EB-5 Visas: A Not-So-New Funding Tool

17 Oct

A program created to bring foreign investment to U.S. shores is becoming a more widely used tool to finance development projects. Created by the Immigration Act of 1990, the EB-5 Visa program provides a mechanism for foreign nationals to obtain a green card in exchange for making investments in U.S. businesses.

The program requires individuals to make a $1 million investment (or a $500,000 investment in rural or high unemployment areas) that creates or preserves ten full-time jobs for U.S. workers. Under the program, financers are permitted to make direct investments. But in practice, these investments are generally managed through third-party “regional centers” that facilitate and coordinate multiple investments. In exchange for the investment, investors and their immediate families become eligible to become permanent U.S. residents. The number of EB-5 visas is capped at 10,000 annually.

By 2004, the program had issued over 6,000 visas and generated about $1 billion in investment, according to the Government Accountability Office [PDF]. The news for California has been particularly good, with about 41 percent of the business investments occurring in the state.

In spite of this, the EB-5 program has hit some snags in the course of its 22-year history. The program was suspended for a few years in the late 90s after widespread complaints of fraud. At its pre-recession peak, the program only issued 1,570 EB-5 visas in a single year, well below the 10,000 limit. By 2004, the number had dwindled to just 126.

Still, President Obama signed the EB-5 Regional Center Program Extension, ostensibly because of the program’s job creation potential. The visa program has been a boon to developers who have had trouble securing funding since the onset of the recession. One plus for developers is that foreign nationals are less concerned about rates of return and more concerned with obtaining a path to U.S. citizenship. Thus, developers can offer returns as low as four percent.

Municipalities are getting in on the action by supporting the establishment of regional centers in their cities. These centers are created to facilitate investment in strategic growth sites that have been identified by local governments. The Bay Area Regional Center, for example, provides investors with legal support services and funding opportunities that are “in-line with the economic needs of the community.” The Regional Center has identified projects that were once under the purview of the now shuttered Oakland Redevelopment Agency as potential investment opportunities.

EB-5 funding is also popular among hotel developers, since those projects tend to create direct employment relatively quickly. Los Angeles’ new downtown Marriot Hotel Complex will be partially financed with funds garnered through the EB-5 visa program. In New York the redevelopment of the Knickerbocker Hotel will also be funded, in part, with these funds.

Supporters praise the program for stimulating local investment, but others point out that this is essentially a cash-for-visa program that allows rich foreigners to pay their way to the front of the line, while others are left to “navigate the labyrinth of the U.S. immigration system.” Moreover, the program has been criticized for its tendency to foster short-term job creation. In spite of this, EB-5 appears to be here to stay.

As the program becomes more widely used, mechanisms must be put in place to ensure that investor needs and job creation goals are being met. A senior federal official featured in the New York Times noted “that the program might need more scrutiny.” In New York, it appears that local officials and developers were stretching the program’s rules to create “high unemployment” development zones and qualify for concessions.

As developers and local governments lean on this tool to achieve economic development objectives, we must ensure that the needs of investors and developers are weighed against the visa program’s goal of creating employment opportunities in our communities.

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