For many, America is seen as the land of opportunity, and immigration has always been a major part of the country’s narrative. Policy around the issue, however, is another matter. The people who are permitted to live in the U.S. and the process those individuals must go through to achieve legal resident status have always been hot-button issues — made even more so in the last presidential-election cycle, in which candidates represented diverse immigration views, including separating the U.S. from its neighbors to the south via a wall.
In all of those discussions, however, there has been the underlying reality that those who wish to pursue legal citizenship face a long waiting list. According to a November 2016 State Department report, there were almost 4.5 million people on the immigrant visa waiting list, both family-sponsored and employer-based. Although the number decreased slightly since 2015, it’s well beyond the annual allotment of visas made available each year. According to a report from the Inland Empire Community News, some of the individuals on that list are looking at a potential wait time of between 18 and 33 years.
As with most things in life, however, if one has enough money, sometimes those roadblocks fall away, and, at least in some cases, the same is true of the immigration process. Those who are able to invest big money in American real estate can take advantage of a controversial entry program called the EB-5, or Employment-Based, Program. While the measure has been a boon for some real estate developers, increasingly, lawmakers say that it’s a process vulnerable to abuse.
Key facts of the EB-5 program
Congress established the EB-5 program in 1990, which requires two things of investors seeking a green card, the moniker given to the permanent-residency identification card and its green print. First, the investment, which must be between $500,000 and $1 million, must be put into a qualified commercial enterprise. Second, the enterprise must create or preserve at least 10 full-time jobs for U.S. workers.
When lawmakers first introduced the EB-5 program, they primarily targeted individuals who wanted to come to the U.S. to start their own businesses, according to David S. Jones, partner at Fisher Phillips in Memphis, TN. After they’ve provided proof of their investment and means, they enter the U.S. on a conditional basis and then have two years to create the required number of jobs. After that time, they can apply for permanent residency.
For those individuals, Jones said, the big draw of the EB-5 program is to live the American entrepreneurial dream, with a green card as a bonus. In fact, he said, the system is similar to those in other countries that grant individuals residency on the condition they sink money into the economy by starting a business or by parking retirement funds there. But others, he said, whose priority is bringing their families to live in the U.S. without any particular business aspirations, also have an EB-5 option — the regional center.
Regional centers, according to Rogelio "Roy" J. Carrasquillo, partner at Fox Rothschild in New York City, allow those who wish to take advantage of the EB-5 program an opportunity to invest in U.S. projects without the responsibility of active involvement.
The job creation requirement when investing through a regional center, he said, is indirect, as the center is a sort of clearinghouse for both developers and EB-5 investors, so it has the ability to pool job numbers. The regional center establishes a fund through which it accepts investments and then disburses that money to qualified projects.
Who's investing — and what's at stake
As to who is gobbling up the majority of the 10,000 allotted EB-5 visas each year, that would be one country. "The EB-5 market is dominated by China," Carrasquillo said. He estimated that 90% of all visas issued under the program go to Chinese nationals, although he has seen an increase recently from Brazil, Turkey, India and other countries, a shift attributed to both economic and political unrest.
"You can never guarantee immigration outcome at all."
David S. Jones
Partner at Fisher Phillips
Contrary to popular belief, however, buying into the EB-5 program doesn’t guarantee a green card. One reason, according to Carrasquillo, is that unless someone is starting their own business, EB-5 investments are generally securities offerings, which means there can be no guaranteed payoff.
The investment must remain at risk for at least two years, and that eliminates any promise of residency in the U.S. Also, there could be some previously undisclosed negative information about the investors that isn’t discovered until they are applying for permanent residency.
The underlying potential for fraud
Nevertheless, the program seems to satisfy both those looking for a source of relatively inexpensive financing to add to their development capital stack, as well as those who want to establish a home base in America. So why does it seem like every day there is another story popping up about how the EB-5 program has the potential for fraud and needs more oversight? According to experts, that's likely because the program has the potential for fraud and needs more oversight.
The immigration portion of the program, Carrasquillo said, is subject to plenty of monitoring, but the construction and development aspect of the system has lacked scrutiny thus far. "Too many projects using EB-5 did not have enough oversight, which allowed the developer to use funds inappropriately," he said. Any future revisions to the EB-5 program, he added, will most assuredly include an overhaul in this area. "It needs to provide a level of confidence for investors."
In a particularly egregious example of EB-5 abuse, Seattle-area developer Lobsang Dargey pleaded guilty this month to diverting EB-5 investor funds into his personal accounts so that he could purchase luxury items for his family and friends, as well as moving money into other unqualified projects. Authorities allege that Dargey also misled both investors and the U.S. Citizenship and Immigration Service about his financial status and dealings. He also supposedly guaranteed green cards in exchange for investments, which would be a securities violation and a misrepresentation of how the green card application process works.
"At the end of the day, [the EB-5 program] is really a great tool for developers to make projects viable and reduce the cost of capital. It creates jobs but doesn’t cost the private sector money."
Rogelio "Roy" J. Carrasquillo
Partner at Fox Rothschild
Dargey faces up to 10 years in prison and a $24 million fine. It’s up to the USCIS to determine the fate of more than 200 investors who now have no qualified investment and face the possibility of deportation. "As an attorney, you can never guarantee immigration outcome at all," Jones said.
This is where regional centers come in handy, according to Jones. "A lot of people tend to steer toward regional centers if they don’t have their own business," he said. Legitimate centers are listed with the USCIS, so at least participants know they haven’t handed over what could be a life’s savings to potential criminals. Of course, he said, there’s always the chance the regional center could "fall apart," which drives home the high degree of risk that investors are taking on when they enlist in the EB-5 program.
What's next for the controversial program
So what’s in store for the system under a new U.S. administration? According to Jones, the investment limits will most likely be raised to a range of $800,000 to $1.2 million. There have also been rumblings from legislators that what was intended to provide an economic boost to rural and high-unemployment communities has turned out to be a ready source of funds for rich developers who know how to work the system. And, apparently, some companies are willing to shell out big bucks to ensure the status quo.
The Wall Street Journal reported this week that Related Cos., who reportedly raised $600 million through EB-5 investors to fund the first phase of its $25 billion Hudson Yards development, has spent $1.4 million in lobbying fees to prevent changes that would limit its ability to use the program in the future. In fact, Related officials told The Journal that they think the investment scheme should be expanded.
"At the end of the day, [the EB-5 program] is really a great tool for developers to make projects viable and reduce the cost of capital. It creates jobs but doesn’t cost the private sector money," Carrasquillo said. As for how President-elect Donald Trump will act regarding the regulation, he said the real estate tycoon is likely to understand the benefits and welcome the program.
"I think it will fit into Trump’s plans," he said. Carrasquillo added that the program could see set-asides to encourage foreign investments in infrastructure and rural development as well. However, like a chance at the precious green card, nothing is guaranteed. "We should see a lot of interesting changes, but it’s sort of a crystal ball at this point," he said.
