage of the hearing

Here's some coverage from last week:

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