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Certain Security
Finding Refuge from Criminal, Economic, and Political Instability through US Investment Visas
By Brian Dickens iUniverse, Inc.
Copyright © 2013 Brian Dickens
All rights reserved.
ISBN: 978-1-4759-8504-7
Excerpt
CHAPTER 1
The Program: What Is EB-5 Immigrant Investment?
US investment-visa programs have been around for a long time. Even the EB-5 program is more than twenty years old, and yet these programs have existed in relative obscurity in the United States until only recently. On a global basis, there is even less awareness. In this first chapter, we'll take a look at the beginnings of the EB-5 program, see how it has grown, and check in on some of the program's recent developments.
Early History
The US Congress established the EB-5 (Employment-Based, Fifth Preference) Immigrant Investor Program in 1990. It is widely believed that the program came about as a result of Canada's success at attracting Hong Kongers—fearful of Chinese Central Government oppression, persecution, and nationalization of assets—when Hong Kong reverted to Chinese control in 1999. While Congress had previously attempted to create immigrant investment programs, the Immigration Act of 1990 was the bill that successfully passed both houses of Congress and earned President George H. W. Bush's signature into law.
The mass exodus from Hong Kong—primarily to major cities like Vancouver and Toronto—created a massive economic boom in those cities and throughout Canada. The expatriated Hong Kongers brought more than just the CN$250,000 required for their visas. They brought the rest of their economy as well. Skyscrapers, luxury homes, and all of the infrastructure needed to support such growth went up seemingly overnight. American leadership felt that the United States should do something to participate in attracting these wealthy investors too.
So in the Immigration Act of 1990, Congress devised a program that would be administered by the Immigration and Naturalization Service—the predecessor of today's US Citizenship and Immigration Services (USCIS)—which would permit a foreign citizen from any country to invest a minimum of US$1 million in a US business, leave that investment fully at risk for at least two years, and create ten permanent full-time jobs for authorized US workers in exchange for permanent resident visas for the investor and the investor's immediate family. Ten thousand visas were set aside each year for the program. The Immigration Act also included a provision to permit a lower investment threshold—US$500,000—in rural areas or preidentified areas with high unemployment called Targeted Employment Areas or TEAs, and three thousand visas were set aside for those investments. The EB-5 Immigrant Investor Program was born.
In 1993, Congress further modified the program by establishing the EB-5 Immigrant Investment Regional Center Pilot Program—which enabled the pooling of many EB-5 investments in regional centers for much larger development projects. Regional centers have the dual benefit of preapproved projects and easier satisfaction of job-creation requirements through the ability to count direct, indirect, and induced job creation using preliminary economic analysis. Congress allocated three thousand visas to investments through regional centers annually.
The EB-5 programs experienced fits and starts in the early years for several reasons. Typically poor marketing and publicity by the US government, along with less-expensive and less-regulated programs in other countries, seemed to limit the US programs' attractiveness. The regional center pilot program even experienced a brief suspension in the late '90s. Still, several million dollars of investment were attracted to early regional centers in Seattle and Los Angeles from Hong Kong, Taiwan, South Korea, and Japan.
The pivotal shot in the arm for the EB-5 program came in 2003 when—to everyone's amazement—the Chinese Central Government announced that it had no objection to its citizens participating in investment-visa and other immigration programs. This announcement sent a wave of enthusiasm and growth through immigrant investment programs all around the globe, but particularly the EB-5 program. China and the US immigrant investment program got up to speed and fully into alignment just in time for the US economic meltdown of 2008.
Rapid Growth
In late 2007, when I began to study the EB-5 program while working for the Idaho Department of Commerce, the USCIS website was only acknowledging the existence of nineteen regional centers nationwide. Of those, perhaps only twelve had been active in the marketplace and had attracted any investment, and only perhaps four of those could be considered truly "successful"—attracting US$10 million or more. During 2008 and 2009, when I was preparing Idaho's first regional-center application and consulting/advising on three additional efforts, the number of approved regional centers swelled to between sixty and ninety. As the US real-estate bubble burst in 2008, many real-estate developers—desperate to recover after losing their shirts in the crash, and unable to get debt financing from the shell-shocked banking industry—discovered EB-5 and glommed onto it like a life preserver in the middle of an oceanic storm. Many recognized the program as an inexpensive and fast process to raise investment capital and save their foundering projects, so they rushed to establish regional centers and gain USCIS approval.
Then, for the beginning of the first federal fiscal quarter of 2010 (October), USCIS imposed a US$6,230 processing fee for EB-5 regional-center applications for the first time. Previously there had been no charge to submit and adjudicate an application. The result was a massive backlog of applications at USCIS, and a 300 to 400 percent increase in the number of regional centers, as the desperation of the real-estate and investment industries combined with a mad dash to beat the September 30 deadline for a "free" regional-center application.
At the time of this writing, the USCIS website acknowledges 243 approved EB-5 regional centers; however, several of those are no longer active. Table 1-1 reflects USCIS's most recent regional- center figures as presented at a 2012 quarterly stakeholder meeting in October. This would seem to indicate that more than thirty regional centers have lost their approved status over the life of the program.
Visits to the websites of active regional centers reveal that they are responsible for a broad variety of industries and projects, ranging from alternative energy to motion pictures, from equity investment funds to ski resorts, from basketball arenas and convention centers to gold mines. The vast majority, however—regardless of their target industry—are some variation on residential or commercial real-estate projects.
I would conservatively estimate that the percentage of truly active and truly "successful" regional centers relative to the total number approved has actually declined by half since 2007. In other words, if twelve out of nineteen (63 percent) were active in 2007 and four out of nineteen (21 percent) were successful, I would estimate that no more than 30 percent are active today (69 out of 230) with 10 percent (23) successful, having attracted more than US$10 million. The actual numbers could be significantly lower. I would attribute the deflated numbers to a strong consolidation of the industry as a few regional-center players have perfected their offerings, their marketing plans, and their processes and have emerged as "investments of choice" in the major Chinese marketplace—making it hard for new players to gain entry. I would also suggest that many of the more recently approved applicants entered the industry without a clue as to what work and investment would actually be required to successfully attract investment to a regional center. Regional centers without a significant bankroll and without a lot of intestinal fortitude usually fold their tent pretty quickly.
With respect to participation by immigrant investors, the EB-5 program remains underutilized. As Table 1-2 reflects, the United States has never approached the ten thousand visas per year allotted to the EB-5 program.
Additionally, USCIS has suggested in public meetings and via memoranda that the ten thousand visas is not a hard quota—that more visas could be allotted to EB-5 annually if they were needed.
Recent Developments
In addition to the continued swelling and contracting of the EB-5 regional-center market, the following sections highlight other recent developments in the industry.
The US$1 Million Threshold
While I would not necessarily call this a recent development, its impact on the EB-5 industry continues to evolve. The provision of US$500,000 EB-5 investments for rural areas and TEAs has rendered US$1 million EB-5 opportunities virtually uncompetitive. Conventional wisdom would suggest that a superior US$1 million investment opportunity should be able to attract investors over a marginal US$500,000 opportunity. It also stands to reason that some of the best business and investment opportunities are going to be in low-unemployment Metropolitan Statistical Areas (MSAs) that are ineligible for the US$500,000 threshold.
In the most mature EB-5 markets, brokers and agents have groomed EB-5 investors to believe that their greatest return on investment (ROI) is the US visa, and therefore to expect low monetary ROIs. As a result, investors are not being attracted by superior investment opportunities in cities with strong economies where the US$500,000 investment is not available. Foreign investors recognize that they derive the same benefits for half of the investment when they invest in a project with rural or TEA status, so they seek out and prefer those opportunities.
Ultimately, it would be better for the US economy if the US$1 million threshold were eliminated, because many more jobs would be created and low-to-average unemployment areas would not be effectively exempted from the program.
The unintended consequence of what was thought to be an incentive to invest in distressed areas has been the wholesale elimination of EB-5 investment in economically strong urban areas. To counter this trend, some states have looked for ways to exercise their TEA designation authority and to increase the number of TEAs where EB-5 projects can locate within some of their MSAs. When localized high unemployment exists in a subregion (census tract) of an MSA, states can succeed with this strategy. Some states, however, will not be able to accomplish this when an MSA's unemployment is more uniform, and these MSAs will remain ineligible for the US$500,000 immigrant investment. Simultaneously, some urban areas that have experienced extensive out-migration and have become distressed, depressed, or even blighted may remain unattractive for EB-5 investment because their unemployment rate does not qualify for TEA status while more affluent areas do qualify, largely through happenstance. These anomalies can and should be addressed through new legislation or rule-making.
US$1 million EB-5 investments do continue to occur occasionally, but they are made almost exclusively through direct EB-5 investments, where investors have a clear idea of the type of business in which they want to invest and where they maintain tighter managerial control of the investment.
A Permanent EB-5 Program
EB-5 is a permanent program, codified in federal regulations (8 CFR 204.6) since 1991, setting aside ten thousand permanent resident visas per year for immigrant investors. Since its inception in 1993, the EB-5 Immigrant Investment Regional Center Pilot Program has been renewed repeatedly—for between one and three years—frequently through Congress's continuing resolution process. In 2012, the House and Senate voted to extend the program through September 30, 2015, and took a small step toward making the program permanent by omitting the word "pilot" from the reauthorization bill's language. Three bills—S-3245, S-642, and H.R.-2972—have been drafted in recent years to permanently reauthorize the program so that the periodic renewals would not be necessary. Although the program has been renewed each time it has "sunset," each sunset seems to send ripples of uncertainty through the industry and the investor marketplace, and a permanent reauthorization would eliminate this periodic instability.
Occupant Tenant Employment
Regional centers, and even some direct EB-5 investment projects (those not made through a regional center), have faced some scrutiny and challenges from USCIS in 2011 and 2012 pertaining to their employment creation. USCIS has taken the position that jobs created by the occupant-tenants of a development project—as opposed to the owners of the project—should not count toward direct employment numbers of the project, and hence should not have employment multipliers applied to them. USCIS prefers to treat occupant-tenant employees as indirect or induced employees. This has severely diminished the overall employment numbers of businesses and projects in some cases and consequently has reduced the number of EB-5 investors that a given project can accommodate. These challenges present a problem for project developers who intend to count the direct employment by businesses that move into the facilities they have built with EB-5 investment dollars.
As an example, a developer who builds, owns, and operates a hotel on a given property would get credit for all of the full-time employees that he proposes to hire, and then an industry jobs multiplier would be used to determine how many indirect and induced jobs those original direct jobs would precipitate. USCIS would give the project credit for the sum total of all of those jobs. Conversely, if a developer builds a hotel for a hotel chain that leases the building and subsequently hires its staff, USCIS has indicated that it will treat those jobs as indirect jobs of the project, and as such, no multipliers would be applied to them in the economic impact analysis. The jobs created by the occupant- tenant hotel chain would not count as direct employment of the project.
While it would seem that USCIS should be pleased with any and all permanent full-time jobs that are facilitated by an EB-5 investment—particularly through a regional center—they have recently expressed a refusal to consider this direct employment unless the original developers of the project actually own the company occupying the facility and hire the workers. This stance seems counterintuitive to a job-creation program, since jobs created by a tenant must certainly be indirect jobs created in the value chain (downstream) of the project developer/owner.
Development of New Markets
While China remains the single largest source of EB-5 investors in US projects, understanding and utilization of the program continues to expand into new markets throughout the world. Essentially, wherever there is some strong motivation to expatriate, the EB-5 and other investment-visa opportunities are attractive. Violent crime, government oppression, run away taxation, economic or political instability, and limited education or employment opportunities all portend a demand for investment-visa programs. Mexico, Central America, South America, Ireland, Spain, Greece, Germany, Egypt, Iran, and Russia have all seen increased interest in US investment-visa programs in recent months and years.
Now that we have some familiarity with the history of EB-5, in chapter 2 we'll dig into the details of the program.
CHAPTER 2
The Details: What Are the Requirements for This Program?
In this chapter, we will examine the detailed requirements of the EB-5 Immigrant Investor Program and its qualification criteria.
Investor Qualifications
Accredited Investor
EB-5 investors must meet the US Securities and Exchange Commission (SEC) definition of an "accredited investor." Accredited investors are deemed to have the education and experience to understand and assume the risk of a given investment and the capacity to absorb any potential loss as a result of that investment. The SEC defines an accredited investor as having at least US$1 million in net worth—excluding the primary home—or an average of either $200,000 per year in individual annual income or $300,000 in household annual income for each of the preceding two years, and an expectation of the same income level in the current year. While I have not seen USCIS apply strict scrutiny to the accredited status of all EB-5 investors, potential investors should provide evidence that they fit some of the criteria listed above.
Clean Money
EB-5 investors must show documentary evidence to prove that their investment funds were derived from legitimate sources. The US Department of Homeland Security, USCIS, and the US State Department work to insure that no monies derived from the drug trade, money laundering, terrorism, or any other illegal activity are invested through investment-visa programs and/or used to grant access to the United States to foreign criminals.
(Continues...)
Excerpted from Certain Security by Brian Dickens. Copyright © 2013 by Brian Dickens. Excerpted by permission of iUniverse, Inc..
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