September Issue: Law & Policy—Framing EB-5 Reform

By Mike Ratliff, Senior Associate Editor

The clock is ticking for the EB-5 Immigrant Investors program. A looming Sept. 30 expiration date marks the first reauthorization opportunity since the program has grown into a vital capital source for commercial real estate.

Since 2007, the number of regional centers arranging EB-5 deals has expanded from 11 to nearly 700. Although the first EB-5 visas were issued in 1993, it took until August 2014 to reach the annual cap of 10,000 visas. This year, the cap was reached in April.

Why the recent surge? The lack of capital during the downturn played a major role.
“In 2008, construction and mezzanine financing evaporated from the capital markets,” said Justin Gardinier, managing director at Greystone and leader of the EB-5 group. “This is when EB-5 took off, and it just hockey-sticked from there.”
Turbulent global economic conditions continue to fuel the fire. Chinese investors comprise more than 90 percent of EB-5 investment, and they are looking for a safe harbor.

“It is not news that China is in an economic slowdown,” said Brian Ward, president of capital markets and investment services at Colliers. “Since our global financial crisis, Chinese investors have amassed huge global wealth, primarily through real estate. Now they are looking to diversify and take that risk off the table. “They tend to know the U.S. well. Maybe their kids are even going to school here. They like the predictability of our markets, and have a drive to put capital into a place that they know and trust as safe.”

Combine the Chinese capital with that flowing from Latin America and the Middle East, and it is no surprise that one of the proposed changes to EB-5 is increased deal volume. In January, Rep. Jared Polis (D-Colo.) introduced the American Entrepreneurship and Investment Act of 2015 (H.R. 616). While the bill would not raise the number of visas issued under the program above 10,000 annually, it proposes to exempt spouses and children of EB-5 immigrants from the limit—significantly expanding the program’s scope.

Polis’ bill got the debate started, but the crux of the issue is now the American Job Creation and Investment Promotion Reform Act of 2015 (S. 1501), introduced in June by Sens. Partrick Leahy (D-Vt.) and Chuck Grassley (R-Iowa). One widely welcomed change would raise the minimum investment in Targeted Employment Areas (TEAs) from $500,000 to $800,000 and in non-TEAs from $1 million to $1.2 million.

Most other proposed modifications address enforcement and reporting, such as giving more authority to the Department of Homeland Security, increasing fraud prevention and requiring more oversight for securities compliance. There are also provisions to speed up the process, which Gardinier pointed out has bogged down in recent years.

Capital Where It’s Needed
To address the purported gerrymandering of Targeted Employment Areas, the Senate bill would tighten the TEA definition. That would funnel more capital to rural areas and cities with high unemployment, as the EB-5 program was originally intended to do. “I think there is a perception that there have been abuses in the past,” said Rick Spees, chair of the government affairs and public policy practice group at Akerman LLP. “But as often happens in Washington, do you decide to throw out the baby with the bathwater?”

Spees said he hasn’t spoken with anyone who suspects that the proposed changes are stalking horses intended to kill the program. But thoughtful reform will take time, which will be hard to come by this month. A late Labor Day and the Iran nuclear deal will probably suck most of the oxygen out of the Capitol Building.
“But the program has proven to be too big and too valuable to let lapse,” added Steven Polivy, chair of Akerman’s economic development and incentive practice. “There is the sense that there is not enough time to properly implement the sweeping changes that the Grassley and Leahy bill envisions.

“I think for now we will see a short-term extension—whether it is 90 days or 180 days—and then we will see more careful legislation with a very wide following once it is eventually adopted.”