The continuing resolution that President Obama signed into law on September 30, 2015, that averted the federal shutdown included a critical extension of the EB-5 Regional Center Program.
The extension for the Regional Center Program permits immigrant investors to continue to file EB-5 petitions through a Regional Center under the current investment threshold. In addition to extending the current program to December 11, 2015, this temporary reprieve provides additional time for Congress to consider a long-term reauthorization bill that would include reforms to the current eligibility requirements. Prior to the sun-setting of the program, there was much debate in Congress over changes that are believed needed to strengthen federal oversight and the integrity of the program. Although most practitioners in the EB-5 arena believe a permanent reauthorization is likely, it is also believed there will be changes that will impact both individual investors as well as developers and Regional Centers.
What Is the EB-5 Immigrant Investor Program?
Congress initially created the EB-5 immigrant investor program in the Immigration Act of 1990 in the hopes of attracting foreign capital to the U.S., creating jobs for American workers in the process. In 1993, Congress amended the program by allowing for "regional centers" located in a Targeted Employment Area ("TEA") to promote "economic growth" through the creation of jobs and "increasing domestic capital investment." Often termed "Economic Citizenship," the EB-5 program provides a mechanism for foreign nationals to invest in the U.S., create jobs, and ultimately receive U.S. lawful permanent residence (a green card). The United States is one of many nations that have created a regulatory scheme that used immigration as a way to infuse capital into its economy. There are two methods to pursue permanent residence through the EB-5 Program. Under the first, a foreign investor must invest one million dollars into a new commercial enterprise that will hire at least 10 U.S. workers. The second method allows the investor to invest in Regional Center projects located in a TEA (high unemployment or rural areas), reduces the investment threshold from one million to $500,000, and allows for indirect and induced jobs to count towards the job creation requirements. The EB-5 Program was not being widely utilized until approximately six years ago, when United States Citizenship and Immigration Services ("USCIS") changed its interpretation on how construction jobs could count toward the job creation requirements. Once the interpretation of construction jobs changed, real estate developers started to aggressively use the program to secure investment capital. Regional Center projects have been used extensively by developers over the past several years, and the foreign capital attracted has been a major source of funding for some of the largest development projects across the United States. EB-5 Regional Center investments have helped finance the construction of a New York sports arena, the Philadelphia Convention Center, and a Vermont ski resort and waterpark; helped provide financing for a Hollywood movie studio; and even financed the construction of the FBI office building in San Diego. The impact to the U.S. economy has been dramatic. A report by U.S. Policy Metrics and Hamilton Place Strategies indicates that between 2005 and 2013, the EB-5 Program generated a minimum of $5.2 billion in private investment. Estimates on the amount of jobs created through EB-5 investments reach upwards of 131,000.
Criticism of the EB-5 Program
Last year, ABC news reporter Brian Ross ran a series of investigative articles concerning the EB-5 Program. Mr. Ross focused on what he deemed to be weaknesses in the program's vetting of the individual investors and whether permitting foreign investors into the United States posed national security concerns. In addition, a recent Government Accountability Office ("GAO") report was critical of the EB-5 Program. The report, "Immigrant Investor Program: Additional Actions needed to Better Assess Fraud Risks and Report Economic Benefits," resulted in Senator Charles Grassley (R-IA), Chair of the Senate Judiciary Committee, saying, with respect to the Regional Center Program, that the status quo was not acceptable and legislation to reform the program was needed. The negative coverage of the EB-5 Program and the overall polarization of immigration in general started to culminate right as the Regional Center Program was coming to a sunset. As September 30, 2015, approached, there were several proposed bills being discussed that would make significant changes to the program. One bill, the EB-5 Reauthorization and Reform Bill, was introduced by Grassley and Judiciary Committee Ranking Member Patrick Leahy (D-VT). The House reauthorization bill was introduced by Representatives Mark Amodei (R-NV) and Jared Polis (D-CO).
The next two months leading up to December 11, 2015, will surely see a continued push for action on reauthorizing and reforming the Regional Center Program. The changes will be hotly debated in Congress as well as in public forums. But it is hard to see any permanent reauthorization without several areas of the program receiving significant changes.1
Raising the Investment Thresholds
A lot of the debate regarding the EB-5 Program has centered on the amount of investment required in order to use the program. As stated above, the current regulations require a foreign investment of either one million dollars, or $500,000 if going into a TEA. Several of the proposals for reforming the program have suggested increases in the threshold investments—taking the one million up to $1.2 million, and the $500,000 for TEAs to $800,000. Program proponents have argued that any increase in capital investment requirements will result in fewer investors being attracted to the program, and thus less money being injected into the economy to spur development and create jobs. Others argue that the raise in capital investment requirements will only make the U.S.'s program more competitive with other countries that have an "Economic Citizenship" program, like the U.K. (which requires two million British Pounds—or approximately three million U.S. dollars), and Canada (requires two million Canadian dollars or approximately $1.5 million U.S. dollars).
Defining What Constitutes TEAs
Another area that has received focus by Congress and detractors is the use of the TEAs in order to qualify for the lower investment threshold. When Congress created the program, it was intended to help high unemployment areas, as well as to spur development and investment in rural areas that do not often receive a major influx of international investment. Under the current regulations, each state is able to make TEA determinations and have different criteria on establishing that a given EB-5 project is within the TEA. As many of the well-known and large-scale EB-5 projects have been in Manhattan, Los Angeles, and Miami, regulators are questioning whether to continue to let states make this determination. Many believe Congress will "federalize" the TEA standards and/or include additional efforts to have the funds placed in rural investments. Others point to the fact that foreign investors are more inclined to invest in well-publicized projects in major cities, which they may have visited or are otherwise more familiar to them than other cities.
Increased Financial Disclosure and Source of Funds Scrutiny
Developers and projects seeking EB-5 funding will likely be required to disclose much more information about how the EB-5 investment capital is being utilized. There have also been suggestions that the program should include provisions prohibiting the use of EB-5 funds by developers and others with criminal backgrounds. Investors also will likely be subjected to more scrutiny, including even more disclosure and evidence as to their "source of funds," to ensure they were obtained lawfully. One congressional proposal would even limit the sources of funds—like eliminating monetary gifts from a friend.
Proponents of these changes have argued that they will only strengthen the program by eliminating opportunities for fraud or misuse of the investment funds, and ensuring that foreign investors are not using the program to launder illicit money and do not have ties to unsavory organizations.
Over the next two months we will certainly witness a debate, at times vitriolic, regarding the weaknesses and benefits of the EB-5 Program. Many are hopeful that a Regional Center reauthorization and reform bill will be passed prior to the end of the extension, December 11, 2015. If that does not occur, the future of the program is unclear and tied up in whether Congress can reach an agreement on spending priorities and pass an Omnibus appropriations bill in December, or another Continuing Resolution to avoid a government shutdown later this year. Whenever Congress does reauthorize the EB-5 Program, the hope is that it will be a permanent reauthorization, and one in which the reforms do not limit or impede the huge economic impact the program has generated for the U.S. economy.
1 On November 6, 2015, Senators Charles Grassley, Chairman of the Committee on the Judiciary, Bob Corker, Chairman of the Committee on Foreign Relations, and Ron Johnson, Chairman of the Committee on Homeland Security and Government Affairs, sent a letter to Senate Majority Leader Mitch McConnell and Minority Leader Harry Reid opposing a straight reauthorization of the EB-5 Regional Center Program.
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