This is a good news story for once. But, of course, since the father of this soupcon of good news is our government, it’s almost unintended.
From the ashes of the economic recession of 2008 came the rebirth of the Immigration Investor Program, more commonly known as “EB-5 Visa Program.” This bit of social engineering has been around since the program was first introduced back in 1990 but got a second wind when everything else went to Hell. The purpose behind the program was to benefit the United States economy by attracting investments from qualified foreign nationals.
The program requires each foreign national to invest $1,000,000 in a new commercial enterprise (or $500,000 if investing in a rural or high unemployment area), in a manner which results in the preservation or creation of at least 10 full-time American jobs within two years of the investor’s admission to the United States as a conditional permanent resident). To make this pay to play gimmick even easier, in 1992 Congress permitted foreign nationals to combine their investments and have them managed by an EB-5 Regional Center, which is an organization regulated by the United States Citizenship Immigration Services that aims to facilitate the management of EB-5 investments in development projects.
Over the past two decades, the EB-5 program purportedly has created more than 65,000 jobs through more than six billion dollars in investments. In 2014 alone, EB-5 investments reached a total of approximately $2.6 billion, representing the creation of more than 16,000 American jobs. Since 2008, the number of visas issued under the program has more than quadrupled, accounting now for more than 8,000 visas granted in the United States per year. I’m sure the amount of investment as reported by the government is right. The government is pretty reliable about accounting for the lucre it collects, but the jobs? Not so sure. What actually is a new job? Would it have occurred anyway? Is this foreign money actually additive to the capital that is otherwise available? The job numbers are likely mushy math (shades of Viet Nam body counts?), but it’s a great sound bite and one that politicians of all stripes can get behind.
The increased use of this program in recent years is surely attributed, in large measure, to the fact that investing money in the United States is a heck of a lot safer than investing in the countries where many EB5 investors live. Let’s face it, in many cases it’s just plain dangerous to live in those places. Nothing focuses the mind of a well-heeled non-domestic investor more wonderfully than the possibility of having his or her wealth and perhaps freedom expropriated for the good of the “People” in various and sundry plutocracies, oligarchies, fake Marxist state and just plain failed states from which many of these folks hail. Nice to have a bolt hole, and a fully-stocked go bag in the good ole US of A! (One percenters: take note.)
Although participation in EB-5 program has reached record highs, the future of it now is a bit uncertain. The current program is set to expire this upcoming September—with a number of distinct Congressional constituencies advocating, variously, for the program’s permanence, reformation, or death. On January 28, 2015, Representatives Jared Polis (D) and Mark Amodei (R) introduced the American Entrepreneurship and Investment Act of 2015, or H.R.616 (don’t you love the double-speak quality of Congressional Acts – shouldn’t this be called the Terrific Deal for Well-Healed Foreigners Act?), which would update the current EB-5 program and make it permanent.
Besides making the program permanent, the bill proposes to make several modest changes to the program purportedly designed to streamline the EB-5 application process and implement procedural safeguards to strengthen its integrity. As of March 17, 2015, the latest draft of the bill was referred to the Subcommittee on Immigration and Border Security and is currently being reviewed. I am morally certain streamlining and strengthening in this context is code for someone is getting some new goodies. But, hey, that’s how it works in Washington.
Industry experts are broadly confident that the EB-5 program will be renewed, and broadly skeptical that this renewal will contain any significant changes. During an expert panel recently held by the CRE Finance Council, Nick Mastroianni, President and CEO of the US Immigration Fund, noted that he believes the program will be renewed as it is currently written with little substantive changes, if any at all.
Other representatives such Patrick Leahy (D) believe that it’s time to finally shake things up. On June 3, 3015, Representative Leahy introduced the American Job Creation and Investment Promotion Reform Act of 2015 or S. 1501, which calls for dramatic revisions to the current EB-5 program, including, but not limited to, increasing the minimum investment amount from $ 1 million to $1.2 million (or $500,000 to $800,000 if investing in a target unemployment area), implementing a pre-approval process for all business plans before allowing a potential EB-5 investor to file a I-526 petition, and a more restricted definition of what constitutes a target unemployment area. We will see.
Although the future of both these bills has not been determined, one thing is for sure: once programs like this one are initiated, it is very hard, if not nigh-on to impossible, to end them. Too many constituencies are fed; too many interested parties have invested. So our bet is this program goes on and on. While immigration is one of the hottest political issues of this or any other Congressional session, everybody appears to feel pretty good about immigrants with money. Who says bipartisanship is dead!
Is this good policy? Well it’s nominally designed to create jobs, and that’s arguably God’s work, but whether it really does is pretty uncertain. Residency for money may be a tad tacky, but is it really a bad thing? We’ve got room, right? It certainly torques any notion of a market allocation of capital. As for these folks, it’s not about earning a return, it’s about value preservation. Now the good news for lenders kicks in.
A Gift to Lenders?
Developers love the committed money. It’s not going anywhere because investors need those green cards! But here’s the problem: Although the EB-5 approval rate is quite high (for example, 93% in the fourth quarter of 2014 alone), investors are quite wary of committing a significant amount of money to a project until his or her EB-5 application is approved. Therefore, it is more likely than not that he or she will place the requisite amount of funds into an escrow account, where the funds will be released when that lovely green card finally shows up. Given that the average processing time is about 14 months, developers need short-term bridge loans, which are eventually replaced with the EB-5 funds held in escrow. So this program provides attractive, but hardly riskless, prefunding lending opportunities. Many lenders have gotten increasingly comfortable that prefunding is a manageable risk. The coupons on these bank loans are quite high and, all in all, it’s a growing and attractive market segment for lenders, notably the banks.
Once the EB-5 money is in the deal, lenders can make some really nifty loans to people who are absolutely committed to protecting their investments and getting those green cards. Default risk? These loans aren’t defaulting and they are not dependent upon the actual success of the projects which they finance. As a lender, it just doesn’t get better.
You know, right, that our omniscient and all wise elected leaders and their regulatory apparatchiki were not thinking about helping the financial sector when this little delight was cooked up, but it’s nice to see the God of Unintended Consequences smiling on the financial sector for a change.