The burning question on the table when the EB-5 regional center program comes up before Congress for renewal this fall, concerns the likelihood of an increase in the qualifying investment that may be made to the program. Renewal itself is not in doubt, as Congress has extended the regional center program many times and is expected to do so again, possibly giving it permanent status as part of the overall EB-5 investor program. However, it is likely that Congress will either increase the present minimum investment of $500,000 or eliminate the TEA designation altogether, leaving the EB-5 investment amount as $1 million for all projects.
The potential elimination of the $500,000 investment in a regional center or TEA project presents a number of unknowns. What would be the ramifications of an increase in the required investment? Will it result in fewer investors? More cash infused into the US? Fewer jobs? Potential abuse by developers?
This article reviews the development of the EB-5 program, and discusses the inevitability of an increase in the minimum investment and its impact.
THE DEVELOPMENT OF THE EB-5 PROGRAM AND CONGRESSIONAL INTENT
When the EB5 program was created in 1990, Congress set the required capital investment amount at $1,000,000. The stated purpose of the program was to create jobs and stimulate the economy.
Targeted Employment Area (TEA) Investments
Congress did create an exception to the $1,000,000 investment for businesses located in a Targeted Employment Area (TEA), defined as either a rural area or an area experiencing unemployment of at least 150 percent of the national average rate. Investment in TEA projects was set at $500,000. Congress added this exception precisely to encourage investors to create jobs in areas that have the greatest need for economic stimulation.
Indeed, it would be reasonable to expect a target employment area to be in rural locations and areas experiencing higher rates of unemployment. Nevertheless, today, many of the large scale EB-5 regional center projects are found in affluent urban areas such as Manhattan, Los Angeles, and Miami, as census tracts are often manipulated to allow for a TEA designation.
Although manipulation of census tracts may be considered to be inappropriate scheming or gerrymandering, the ultimate goal and purpose of the EB-5 program is to create jobs and, in turn, stimulate the economy. If a project is located in a highly populated location where more people are affected, it is more likely to stimulate the economy than if it is established in a rural area with a low population density. Furthermore, the same project would be more likely to attract a higher number of foreign investors, as there is likely to be a greater probability of a return of capital in a commercially viable location such as a major city.
Regional Center Investments
In 2005, when the regional center program emerged, regional centers looked to the success of our Canadian neighbors, who had been attracting considerable wealth from the Asian Pacific with an investment amount of only $400,000. Accordingly, investments in EB-5 regional center projects had to be competitively priced at $500,000 in order for these early regional centers to attract any Asian Pacific investors.
The first regional center in New York was NYCRC, established in 2007; however, NYCRC’s initial projects were in safe, uncontroversial TEA’s in Brooklyn. The first Manhattan-centric project that oozed glamour and attracted attention was the Times Square Hotel, developed by the Friedman Brothers. The majority of the 150 EB-5 investors in this project were from China, and were amazed that such a glamorous project could be located within a TEA that was in Times Square, NYC.
This project was a precursor of what was to come. In the past year, Manhattan has claimed the lion’s share of $500,000 investors.
The Status of the $500,000 Investment
Today, around 90% of all EB-5 project investments are at the $500,000 level. The current EB-5 investment program has evolved into a full-fledged industry, revolving around the $500,000 investment, which brings billions into the US.
According to the Consumer Price Index, however, in the 25 years since the investment amount of $500,000 was set, the purchasing power of that amount has dropped to only $275,235. An unavoidable issue pertaining to the EB-5 regional center projects is whether an investment increase by Congress, accomplished by eliminating the $500,000 investment, may be inevitable.
THE IMPACT OF AN INVESTMENT INCREASE ON THE MARKET
Developers have stated that they would welcome raising the minimum investment amount or erasing it entirely. It would make the job of fundraising less onerous, and also would erase any accredited investor issues. Nonetheless, at the very core of the EB-5 program is the objective of creating jobs, compelling the question of how job creation and the economy would be affected.
An Increase Would Mean Fewer Jobs
Presently, a total of $1mm invested in an EB-5 project located in a TEA represents 2 individual investments, which in turn requires the creation of 20 jobs. If the minimum $500,000 investment amount is eliminated, the same 1 million will represent an investment from 1 rather than 2 investors, and as such, only require the creation of 10 jobs.
Thus, if a project needed funding of $50 million, it would require 100 investors resulting in the creation of 1000 jobs. If the $500,000 minimum threshold is eliminated, only 50 investors would be required to generate the same amount, resulting in the creation of only 500 jobs. The same amount of capital is generated, but fewer jobs must be created, resulting in a reduced cost for the developer. The additional capital raised would inure to the developer’s advantage. Some argue that there is a dark side of this equation, in that the additional capital may simply disappear into soft costs, never to be seen again!
An Increase Would Mean Little or No Targeted Area Development
It also has been argued that without a TEA, investors and developers would have little or no motivation to create and develop projects in under-developed and rural areas. This would frustrate and could eliminate entirely any benefit that those communities receive from EB-5 investment, which stimulate both employment and business growth.
An Increase Would Mean Fewer Investors
The majority of EB-5 practitioners, agents, brokers and attorneys have been relatively unified in their view that by raising the minimum investment, many investors are going to be priced out of the market. The “at risk” element undoubtedly will make the US projects less attractive for a higher investment amount, whereas the $500,000 investment encourages a higher volume of investors.
The majority of these $500,000 investors infuse fresh capital by purchasing real estate, engaging professionals, paying taxes on their global income, paying for education, and making alternative investments into the stock market, as well as expanding their overseas business in the U.S. For example, in 2010, new immigrant business owners had a total net business income of $121.2 billion, representing 15 percent of all net business income in the country. Furthermore, once the initial investment money is returned, there is a greater likelihood that it will be reinvested in the US.
An Increase Would Adversely Affect the US Foreign Student Population
The majority of EB-5 investors are foreign students and high achievers. Reports indicate that the number of foreign students on F-1 visas in U.S. colleges and universities grew dramatically from 110,000 in 2001 to 524,000 in 2012. These students contributed approximately $21.8 billion in tuition and $12.8 billion in other spending from 2008 to 2012.
The top 3 countries to send their nationals to study in the US are China, South Korea and India.
Moreover, as other avenues to obtain permanent residence in the US are rather limited, the EB-5 Program has become an increasingly popular option. Parents support and gift the funds enabling their children studying in the US to make the EB-5 investment.
The economic benefits derived from foreign students is inextricably linked to the ability of those students’ parents to participate as a $500,000 investor in the EB-5 program. Ms. Xueli Ma, who has been working closely with Chinese investors stated that “I would lose half of my investors if the investment increases from $500,000 to $1,000,000. Lots of them are hard-working small business owners who save for their children’s education and future.”
EXISTENCE OF INVESTMENT PROGRAM ALTERNATIVES
When the Canadian Federal Immigrant Investor Program (IIP) doubled the investment threshold from $400,000 to $800,000 in 2010, many immigrants flocked to the ready alternative, the EB-5 program. Arguably, today a ready alternative does not exist.
Canada and Hong Kong have both closed their doors. The other alternatives, Australia, Singapore, New Zealand and UK each have higher investment capital requirements. This fact in itself, may encourage legislators to eliminate or increase the $500,000.00 figure.
It is important to note, however, that the Canadian program “competes with a number of other countries for high net worth immigrants; however, the investment required under the Canadian IIP is significantly lower in comparison to international programs.” Moreover, “in addition to costing less, the Canadian IIP offers significant incentives over other countries including the United States…”. Id. And, unlike EB-5, the Canadian program guaranteed the return of the invested funds.
It appears inevitable that the minimum investment figure will either be raised or eliminated altogether, leaving the EB-5 investment capital amount as $1mm. While this figure does bring the required capital investment amount more in line with that of other countries, it does not take into account the disadvantage created by the at risk element of the EB-5 program, which is likely to make it unattractive in comparison to its international competitors.
EB-5 investment accounts for 1% of overall immigrant investment and yet this is the category that is most likely to stimulate the economy. Congress should not limit the number of potential investors we can attract to the EB-5 program, which essentially provides a cheap source of financing for US businesses. With over $20 billion at stake and thousands of jobs being created every year, the EB-5 program will continue to thrive as long as Congress does not stifle its growth.
The adverse domino effect on economic growth resulting from fewer EB-5 investors reveals that a reduction of the number of foreign investors in the EB5 category is not in America’s best interest.
Immigrant Investor’s Program from Different Countries
At least invest $500,000 “at risk” and create 10 full-time permanent employees directly or indirectly
Must own at least $1.6 million Canadian dollars in personal assets and have been a top manager or business owner during two of the past five years; or must invest $800,000 Canadian dollars in a bank designated by the Canadian government, to be returned in full after five years without interest
5 million dollars
(USD $ 4 million)
Must invest 5 million Australian dollars in Australian state or federal bonds, or in investment funds vetted by Australian Foreign Investment
2 million pounds
(USD $3 million)
Must invest 2 million pounds in one or more regulated financial institutions; or invest 200,000 pounds in the Tier 1 Entrepreneur projects
(USD $1.2 million)
Must invest 1.5 million New Zealand dollars in designated funds over the course of 4 years (with English speaking requirement); or $10 million New Zealand dollars for three years (no language requirement)
(USD $2 million)
Must invest at least 2.5 million Singapore dollars in either a new business entity, expanding an existing business operation, or in an approved fund that invests in Singapore based companies
Invest more than 500,000,000 Won in real estate, public fund and community development project, etc.
 8 U.S.C. § 1153(b)(5)(C)(i),
 Brooklyn Navy Yard was NYCRC’s first project.
 The Geography of Foreign Students in U.S. Higher Education: Origins and Destinations, Brookings Institution, http://www.brookings.edu/research/interactives/2014/geography-of-foreign-students#/M10420 (August 29, 2014)
 With the exception of Quebec
 Regulatory Impact Analysis Statement, Statutory authority, Immigration and Refugee Protection Act, Department of Citizenship and Immigration, Vol. 144, No. 26, http://www.gazette.gc.ca/rp-pr/p1/2010/2010-06-26/html/reg6-eng.html, June 26, 2010
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