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Preview of Potential Changes to EB-5 Immigration Program: Source of Financing for Construction and Hospitality Projects

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July 14, 2015

By: Tejas Shah, Jeff Nowak and John Swinney*

With the impending expiration of the Immigrant Investor Visa Program, also known as EB-5, in September, bipartisan legislation has been proposed in Congress to renew and improve the Program. The proposed changes could significantly impact the attractiveness of the program to investors, particularly in certain parts of the country. The following overview describes the proposed changes to this important immigration program which has provided billions of dollars in financing for hospitality, real estate, and other sectors in the United States over the past decade. 

What is EB-5? 

Originally drafted in 1990, the EB-5 Program aims to stimulate the U.S. economy through job creation by foreign investors. The Program achieves this goal by offering permanent residency to wealthy foreigners willing to invest capital in the U.S. market that meets certain criteria. As the Program currently stands, three routes are available to investors to obtain a visa: 

Investments Made in Targeted Employment Areas (TEAs):

  1. Must invest at least $500,000 in a commercial enterprise and create 10 full time jobs for two years.
  2. Must maintain some leadership role in that enterprise.
  3. Must invest in a Targeted Employment Area: (A partial list is available online)
    1. Geographic areas with unemployment rates of at least 150% the national average.
    2. Rural areas—any area outside a metropolitan area or outside the boundary of any city or town of more than 20,000 people.
    3. Limited by the 10,000 visa restriction (3,000 of which are solely reserved for TEAs)

 Investments Made in Non-TEAs:

  1. Must invest at least $1,000,000 and create 10 full time jobs, for two years, in:
    1. An enterprise established after November 29, 1990, or
    2. An enterprise that was established before said date and is re-organized or expanded such that 
            • A new enterprise results, or    
            • A 40% increase in net worth or number of employees occurs.
  2. Must maintain some leadership role in that enterprise.
  3. Limited by the 10,000 visa restriction (3,000 of which are solely reserved for TEAs)

Investments through Regional Centers:

  1. Investor may invest in a Regional Center rather than a specific enterprise.
    1. The Regional Center then distributes the funding to large-scale projects in coordination with development agencies.
    2. At least 10 jobs must be made either directly or indirectly from an investment in a Center.
    3. Required investment will depend on the location of the project the Center is funding.

List of regional centers available through USCIS

EB-5 and Development

The Program has proven widely successful. In recent years, due in part to the Great Recession, international demand to participate in the Program has soared. Last year’s demand was triple that of 2011 and over seven times the demand of 2008. Domestically, over the past nine years, almost $9 billion have been invested through EB-5 financing. The area that has seen the most EB-5 capital, however, has been development—specifically in the hospitality sector. 

An investor seeking to participate in the EB-5 Program is focused, generally, on obtaining a visa. Thus, at the time of investment, the investor is less concerned with seeing large profits and more so on satisfying the requirements of the Program. Because obtaining a visa is the Program’s primary motivator, EB-5 funding provides a lower-cost investment alternative to traditional bank loans. 

EB-5 financing for real estate and hotel construction began to take off in 2008, when domestic funding for development was difficult to acquire. Wealthy foreign investors, primarily looking to obtain a visa, provided an alternative source of capital for independent and small hotel developers. Large-scale development through the EB-5 Program remained possible through Regional Centers. Because these Centers gather investments from multiple investors, they provide the market with a pool of money able to be organized towards large projects. Hotel chains, such as Marriott, have capitalized on this EB-5 money to construct new branches across the country. Even though traditional sources of funding for construction are more readily available as a result of the economic recovery, many developers prefer EB-5 investments due to the investment’s low repayment costs. 

What Are the Proposed Changes?

The proposed 2015 EB-5 amendments could result in significant changes to the program. First, under current law, TEAs are determined at the state or local level by bundling various data. But, proposed amendments would require TEAs to be calculated using a single national census tract on unemployment rates. This would mean, for example, that a project in downtown Chicago that could have otherwise bundled nearby census tracts with higher unemployment rates and thereby qualified as a TEA would no longer qualify to do so. In short summary, the proposed amendments would disallow the classification of high employment areas as TEAs regardless of the investment’s impact on surrounding high unemployment areas. Fundamentally, EB-5 investments in TEAs are attractive to investors because the return, a visa, is obtained at a lower cost in those areas. The inability to designate TEA zones could cause some cities or states to lose a competitive edge in obtaining EB-5 investments. 

On a lesser scale, the proposed legislation would also increase the base investment required to obtain a visa. Under the proposed changes, the base investment for a TEA would increase to $800,000 while non-TEA investments would require $1.2 million. However, these increases are unlikely to have a large impact on the EB-5 program due to high demand and the wealth of investors pursuing this immigration option. Other possible changes to the program include increasing USCIS’s ability to revoke an EB-5 visa for security concerns and providing increased protections for investors. 

In Conclusion

While the proposed increase in investment requirements will likely prove inconsequential, the changes to the process of calculating a TEA might adversely impact the flexibility of the program. By solely determining targeted areas through unemployment statistics, states will be disallowed from viewing the ripple effects of development to determine if an investment may qualify for the lower TEA capital investment amount. These changes are still only proposed, however, and we will not know their impact until final decisions are made and implemented. Yet, while proposed changes may make qualifying for a TEA investment more difficult and impact the appeal of certain regions to an investor, the EB-5 Program is likely to remain a viable and inexpensive source of funding for development, especially within the fields of real estate and hospitality 

* John Swinney is currently a first-year law student at University of Notre Dame Law School and is a Franczek Radelet LEADS Fellow.

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