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Atlantic Yards/Pacific Park graphic: what's built/what's coming + FAQ (pinned post)

EB-5 in question: deadline for tougher new rules approaches; investment expected to decline; push in Congress for sweeter deal?

As I wrote in August, the Trump Administration, to some surprise, agreed to implement (with revisions) a major Obama Administration-proposed change in the EB-5 Immigrant Investor Program, which had granted visas to wealthy foreigners in exchange for a minimum $500,000 investment in a purportedly job-creating investment.

The new rules, from U.S. Citizenship and Immigration Services (USCIS), which is part of the Department of Homeland Security, raise the minimum investment from $500,000 to $900,000 (but not $1.35 million, as originally proposed), as long as the project is in a Targeted Employment Area (TEA), which is a rural area or an area of high unemployment. The non-TEA investment, generally ignored in recent years, will rise from $1 million to $1.8 million. That catches up with inflation.

TEAs have long been gamed--or gerrymandered--by states willing to designate a bizarrely shaped zone to qualify a project for the lower investment level. As the Real Deal reported 10/21/19, EB-5 investors rush in ahead of looming rules change, EB-5 investment exploded in a decade, from $300 million in 2008 to $5.7 billion in 2018. Atlantic Yards/Pacific Park accounted for $577 million, in three tranches. (It's supported numerous projects in Brooklyn, the latest One Willoughby Square.)

Now the federal government, rather than states, will designate TEAs, and significantly restrict gerrymandering. The census tracts, with an average unemployment rate at least 150% of the national average, must be directly adjacent rather than merely connected in a chain.

As I wrote, the changes have been met with concern and opposition from significant EB-5 players--the investment packagers and loan beneficiaries eager for cheap capital and investors unconcerned about interest payments--and expected to slow investment.

But they do preserve a key element of the program: dubious and generous (to my mind) formulas for calculating job-creation, purportedly ten jobs per investor.

A tightening timetable

As I wrote in August, developers weren't happy, and some were trying to shoehorn in investors before the 11/21/19 date of the policy change. Indeed, as the Real Deal reported, a hotel builder in Florida and Arizon said he'd gotten a flood of calls from potential investors.

Not only would many investments in urban centers--previously subject to gerrymandering of TEAs--be untenable, but the investment pools known as regional centers, which package the loans while charging fees and creaming off interest, are threatened.

“Two-thirds of the regional centers are going to be out of business after Nov. 21," said consultant Michael Gibson of USAdvisors, who helps EB-5 applicants try to vet projects.

Moreover, given the constraints on TEAs, the program will likely include smaller, less ambitious projects, rather than complex real-estate developments. “The days of the Hudson and Atlantic Yards are done,” said Gibson.

Going forward, the Real Deal reported, investors parking their EB-5 investment for five to seven years--they mostly forego interest, expecting to be repaid--will not only expect more than nominal returns, they'll want more assurance they'll be repaid.

“Most EB-5 projects, the yield is significantly less than 1 percent," Gibson said. "Nobody is going to invest in anything over $1 million and expect a 1 percent [return].” For the first round of Atlantic Yards, Chinese investors got no interest.

Country changes

Moreover, there's still a huge backlog of Chinese investors who've invested but have seen delays in their processing because of country quotas. That's led EB-5 packagers to focus on other parts of the world, notably Latin America, though they want a higher return.

Voice of America reported 10/27/19, in Hong Kong Business People Set their Sights on America, that turmoil there have led some wealthy locals to consider EB-5 under current rules.

Long-term questions

Meanwhile, the EB-5 regional center program has been extended thanks to continuing budget resolutions, only to 11/21/19 (though that's not connected to the rules change).

Industry consultant Suzanne Lazicki in September pointed out that EB-5 heavyweights would like Congress to enact lighter rules, while Sens. Charles Grassley and Patrick Leahy, representing rural areas seeking more EB-5 investment, have proposed reforms that industry groups abhor:
The regional center program needs the stability of a long-term authorization — something it hasn’t gotten since 2012. So far as I know, IIUSA and EB5 Coalition are still marching in lockstep and arm-in-arm over a consensus wish list for legislation that combines long-term authorization with an investment threshold lower than what was set in 1990, a neutered TEA incentive, and a TEA set-aside provision to set aside visas for incoming investors at the inevitable cost of reducing visas available to past investors. Meanwhile, last week Senators Grassley and Leahy announced proposed EB-5 legislation that does not appear to have benefited from any EB-5 industry input. S.2540 – A bill to reauthorize the EB-5 Regional Center Program in order to prevent fraud and promote and reform foreign capital investment and job creation in American communities is an updated version of the EB-5 Reform Acts associated with Senator Grassley’s office since 2015. Unlike previous versions, the new bill does not treat investment amounts or TEA designations. It does attempt to define measures that would improve the integrity and security of the EB-5 program. I admire the intention, but wish that Senator Grassley’s office had consulted with anyone who knows EB-5 in practice. If S.2540 passed, it would sweep almost everyone out of EB-5 except a few big-city regional centers (the only ones who could afford the swathes of new red tape and fees proposed) and direct EB-5 (whose existence the bill apparently forgot).
What's that "neutered TEA incentive"? Well, industry groups have proposed... piggybacking on Opportunity Zones:
The balanced principles we propose would provide market advantages to Targeted Employment Area (TEA) projects in rural communities and distressed urban census tracts designated by the U.S. Treasury Department as “Opportunity Zones.” 
Bloomberg Law 10/29/19 reported:
Groups representing the businesses that receive EB-5 funds are “very much focused on getting a legislative fix,” more so than worrying about the regulations’ effects, said [attorney Laura] Reiff, who serves as counsel to the EB-5 Investment Coalition.
“We’ve got some really good bipartisan, bicameral players,” and “the moon and the stars have kind of realigned” in favor of EB-5 overhaul legislation being passed, she said.
A 10/28/19 Letter to the Editor of the Washington Post, from Angelique Brunner, spokesperson for the EB-5 Investment Coalition:
The regulations recently put forward by the Department of Homeland Security and praised in the editorial would devastate foreign investment and put hundreds of thousands of jobs at risk without addressing the fraud and national security concerns we share. Senate Judiciary Committee Chairman Lindsey O. Graham (R-S.C.) has been working with Sens. Mike Rounds (R-S.D.) and John Cornyn (R-Tex.) — with essential input from EB-5 practitioners — on a consensus legislative proposal that would bring meaningful reform to the program, with strong integrity measures at the core.
An alternative idea: fund infrastructure

The moderate (formerly libertarian) think tank Niskanen Center recently proposed:
The EB-5 program could be altered to provide a major funding stream for national infrastructure improvements by granting approved applicants who choose to invest in critical public infrastructure projects an exemption from the cap. Not only would this finance enhanced infrastructure across the nation, it would provide thousands of jobs for Americans.
The Center doesn't provide more details, but it's not unreasonable idea, as long as the process cuts out all the middlemen making profits from our government's willingness to sell green cards cheap, as  Dartmouth's John Vogel wrote in February 2013:
One of the oddities about the EB-5 program is that the U.S. government is giving out the green cards, but the entrepreneur who puts together the investment gets the money. This scheme seems inefficient and open to corruption. If our government really believes that it is a good idea to sell green cards, maybe we should drop the pretense that this is a job creation program. It might be more efficient to have the money go directly to the U.S. Treasury and reduce the deficit by billions of dollars a year. In fact, the U.S. government could auction off these green cards and perhaps raise even more money.
An unlikely reform still wouldn't go far enough

The Grassley/Leahy reform would, via its summary, among other things "Improve how jobs are calculated to ensure that EB-5 projects truly create the statutorily required 10 jobs per investor."

That's still pretty generous, to my eyes. The major change is that ten percent of the jobs are required to be direct jobs, in the new job-creating entity or project. That could make it difficult for regional centers, since those are typically pass-through entities.

However, if 90 percent of the jobs can be indirect, created by construction spending, for example, those formulas are fairly generous. Moreover, as far as I can tell, the job-creation calculation could still be based on full "project" spending, rather than be limited to the funds from immigrant investors.

In other words, if immigrant investors contribute just 20 percent of the funding for a project, they could still get job-creation credit for the entire pot of money, including taxpayer funds. 

Here's the bill text:
(iv) INDIRECT JOB CREATION.—The Secretary of Homeland Security shall permit aliens seeking admission under this subparagraph to satisfy only up to 90 percent of the requirement under subparagraph (A)(ii) with jobs that are estimated to be created indirectly through investment under this paragraph in accordance with this subparagraph. An employee of the new commercial enterprise or job-creating entity may be considered to hold a job that has been directly created.
‘(v) COMPLIANCE.— ‘‘(I) IN GENERAL.—In determining compliance with subparagraph (A)(ii), the Secretary of Homeland Security shall permit aliens seeking admission under this subparagraph to rely on economically and statistically valid methodologies for determining the number of jobs created by the program, including— ‘‘(aa) jobs estimated to have been created directly, which may be verified using such methodologies, provided that the Secretary may request additional evidence to verify that the directly created jobs satisfy the requirements under such subparagraph; and ‘‘(bb) consistent with this subparagraph, jobs estimated to have been created indirectly through capital expenditures, revenues generated from increased exports, improved regional productivity, job creation, and increased domestic capital investment resulting from the program. ‘‘(II) JOB AND INVESTMENT REQUIREMENTS.— ‘‘(aa) RELOCATED JOBS.— In determining compliance with the job creation requirement under subparagraph (A)(ii), the Secretary may include jobs estimated to be created under a methodology that attributes jobs to prospective tenants occupying commercial real estate created or improved by capital investments if the number of such jobs estimated to be created has been determined by an economically and statistically valid methodology and such jobs are not existing jobs that have been relocated.