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As EB-5 reform percolates, no challenge to program's fundamental flaw; also, a rising investment threshold may not help rural/poor areas

Update: The Real Deal reports that Sen. Charles Grassley (R-IA), an advocate of the reform plan, since it would help his rural state, has said that "moneyed developers" aiming to keep the status quo have blocked the compromise.

It is telling but dismaying that reform of the EB-5 immigrant investor program is brewing, and 1) the main (only?) ones discussing it are those with a stake in the outcome and 2) the discussion seems to mainly concern spreading the wealth, so projects in truly poor or rural locales can get access to below-market funding, rather than ensuring that all projects funded truly need the money.

According to Summary of the Draft EB-5 Reform Act, posted 3/16/18 by attorney Ronald R. Fieldstone of Saul Ewing Arnstein & Lehr, the EB-5 program would be extended until September 30, 2023 and the previous threshold $500,000 investment level--which, by the way, was never raised in decades--will be honored for applications in the pipeline, with no reassessment of the so-called Targeted Employment Area (TEA).

For years, real estate developers, assisted by cities and states willing to gerrymander zones of high unemployment, have created urban TEAs that yoke prosperous areas--like, say, Midtown Manhattan or Prospect Heights--to poor neighborhoods to qualify projects for the $500,000 investment, rather than the statutory $1 million.

(In three fundraising efforts, Atlantic Yards/Pacific Park got $577 million in cheap EB-5 loans. The Nassau Coliseum project raised $90 million.)

Going forward, the law would raise the minimum investment from $500,000 to $925,000 for projects in three set-aside categories, and from $1 million to $1,025,000 for non-set-aside projects.

The former category would include 1,450 Priority Urban Investment visas, in zones of high unemployment, high poverty, and/or low-income, as well as 1,450 visas in rural areas, plus 200 visas for infrastructure projects. (That seems low.)

Instead having to create 10 jobs per investment, there'd be 12 jobs required for most projects, but only 9 in the set-aside categories or a former military installation.

The overall investment minimum would be adjusted every three years for inflation. There's also be more checks on integrity, which responds to some of the blatant scams that have periodically infected EB-5.

What's missing

What's missing is the recognition that many project simply don't need the money, so no jobs are created, and it's margin for the developer.

As I reported, EB-5 middleman Nicholas Mastroianni said at a session in November 2016,  "Projects that don't typically need the capital are the projects that we look to lend money on. If a project can't be developed without the EB-5 capital, it's not a project that you should be looking to invest in, because you've got a desperate situation."

Perhaps that's why EB-5 attorney Carolyn S. Lee of Miller Mayer recently wrote
No one thinks this is a perfect bill. That’s probably its chief strength, because it signifies compromise. The diverse interests within the EB-5 industry foreclose a universally agreeable bill. So given no consensus, the question is – would this be a bill still worth supporting?
The answer for me is grounded in pragmatism. I support this draft because a six-year lifespan for the EB-5 regional center program with these terms is better than another desiccating year - or more - of uncertainty.
After all, it sustains their legal business, and doesn't get to the core issue.

One warning, though, comes from the law firm Mintz Levin, which recently warned that the $100,000 difference between projects in set-aside areas would "erase the relevance of targeted employment areas altogether." After all, many investors would see that as an insufficient incentive to stray from a big-name developer in a project in a major city like New York.

Attorneys Douglas Hauer, Alex Hecht & R. Neal Martin wrote:
If the new investment amounts in the framework become law, developers in major urban areas will use the EB-5 Program to enjoy the low costs of EB-5 debt or equity being deployed for large-scale refinancing of more expensive debt. This is not how Congress intended the EB-5 Program to work. It makes good sense for lawmakers to consider EB-5 investment amounts more carefully. Otherwise, the EB-5 Program will have a limited future in rural and distressed areas.

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