Make EB-5 REALLY Work

Make EB-5 REALLY Work

Is PII “selling citizenship”? Is the current “at risk” EB-5 program really that different? I believe that the removal of “at risk” from PII would not be a great philosophic change from the existing EB-5 Investment Program.

The EB-5 program is a job-creating investment program that can lead to permanent residence for a foreign investor. There are two main concepts underlying the EB-5 program:

1) Job-creating economic stimulus program.
a. An investor must invest
i. $500,000 in a Targeted Employment Area, located in a specified rural or high unemployment area; or
ii. $500,000 in a Regional Center; (A regional center is defined as any economic unit engaged in the promotion of economic growth, improved regional productivity, job creation and increased investment. A regional center must be approved by US Citizenship and Immigration Services before it can accept investors and must explain how the investments it will accept will translate into job creation for US workers.); or
iii. $1,000,000 in any project.
b. Each investment must cause the creation of at least 10 new jobs or the 40% expansion of an existing business.
2) Vulnerability of the investment
a. All investment must be “at risk”, meaning that there can be no guaranteed return on investment.

The logic behind the second concept arises from the belief that, as a great and prosperous nation, the United States should not deign to sell citizenship to the highest bidder. Therefore, the EB-5 program comes with no guarantee as to the success of any particular investment venture.

THE EB-5 PROGRAM HAS BEEN A GREAT SUCCESS IN THE GOAL OF ECONOMIC STIMULUS. Real estate projects, ski and summer resorts, meat processing plants are examples of how EB-5 funds have been invested and have created jobs in the localities where these commercial ventures are located, as per CNN Money.

Economist Dr. Scott Barnhart published a study in EB-5 Investors Magazine on October 23, 2013 illustrating that 6000 visas issued through the EB-5 program would result in a $3.8 billion accretion of the GDP, with $532 million paid in Federal taxes, and $371 million in state and local taxes.

Note that the focus of these investments is on commercial ventures, even if a state or municipality is running a regional center. For example, the state of Vermont’s regional center is a major funder of Jay Peak, an all season resort in northern Vermont. The State of Michigan, has only recently created its own regional center, and should be focusing on real estate redevelopment and manufacturing projects. What do all of these projects have in common? They are all for profit commercial ventures; to truly maximize the benefit of the EB-5 Program, drafters should consider reexamining the philosophic underpinning of the EB-5 Program. If the goal is to bring foreign capital into the United States to the benefit of our economy, then a mechanism to more directly accomplish this should be created. What I propose is an additional EB-5 investment vehicle called the Public Infrastructure Investment (PII).

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Under this program, a minimum investment such as $1M would be required as an investment in a project run directly by a local, state or Federal agency. These projects could be for bridge reconstruction, a new school complex, a mass transit expansion or other major infrastructure projects. The benefits of investments in these types of municipal projects are two-fold:

1) These types of investments create long-term economic and safety benefits to an area,
2) These types of investments are not developed to provide an economic return to an investor.

It should be noted that the EB-5 investors typically do not enter into the program with the expectation of a market rate return such that they might expect to receive through a more conventional investment that does not offer an immigrant benefit. The rate of return on existing EB-5 investments is typically below market rate: a sign that investors are not participating in the EB-5 program for pecuniary gain. It is the expectation of the grant of permanent residence that makes the program so appealing, not Return on Investment.

Under PII, in exchange for the invested funds not being put at risk, an EB-5 investor would be guaranteed permanent resident status for himself and his family, subject only to criminal, immigration and national security background checks. Further, it would be possible to structure this PII program so that the EB-5 investors would be guaranteed their principal to be returned in full, minus a certain percentage of the investment, perhaps 5% after five years, in exchange for a grant of resident status for themselves and their families.

The benefit to the United States would be that government entities would be paying negative interest on short term loans dedicated to capital improvements.

The percentage of EB-5 investors who have lost all or part of their investments in legitimate projects is extremely low. For example US Citizenship and Immigration Services published statistics showing that in 2013 3,699 petitions were approved for immigrant investors for conditional resident status; only 943 were denied. Therefore, over 79% of the cases were approved for the initial two year period. Similarly, 844 petitions were approved in 2013, removing the conditional status and granting permanent resident status, while only 44 were denied; this is a 95% approval rate. These rates indicate that the “at risk” investment factor is not ultimately significant.

Is PII “selling citizenship”? Is the current “at risk” EB-5 program really that different? I believe that the removal of “at risk” from PII would not be a great philosophic change from the existing EB-5 Investment Program. Funds invested under the PII would be a more direct stimulus on the economy than the current EB-5 Investment Program in that they would not only create jobs, they would create public benefit—something missing as a primary focus of the existing EB-5 Investment Program.

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