Most economists, government officials and business developers readily agree that commercial real estate and infrastructure development projects heavily contribute to a region's economic growth. Take as an example the aggressive rise of such projects in the gulf cities of Dubai and Abu Dhabi, United Arab Emirates; Doha, Qatar; and Riyadh, Saudi Arabia. Drive around any of these cities and you cannot help but admire the sight of towering cranes rising above large-scale construction projects. However, whereas these cities are awash with capital but lack adequate access to an appropriate labor force, mature U.S. markets maintain an abundant supply of an unemployed labor force while lacking access to affordable capital. Even though construction spending in the United States recently hit its highest level in four years, access to developer financing continues to temper the pace of the industry's post-recession recovery.
EB-5 to the Rescue
The EB-5 immigrant investor program has become one of the most popular forms of alternative financing. Under the program, each investor invests $500,000 (in rural areas or areas with higher than average unemployment) or $1 million (everywhere else) into a project. The principal criteria are that the investor's capital infusion must create at least 10 jobs for U.S. workers, and maintain those jobs for two years or more. If these criteria are met, the investor and his or her immediate family receive permanent residence (a green card), allowing them to live in the United States (and incorporating their worldwide income into the U.S. tax system).
There are two types of EB-5 structures: direct (or individual) projects, in which the investment must create at least 10 jobs itself, and regional center-based projects, in which several investors combine their investments into much larger projects with significant direct and indirect job-creation benefits. The latter is currently the preferred structure and as of today, approximately 350 existing regional centers are spread around the country.
The program falls under the purview of the U.S. Citizenship and Immigration Services (USCIS). Currently, up to 10,000 green cards are available to investors each year.
While the program has existed since 1990 (the regional center pilot program since 1992), its popularity only exploded after traditional financing sources dried up during the economic downturn. For example, in fiscal year 2005, USCIS received just 332 petitions requesting EB-5 classification; however, in fiscal year 2012, it received 6,041 petitions (almost double the previous year's applications). Of this number, nearly 80 percent of the applications originated from China while the remaining approximate 20 percent came from a mix of South Korea, Iran, the United Kingdom, Mexico, Venezuela, India and a host of other countries.
Between fiscal years 2005-12, an EB-5 trade group estimates that more than $4.7 billion was raised through the EB-5 program and more than 95,000 jobs have been created. EB-5 dollars have been poured into the development of hospitals, medical research facilities, manufacturing plants, mixed-use real estate, restaurants, and even into large infrastructure and construction projects such as harbors, neighborhood developments and bridges. In Philadelphia itself, EB-5 dollars have been used in the construction of the Pennsylvania Convention Center, Comcast Center, Temple Health building and even Southeastern Pennsylvania Transportation Authority projects, to name a few.
EB-5 Investors — from whence they come
Given the popularity of the EB-5 program among Chinese citizens, U.S. developers have largely focused their marketing efforts in China. The success of EB-5 in China largely relates to the sophisticated network of migration agents and their connections to the wealthy Chinese class. Yet, a looming and rather complicated visa quota may take effect in the next fiscal year, possibly causing the Chinese investment market to begin losing some of its appeal.
This author strongly champions India as the next big EB-5 market. While it is true that many Indian citizens migrate to the United States each year on a variety of different visa programs, traditionally, Indian EB-5 investors have generally represented only 1 to 2 percent of the annual EB-5 group. There are several reasons.
First, unlike China, India does not have the sophisticated and connected network of migration agents equipped with information on the EB-5 program. Second, unlike China — where EB-5 investors are keen on emigrating (with the entire family) to the United States, wealthy Indian citizens are typically not as anxious to make the move. These potential investors are accustomed to a standard of luxury that far outstrips what would be within their grasp in the United States. The feeling is that India, despite its current economic woes that have further been exacerbated by political uncertainty surrounding the looming elections, remains a great place to live. Last, wealthy Indians are not keen on falling under the Internal Revenue Service's jurisdiction.
Yet, none of these hurdles are fatal for the Indian EB-5 market. While it may take a couple of years to develop a network of migration agents, it is relatively easy for U.S. developers to connect with existing migration specialists and educate them on the EB-5 program. One of the greatest advantages is that whereas developers often struggle with the language barrier in China, they can easily navigate the Indian investor market where English (one of the 23 constitutionally recognized languages) is a common medium of communication.
The tax concerns and general reluctance to migrate to the United States can also be overcome. Most wealthy Indians send their children on student visas (F-1 visas) to American universities. The F-1 visas are generally valid for the duration of the university course. However, following graduation, if these children wish to earn a few years of work experience at American firms (generally a favored path) prior to returning to India or even eventually to settle within the United States, visa options are limited, subject to quotas and difficult to acquire. EB-5 is a great alternative. The wealthy parent can "gift" the child the capital funds to invest in an EB-5 project. Once the child receives a green card, the child will not only be subject to lower tuition rates (international students often pay higher tuition fees) but the child will be free from the visa concerns post-graduation. Meanwhile, only the child, not the parent, will be subject to the U.S. tax system. U.S. developers should begin making connections with the large pool of potential EB-5 Indian investors.
Criticisms Abound, But Fall Short of Substance
The increasing popularity of the EB-5 program has not been without its share of scandals and critics. Current USCIS Director Alejandro Mayorkas was recently nominated by President Obama to take the position of deputy secretary of the U.S. Department of Homeland Security. Unsurprisingly, given the sensitivity of the post, Mayorkas has found himself the target of political attacks. His detractors have alleged that he personally intervened in a case involving Anthony Rodham (former Secretary of State Hillary Clinton's brother) and Terry McAuliffe (former chairman of the Democratic National Committee and current Democratic nominee for governor of Virginia) to push an EB-5 petition through back channels. It is alleged that Mayorkas succumbed to pressure from McAuliffe, who, as principal of GreenTech Automotive, was filing an EB-5 petition under Rodham's regional center. Mayorkas is alleged to have improperly expedited the petition that was initially rejected by USCIS's adjudicators.
However, it is generally accepted within the EB-5 community that Mayorkas has staunchly adhered to a policy of noninterference in individual cases. In fact, under his competent direction, the EB-5 program has greatly expanded and USCIS's oversight has markedly increased. For example, Mayorkas has been focused on enhancing regulation and cooperation with federal agencies such as the U.S. Securities and Exchange Commission to ensure that EB-5 investment projects receive appropriate review for possible violations of federal laws. Earlier this year, a critical success story emerged from a joint task force between USCIS and the SEC. The SEC pursued an action against the Intercontinental Regional Center Trust of Chicago and its principal, Anshoo Sethi. Sethi is alleged to have made materially false and misleading statements that duped 250 foreign investors into making a total $145 million EB-5 capital investment (plus an additional $11 million in administrative fees) into a non-existent hotel and convention center project. Fortunately for the investors, because of the SEC's quick action to freeze the funds, all 250 have since been returned their respective investments.
Mayorkas has also stepped up the review process of EB-5 projects. While U.S. developers sometimes get frustrated with the painstaking detail with which USCIS reviews each project, what is abundantly clear is that the agency is taking a cautious path to the approval process. Following receipt and review of an EB-5 petition, the agency regularly issues requests for evidence (RFE) prior to approving or denying the case. Common RFE issues relate to requests for supporting documentation for revenue, job creation or construction timeline projections. A U.S. developer cannot simply get away with sloppy project documents that envisage unreasonable and unattainable project goals. Under Mayorkas, the RFE rates have increased and it is clear that the integrity of the EB-5 program is taken very seriously.
Nevertheless, in an effort to address criticisms within the EB-5 community that USCIS project approvals are taking increasingly longer, Mayorkas reorganized the EB-5 function within USCIS and created a specialized EB-5 unit from the California Service Center (famously viewed as being unfriendly to EB-5) to Washington, D.C. He further appointed Dan Renaud and Robert Coxe, two successful administrators, to oversee and train a group of new economists and adjudicators within the new EB-5 headquarters. In the last four months, the effects of the positive changes have been evident. While there was previously a backlog of petitions stuck within the review process, the clog is slowly but surely being unhinged.
Last, in an effort to address USCIS's fluctuating policies, Mayorkas pushed through a written and binding EB-5 adjudications policy memorandum May 30. This 27-page document outlines USCIS's interpretation of the regulations and provides greater insight into the rigorous standards that the agency is applying to EB-5 project petitions.
There will always be critics but no one can deny the positive impact Mayorkas has had on the 23-year-old EB-5 program. His overhaul of the EB-5 program has strengthened its stance. The world of EB-5 can be somewhat complicated, but it is well worth it.
EB-5 is here to Stay
In an effort to manage the EB-5 boom, USCIS has stepped up scrutiny on all EB-5 projects. Obama also signed SB 3245 last fall, ratifying the sixth consecutive three-year reauthorization of the EB-5 regional center program. There is even hope that the pending immigration overhaul will make the program permanent. Collectively, these moves signal that EB-5 is here to stay and will continue to be an alternative financing tool for U.S. developers. With multiple development projects in the works in Philadelphia, developers just might find themselves seeking EB-5 financing along the way.
Rohit Kapuria is an associate in the Philadelphia office of Klasko, Rulon, Stock & Seltzer and a member of the firm's EB-5 practice. He currently represents developers and foreign investors under the EB-5 program. He can be reached at 215-825-8639 or email@example.com.