EB-5 gets temporary extension, but still no changes

Feds delay permanent continuation of ‘immigrant investor’ program until December

By Jeff Shaw

Managing Editor

The U.S. Congress has kicked the can down the road once again for the EB-5 program, which allows foreigners to earn a green card in exchange for investment in U.S. businesses.

The program was implemented in 1990 and, for the most part, has been routinely extended each time it comes up for renewal, usually for five years at a time. In 2015, amid calls for changes that would reduce fraud and increase investment in areas that needed it most, the program was instead given a temporary extension — first to Dec. 11, 2015, and then to Sept. 30, 2016.

But as that September date approached, Congress opted for another temporary extension until Dec. 9, after the 2016 election cycle had run its course. 

“That date does have something to do with the election, but not so much who’s going to be elected as the logistics of completing an election,” says Jimmy Taylor Jr., chief operating officer of Omega Communities, a seniors housing developer that often uses EB-5 to help finance projects. “A lot of senators and members of the House of Representatives are up for re-election. Dec. 9 was a practical date.”

The Birmingham, Ala.-based company uses EB-5 as a way to supplement its capital stack, but notes that many companies exclusively use EB-5 capital for projects. In Omega’s case, the company likes the flexibility of the program, which allows the developer to use a standard loan until enough EB-5 capital is raised.

“We raise initial funding through bridge loans, which is specifically permitted under the EB-5 rules and guidelines,” says Taylor. “We can begin construction, then raise EB-5 capital to take out the bridge loans.”

Omega currently owns four communities, with a fifth about to break ground, all located in the Southeast. It is the developer and owner for each of its own communities, and contracts with Greenbrier Senior Living of Birmingham, Ala., to handle the day-to-day operations and management of the properties.

Long-term, Taylor predicts that EB-5 will be extended without much trouble. 

“It’s been a very successful program on the whole — it has brought in billions of dollars that have stimulated investment,” says Taylor. “It’s a great source of capital and a great source of access for immigrants. These are wealthy foreign nationals, primarily from China, Europe and South America. It’s attractive for them and for us.”

However, the hitches that have held up long-term renewal need to be addressed. 

 

Rooting out fraud

The program, overseen by U.S. Citizenship and Immigration Services (USCIS), a division of the Department of Homeland Security, has come under fire for fraud concerns several times. In August 2015, the U.S. Government Accountability Office (GAO) released a report calling for stronger fraud prevention and oversight within the program.

“Unique fraud risks identified in the program included uncertainties in verifying that the funds invested were obtained lawfully and various investment-related schemes to defraud investors,” the report stated. It also cited gaps in the ability of USCIS to verify that projects meet job creation requirements. According to EB-5 rules, each investment must create at least 10 full-time jobs within two years of completion.

Although generally supportive of the program, the report suggested that USCIS needed to continue to strengthen its data collection, which would enable the organization to better root out EB-5 fraud.

“USCIS has taken steps to address the fraud risks it identified by enhancing its fraud risk management efforts, including establishing a dedicated entity to oversee these efforts,” the report stated. “However, USCIS’s information systems and processes limit its ability to collect and use data on EB-5 program participants to address fraud risks in the program.”

While fraud concerns are legitimate, they are not
a reason to scrap the whole program, says Taylor, and the level of fraud is “not inconsistent with any other industry.”

“Every industry has bad apples. Generally, they can give the overall apple juice a bad taste,” says Taylor. “For the most part, USCIS has done a great job identifying that and then taking action.”

“The bad news always hits the front page,” he continues. “The great news about the hospitals and senior living communities that are built, you don’t hear about those stories. That’s human nature, unfortunately.”

 

Serving the underserved

Another concern to be addressed is that funds aren’t being used to support needy communities, as the program was originally set up to accomplish.

EB-5 investors must commit at least $1 million to a project and create 10 full-time jobs to meet the minimum requirement. However, if a business investment is “located in an area that is rural or has experienced unemployment of at least 150 percent of the national average rate,” according to the GAO report, that investment can be halved to $500,000.

The intent of this provision was to bring economic stimulus to underserved areas with high unemployment. That’s unfortunately not how it has worked out, according to Taylor.

“Over the last several years, a lot of EB-5 money has gone into projects like the Brooklyn Nets arena. That doesn’t seem like an area that’s impoverished or in need of economic stimuli,” says Taylor. “This was supposed to be for rural or economically disadvantaged areas, not Los Angeles, San Francisco and New York.”

Omega only uses EB-5 funding for areas that meet the rural or unemployment requirements, notes Taylor.

 

Possible changes to eligibility requirements

One possible method for tackling this issue is to increase the minimum commitments to be eligible for EB-5 benefits. For example, the minimum could be increased to $1.5 million generally, or $750,000 for rural or high-unemployment areas. With a wider gap between minimum commitments, more foreign investors might elect to go after underserved markets.

An added benefit for the U.S. businesses receiving the investment, Taylor notes, is that each project could reach the total capital needed using fewer EB-5 investors, as they’ll each contribute more capital.

Overall, Taylor stands by his prediction that EB-5 isn’t going anywhere. Although it may be tweaked for effectiveness, the program itself is sure to be renewed going forward.

“I believe between now and Dec. 9, there will be changes that detail the way EB-5 will work going forward,” says Taylor. “We feel strongly that the long-term plan is to keep EB-5 in place.”