Federal visa program attracts wealthy foreign investors with promise of a quicker green card application process; hundreds of domestic jobs are created in the process. The program is an easier way for developers to fund their real estate projects, but for prospective immigrants with the means, EB-5 is a simple path toward legal United States residency.
New Trends in EB-5 Immigration
Real estate investments in exchange for lawful immigrant status have become common practice in New York City through EB-5, a federal visa program that began in 1990. Through this initiative, billions of dollars have been poured into projects such as hotels, office buildings, condominiums, and public and private works, all with the intent of gaining green cards for the investors and their families, over 80 percent of whom are Chinese. The federal program stipulates that a foreign person who invests $500,000 in a project which creates at least ten jobs can apply for a green card.
The investor can expect to receive it, typically, within 26 months. The standard process can take several years by comparison. Nearly three thousand foreign financiers have invested almost $1.5 billion into three major real estate projects in New York. Hudson Yards, the largest development in New York City since the Rockefeller Center in the 1930s, has received $600 million of that sum; Pacific Park, a 22-acre planned neighborhood in Brooklyn, welcomed $577 million; the Four Seasons Hotel and condominium in the financial district accepted the remaining $250 million of that staggering sum. West 47th Street’s International Gem Tower, West 57th Street’s Via (a rental of the Durst Organization) and Staten Island’s New York Wheel have also received funding through EB-5 investments. A collaboration of investors called the Victor Group is currently raising $90 million from 180 overseas investors for a $400 million condominium project on 5th Avenue.
Immediately following the recession, companies began to use EB-5 seriously for project fundraising. Leery of potentially defaulted loans, lenders began exercising more strict application processes, which caused the developers who would have turned to them to seek alternative funding sources. The EB-5 program seemed a perfect solution. Companies as well as individuals like the Zhao family were able to qualify as long as they met the requirement of a $500,000 stake per investor and resulting in 10 new employees hired. For instance, a condominium developer could raise $2 million from four investors as long as they brought in 40 employees.
The program has a limit of 10,000 visas issued annually. The investor’s family, including dependents under the age of 21, may apply for green cards. Most foreign investors take advantage of this benefit, and each application counts toward the limit. The threshold had not nearly been reached since the EB-5’s inception in 1990 until just two years ago. Participation in the program has risen dramatically since 2010. For instance, in fiscal year 2010, less than 20 percent of the visas allotted were issued. As applying for lending from traditional financial institutions continued to present obstacles, that began to change. Three years later, 8,564 visas were issued—a staggering 354 percent increase. In fiscal year 2014, the entire allotment of visas had been claimed before Labor Day, about two months before fiscal year end. In fiscal year 2015, all 10,000 visas were applied for by May 1.
The visa program has never experienced such high volume since its beginning. As popularity began to rise, the federal government added function within the program that developers found makes EB-5 easier to use. David Finkelstein, chief operating officer of the American Immigration Group, which provides advising for developers specifically on the EB-5 program, said, “Two or three years ago, the government created a structure that made it much easier for us. Now we can use our construction costs and certain soft costs, like architectural costs, to determine how many jobs we will create, and therefore, how much we can raise from investors.”
Application volume is easier to track than total investment through the federal visa program. Figures are collected slowly, and the most recent compiled data available is from fiscal year 2013. At that point, $379 million total had been reported invested in New York—19 percent of the program’s total investment and $52 million more than fiscal years 2010 and 2011 combined. The economic impact stretches from coast to coast, as foreign investments in California amounted to 22 percent of the roughly $2 billion total brought in from the visa program.
Shopping for investors
Locating the right investors for developers has become a competitive industry all its own. “Immigration agents” overseas are hired by U.S. developers to leverage their business networks and connect developers with the investors they need. Gary M. Rosenburg, a partner in our law firm representing the Durst Organization, describes how developers woo investors on the road, sometimes with glitzy roadshows. “We had one where they started off with a dance program and a light show.” Another event seeking investors for Durst developments involved trivia competitions, prizes, and an M.C. “The first 100 people who signed up to make a $500,000 commitment that day were given iPads,” he said.
Domestic developers are still keen to use the federal visa program because, in spite of the pomp and circumstance of events such as the one Mr. Rosenburg described, it is still an easier and less expensive method of securing financing than many traditional sources. The added benefit of quicker green cards motivates foreign participants to accept smaller returns on their investment, even as low as less than 1 percent. It appears that even if foreign investor’s money is returned to them and almost nothing more, that the short waiting period for a green card makes it all worth it. In years prior to EB-5’s conception, it was not uncommon for a company to acquire a bank loan and pay roughly 12 percent in interest, “but EB-5 money can be as low as 5 percent,” said Asaf Shuster, the vice president for business development of the Victor Group. “It is a good financing vehicle.” Developers pay the costly immigration agents, as well as legal fees and other expenses, said Mr. Finkelstein, who is advising the Victor Group on 281 Fifth Avenue. The total budget for their project is about $400 million, which calls for “a lot of equity and a big stack of financing,” Mr. Shuster said.
Problems within the program
The program’s popularity has led to some less attractive results, as well. Eager to take advantage of proactive investors, many dishonest developers have been caught too late, having falsified their business plans and abilities in order to obtain funds, failing to complete the project and leaving the investor stranded without their investment or the coveted green card. The risk of fraud is higher within the federal program because, unlike conventional commercial lenders who scrutinize builder credibility, and disburse funds based on a specific construction draw schedule, foreign investors in EB-5 projects deliver the lump sum up front. The developers then have access to all the cash with little incentive to ensure the project is complete, if they are dishonest.EB-5 has not yet caused significant problems in New York City, but with the program’s rising popularity, eager investors, and lack of traditional underwriting of the developers, the problems could begin at any moment.
Lack of Accountability
The lack of accountability and management of the federal visa program also raises concern with critics and program advocates alike. “We would like to see enhanced interagency collaboration,” said Peter D. Joseph, the executive director of Invest in the USA. “It takes a lot of work to make a transparent market and we are continuing to work to improve this.” Invest in the USA proposes increased collaboration among the Department of Homeland Security, which runs EB-5 through its Citizenship and Immigration Services arm, and other government committees and departments. The group has also called for Citizenship and Immigration Services to increase their role by enhancing authority to reject foreign investors and sending regulators to visit development sites. By these two means, the group hopes to decrease instances of fraud substantially on both the developer and investor ends.
Critics also place project locations under scrutiny. According to EB-5, developers are to work on projects in areas where unemployment rates are problematic. However, because developers have a loophole permitting them to include adjoining lower census tracts in their calculations, projects are widely seen in wealthy areas including Midtown, Chelsea, and TriBeCa. For instance, Pacific Park developers were able to incorporate high unemployment figures from Bedford-Stuyvesant and Crown Heights to qualify, although the project is on the border of Brooklyn’s upscale brownstone neighborhoods.
Thoughts From Congress
Congress is expected to address these and other concerns, with parts of EB-5 up for renewal in September. “It is going to be fixed and they will reshuffle the number of visas to make more available,” said Mona Shah, an immigration lawyer who specializes in the visa program, referring to the 10,000 visa quota which has rapidly disappeared in recent program years. Invest in the USA is calling for the $500,000 investment minimum to be raised, which seems likely at this time. The lack of integrity in location selection may also be remedied by the restricting the use of contiguous census tracts in developer calculations. The scope of EB-5 projects in New York would be drastically changed, as most of the larger-scale projects thus far have been in Manhattan, which has few areas of high unemployment that would qualify for the program. Whether changes are added or not, the program could continue for the foreseeable future, because of the diverse groups who stand to benefit from EB-5 and who are willing to lobby for it to stay.
Beeraj Patel, Esq.
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