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 yetthese programs have existed in relative obscurity in the UnitedStates until only recently. On a global basis, there is even lessawareness. In this first chapter, we'll take a look at the beginningsof the EB-5 program, see how it has grown, and check in on someof the program's recent developments.

Early History

The US Congress established the EB-5 (Employment-Based, FifthPreference) Immigrant Investor Program in 1990. It is widelybelieved that the program came about as a result of Canada'ssuccess at attracting Hong Kongers—fearful of Chinese CentralGovernment oppression, persecution, and nationalization ofassets—when Hong Kong reverted to Chinese control in 1999.While Congress had previously attempted to create immigrantinvestment programs, the Immigration Act of 1990 was the billthat successfully passed both houses of Congress and earnedPresident George H. W. Bush's signature into law.

The mass exodus from Hong Kong—primarily to majorcities like Vancouver and Toronto—created a massive economicboom in those cities and throughout Canada. The expatriatedHong Kongers brought more than just the CN$250,000 requiredfor their visas. They brought the rest of their economy as well.Skyscrapers, luxury homes, and all of the infrastructure neededto support such growth went up seemingly overnight. Americanleadership felt that the United States should do something toparticipate in attracting these wealthy investors too.

So in the Immigration Act of 1990, Congress devised aprogram that would be administered by the Immigration andNaturalization Service—the predecessor of today's US Citizenshipand Immigration Services (USCIS)—which would permit a foreigncitizen from any country to invest a minimum of US$1 million ina US business, leave that investment fully at risk for at least twoyears, and create ten permanent full-time jobs for authorized USworkers in exchange for permanent resident visas for the investorand the investor's immediate family. Ten thousand visas wereset aside each year for the program. The Immigration Act alsoincluded a provision to permit a lower investment threshold—US$500,000—inrural areas or preidentified areas with highunemployment called Targeted Employment Areas or TEAs, andthree thousand visas were set aside for those investments. TheEB-5 Immigrant Investor Program was born.

In 1993, Congress further modified the program byestablishing the EB-5 Immigrant Investment Regional Center PilotProgram—which enabled the pooling of many EB-5 investmentsin regional centers for much larger development projects. Regionalcenters have the dual benefit of preapproved projects and easiersatisfaction of job-creation requirements through the ability tocount direct, indirect, and induced job creation using preliminaryeconomic analysis. Congress allocated three thousand visas toinvestments through regional centers annually.

The EB-5 programs experienced fits and starts in the earlyyears for several reasons. Typically poor marketing and publicity bythe US government, along with less-expensive and less-regulatedprograms in other countries, seemed to limit the US programs'attractiveness. The regional center pilot program even experienceda brief suspension in the late '90s. Still, several million dollarsof investment were attracted to early regional centers in Seattleand Los Angeles from Hong Kong, Taiwan, South Korea, andJapan.

The pivotal shot in the arm for the EB-5 program came in2003 when—to everyone's amazement—the Chinese CentralGovernment announced that it had no objection to its citizensparticipating in investment-visa and other immigration programs.This announcement sent a wave of enthusiasm and growththrough immigrant investment programs all around the globe,but particularly the EB-5 program. China and the US immigrantinvestment program got up to speed and fully into alignment justin time for the US economic meltdown of 2008.

Rapid Growth

In late 2007, when I began to study the EB-5 program whileworking for the Idaho Department of Commerce, the USCISwebsite was only acknowledging the existence of nineteen regionalcenters nationwide. Of those, perhaps only twelve had been activein the marketplace and had attracted any investment, and onlyperhaps four of those could be considered truly "successful"—attractingUS$10 million or more. During 2008 and 2009, whenI was preparing Idaho's first regional-center application andconsulting/advising on three additional efforts, the number ofapproved regional centers swelled to between sixty and ninety.As the US real-estate bubble burst in 2008, many real-estatedevelopers—desperate to recover after losing their shirts in thecrash, and unable to get debt financing from the shell-shockedbanking industry—discovered EB-5 and glommed onto it like alife preserver in the middle of an oceanic storm. Many recognizedthe program as an inexpensive and fast process to raise investmentcapital and save their foundering projects, so they rushed toestablish regional centers and gain USCIS approval.

Then, for the beginning of the first federal fiscal quarter of2010 (October), USCIS imposed a US$6,230 processing fee forEB-5 regional-center applications for the first time. Previouslythere had been no charge to submit and adjudicate an application.The result was a massive backlog of applications at USCIS, anda 300 to 400 percent increase in the number of regional centers,as the desperation of the real-estate and investment industriescombined with a mad dash to beat the September 30 deadline fora "free" regional-center application.

At the time of this writing, the USCIS website acknowledges243 approved EB-5 regional centers; however, several of those areno longer active. Table 1-1 reflects USCIS's most recent regional-center figures as presented at a 2012 quarterly stakeholder meetingin October. This would seem to indicate that more than thirtyregional centers have lost their approved status over the life of theprogram.

Visits to the websites of active regional centers reveal that theyare responsible for a broad variety of industries and projects, rangingfrom alternative energy to motion pictures, from equity investmentfunds to ski resorts, from basketball arenas and convention centersto gold mines. The vast majority, however—regardless of theirtarget industry—are some variation on residential or commercialreal-estate projects.

I would conservatively estimate that the percentage of trulyactive and truly "successful" regional centers relative to the totalnumber approved has actually declined by half since 2007. Inother words, if twelve out of nineteen (63 percent) were activein 2007 and four out of nineteen (21 percent) were successful,I would estimate that no more than 30 percent are activetoday (69 out of 230) with 10 percent (23) successful, havingattracted more than US$10 million. The actual numbers couldbe significantly lower. I would attribute the deflated numbers toa strong consolidation of the industry as a few regional-centerplayers have perfected their offerings, their marketing plans, andtheir processes and have emerged as "investments of choice" inthe major Chinese marketplace—making it hard for new playersto gain entry. I would also suggest that many of the more recentlyapproved applicants entered the industry without a clue as to whatwork and investment would actually be required to successfullyattract investment to a regional center. Regional centers withouta significant bankroll and without a lot of intestinal fortitudeusually fold their tent pretty quickly.

With respect to participation by immigrant investors, theEB-5 program remains underutilized. As Table 1-2 reflects, theUnited States has never approached the ten thousand visas peryear allotted to the EB-5 program.

Additionally, USCIS has suggested in public meetings andvia memoranda that the ten thousand visas is not a hard quota—thatmore visas could be allotted to EB-5 annually if they wereneeded.

Recent Developments

In addition to the continued swelling and contracting of the EB-5regional-center market, the following sections highlight otherrecent developments in the industry.

The US$1 Million Threshold

While I would not necessarily call this a recent development, itsimpact on the EB-5 industry continues to evolve. The provisionof US$500,000 EB-5 investments for rural areas and TEAs hasrendered US$1 million EB-5 opportunities virtually uncompetitive.Conventional wisdom would suggest that a superior US$1 millioninvestment opportunity should be able to attract investors overa marginal US$500,000 opportunity. It also stands to reasonthat some of the best business and investment opportunities aregoing 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 havegroomed EB-5 investors to believe that their greatest return oninvestment (ROI) is the US visa, and therefore to expect lowmonetary ROIs. As a result, investors are not being attracted bysuperior investment opportunities in cities with strong economieswhere the US$500,000 investment is not available. Foreigninvestors recognize that they derive the same benefits for half ofthe investment when they invest in a project with rural or TEAstatus, so they seek out and prefer those opportunities.

Ultimately, it would be better for the US economy if the US$1million threshold were eliminated, because many more jobs wouldbe created and low-to-average unemployment areas would not beeffectively exempted from the program.

The unintended consequence of what was thought to be anincentive to invest in distressed areas has been the wholesaleelimination of EB-5 investment in economically strong urbanareas. To counter this trend, some states have looked for waysto exercise their TEA designation authority and to increase thenumber of TEAs where EB-5 projects can locate within someof their MSAs. When localized high unemployment exists in asubregion (census tract) of an MSA, states can succeed with thisstrategy. Some states, however, will not be able to accomplish thiswhen an MSA's unemployment is more uniform, and these MSAswill remain ineligible for the US$500,000 immigrant investment.Simultaneously, some urban areas that have experienced extensiveout-migration and have become distressed, depressed, or evenblighted may remain unattractive for EB-5 investment becausetheir unemployment rate does not qualify for TEA status whilemore affluent areas do qualify, largely through happenstance.These anomalies can and should be addressed through newlegislation or rule-making.

US$1 million EB-5 investments do continue to occuroccasionally, but they are made almost exclusively through directEB-5 investments, where investors have a clear idea of the type ofbusiness in which they want to invest and where they maintaintighter managerial control of the investment.

A Permanent EB-5 Program

EB-5 is a permanent program, codified in federal regulations (8CFR 204.6) since 1991, setting aside ten thousand permanentresident visas per year for immigrant investors. Since its inceptionin 1993, the EB-5 Immigrant Investment Regional Center PilotProgram has been renewed repeatedly—for between one andthree years—frequently through Congress's continuing resolutionprocess. In 2012, the House and Senate voted to extend theprogram through September 30, 2015, and took a small steptoward 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 yearsto permanently reauthorize the program so that the periodicrenewals would not be necessary. Although the program hasbeen renewed each time it has "sunset," each sunset seems tosend ripples of uncertainty through the industry and the investormarketplace, and a permanent reauthorization would eliminatethis periodic instability.

Occupant Tenant Employment

Regional centers, and even some direct EB-5 investment projects(those not made through a regional center), have faced somescrutiny and challenges from USCIS in 2011 and 2012 pertainingto their employment creation. USCIS has taken the position thatjobs created by the occupant-tenants of a development project—asopposed to the owners of the project—should not count towarddirect employment numbers of the project, and hence should nothave employment multipliers applied to them. USCIS prefers totreat occupant-tenant employees as indirect or induced employees.This has severely diminished the overall employment numbersof businesses and projects in some cases and consequently hasreduced the number of EB-5 investors that a given project canaccommodate. These challenges present a problem for projectdevelopers who intend to count the direct employment bybusinesses that move into the facilities they have built with EB-5investment dollars.

As an example, a developer who builds, owns, and operates ahotel on a given property would get credit for all of the full-timeemployees that he proposes to hire, and then an industry jobsmultiplier would be used to determine how many indirect andinduced jobs those original direct jobs would precipitate. USCISwould give the project credit for the sum total of all of thosejobs. Conversely, if a developer builds a hotel for a hotel chainthat leases the building and subsequently hires its staff, USCIShas indicated that it will treat those jobs as indirect jobs of theproject, and as such, no multipliers would be applied to them inthe economic impact analysis. The jobs created by the occupant-tenant hotel chain would not count as direct employment of theproject.

While it would seem that USCIS should be pleased with anyand all permanent full-time jobs that are facilitated by an EB-5investment—particularly through a regional center—they haverecently expressed a refusal to consider this direct employmentunless the original developers of the project actually own thecompany occupying the facility and hire the workers. This stanceseems counterintuitive to a job-creation program, since jobscreated by a tenant must certainly be indirect jobs created in thevalue chain (downstream) of the project developer/owner.

Development of New Markets

While China remains the single largest source of EB-5 investorsin US projects, understanding and utilization of the programcontinues 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, economicor political instability, and limited education or employmentopportunities 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 interestin 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 Requirementsfor This Program?

In this chapter, we will examine the detailed requirements of theEB-5 Immigrant Investor Program and its qualification criteria.

Investor Qualifications

Accredited Investor

EB-5 investors must meet the US Securities and ExchangeCommission (SEC) definition of an "accredited investor."Accredited investors are deemed to have the education andexperience to understand and assume the risk of a given investmentand the capacity to absorb any potential loss as a result of thatinvestment. The SEC defines an accredited investor as having atleast US$1 million in net worth—excluding the primary home—oran average of either $200,000 per year in individual annualincome or $300,000 in household annual income for each of thepreceding two years, and an expectation of the same income levelin the current year. While I have not seen USCIS apply strictscrutiny to the accredited status of all EB-5 investors, potentialinvestors should provide evidence that they fit some of the criterialisted above.

Clean Money

EB-5 investors must show documentary evidence to prove thattheir investment funds were derived from legitimate sources. TheUS Department of Homeland Security, USCIS, and the US StateDepartment work to insure that no monies derived from the drugtrade, money laundering, terrorism, or any other illegal activityare invested through investment-visa programs and/or used togrant access to the United States to foreign criminals.