When the Athia family arrived in Washington, D.C., during the 1990s, they gained entrée to the local motel industry through connections from their native India. What began for them as front desk check-ins and the cleaning of motel rooms in suburban Maryland has grown into Baywood Hotels, a successful family-run hospitality development firm that has completed more than 70 hotels nationwide. The Athias’ experience represents immigrants’ traditional American dream story—the ethos that hard work at one’s business can pay off in prosperity.
Baywood’s latest project is a dual-branded Hilton hotel—the U.S. Capitol Hotel Complex, Hampton Inn & Homewood Suites—and is a redevelopment of the family’s first hotel, where they once lived. Not only does the project represent the dreams of the Baywood hotel team, but $39 million of financing also represents the dreams and investments of 78 foreign investors who have contributed to the project in exchange for two-year conditional green cards, with the possibility of becoming permanent green-card holders.
The Baywood investors are participating in the employment-based Immigrant Investor Program, also known as EB-5, which is administered by the U.S. Department of Homeland Security (DHS). The program is quickly becoming a household name in the immigration law, real estate, and economic development industries.
The financing for the Baywood project came from a regional center, a federally approved private company that pools the foreign investment. Interest in the EB-5 program has led to the exponential growth of the regional center industry over the past five years.
Yet, critics argue the EB-5 program is an abuse of the immigration system that allows wealthy foreigners to buy their way into the United States. Detractors assert that the DHS lacks the necessary personnel trained in economics, business, and securities to properly oversee the system.
Regulators have struggled to keep pace with the increasing number of foreign investors and regional centers applying to participate in the EB-5 program. As a result, a number of high-profile cases in which regional centers attempted to defraud foreign investors have occurred. The rapid growth in the EB-5 program has raised concerns among critics and industry leaders who seek ways to improve this effective economic development program while safeguarding investors from fraud.
How It Works
Congress established EB-5 as a program that allows foreign individuals who invest at least $500,000 in eligible projects to receive temporary visas. To qualify, their investment must create or preserve ten full-time jobs in new or existing businesses. After two years, if the project has directly or indirectly created ten full-time jobs, the investors are eligible for permanent residency for themselves and their dependents. Typically, investors have no involvement with the project other than providing financing.
The EB-5 program was modeled after successful programs that have existed in Canada and Australia since the early 1980s. These immigrant-investor programs had received significant attention from Hong Kong investors in the early 1990s who were uncertain about their country’s future due to the impending takeover by China.
The EB-5 program averaged only 450 applications per year in its first few years, but interest has surged since 2008. This coincided with the global recession, when many real estate developers lost funding and looked to alternative sources for investment. In 2013, a record 6,434 individuals applied for visas.
In 2012, the EB-5 program created 42,000 jobs and contributed $3.39 billion to the U.S. gross domestic product (GDP), according to a study commissioned by the Association to Invest in the USA (IIUSA), a trade association for regional centers. The same study found that spending from investors accounted for $447 million in federal tax revenue and $265 million in state and local tax revenues. The impact on the real estate industry was substantial. According to the IIUSA study, 38 percent of all jobs and 31 percent of GDP contribution created through the EB-5 program were in the real estate industry.
Approximately 90 to 95 percent of EB-5 investments occur through regional centers, which are private companies designed to pool investments to fund larger projects and create employment opportunities. To operate as a private enterprise, a regional center must apply to the U.S. Citizenship and Immigration Services (USCIS), a division of DHS.
Regional centers have emerged alongside the EB-5 program. According to USCIS, these federally approved private investment companies expanded from 11 in 2007 to 442 in 2013. The centers have been instrumental in raising capital for office buildings, mixed-use developments, affordable and seniors’ housing, health care facilities, shopping centers, infrastructure, and construction projects. In 2012, California, New York, and Pennsylvania witnessed the most EB-5 investment.
Regional centers have become a formidable industry in their own right: they typically charge foreign investors $45,000 to $50,000 in fees in addition to the initial $500,000 project investment. These fees go to immigration lawyers, business plan writers, economists, securities lawyers, investor agents, and other consultants required to execute a complex EB-5 deal.
A major reason for the spike in the number of regional centers is that private developers, looking to cut out the middleman from their transaction costs, have established their own regional centers to reduce the cost of capital.Most regional center investments are made in targeted employment areas (TEAs), zones designated by state economic development officials that have at least 150 percent of the national unemployment average. In TEAs and rural areas with fewer than 20,000 residents, investors have to put only $500,000 toward a project, compared with $1 million in non-TEAs. At present, there is not much of a market for non-TEA projects, since EB-5 deals typically have only a 0.5 percent to 3 percent return for the investor.
“Realistically, investors are perfectly happy having 0.5 percent to 1 percent, because the main return they are getting is their green card,” says H. Ronald Klasko, an immigration lawyer and chairman of the EB-5 Committee of the American Immigration Lawyers Association. “They would rather have a green card than a few more percentage points.” Regional centers are able to lower lending rates to partners, and value of this cheaper cost of capital is not lost on developers.
“Regional center projects are premised on the fact that if you build a hotel or an office building, it’s not only a question of how many people will be employed in the office building, but the construction process as well,” says Klasko. “There are many spinoffs of indirect and induced employment.” Regional centers include both direct and indirect job creation statistics in visa applications.
Regional centers are tasked with documenting and tracking the employment gains from an EB-5 project. The centers hire economists who use sophisticated employment models to calculate job growth over the evaluation period. These employment numbers are reported to USCIS to help determine eligible visa applicants. USCIS does not maintain an active database categorized by regional center, project, industry, or other information, which could help improve transparency and the program’s progress.
As the program grew after the recession, USCIS officials began to understand the limitations of immigration adjudication officers. These officers, while trained in immigration law, lacked the business acumen required to administer the growing program.
In 2011, President Obama instructed federal agencies to examine the program’s rules, processes, and regulations to see if they prohibited economic growth. To deal with the growing interest in the program, USCIS has begun establishing a command center to review EB-5 visa applications in the immigrant-investor office based in Washington, D.C.
Yet the growing interest in the program has also brought increased criticism. In 2011, David North, a fellow of the Center for Immigration Studies and a prominent critic of the EB-5 visa system, testified before Congress about its flaws. It is “a program troubled with too many cooks, too many complications,” he said, “and too many scandals [with] the basic question: should the U.S. be selling visas to people who cannot otherwise qualify for green cards?”
The program currently has a 10,000-visa capacity annually. Although this number has never been met, proponents of the program expect there to be a backlog of applications in the next few years, especially from China, where the majority of the investors are from.
How Funding Works
In 2008, the city of Dallas was looking at new ways to foster economic development and to promote foreign investment in the city. Civitas Capital Group, a private investment company, learned of the city’s intent to set up a regional center and approached the city.
Civitas now operates the City of Dallas Regional Center (CDRC) on behalf of the city, making it one of the few public/private partnership regional centers in the country. CDRC differs from most regional centers in that the majority are privately run companies that may have goals that differ from those of the public sector. “We go out in the city of Dallas and look for opportunities that are a good fit for the EB-5 program,” explains Gabriel Hidalgo, managing director of Civitas Capital Group.
Regional centers’ roles also include finding investors, managing the investments on behalf of clients, and ensuring that customers comply with EB-5 visa requirements to ultimately obtain their residency.
“Operating a regional center is a level of responsibility and type of risk a city shouldn’t expose itself to,” says Hidalgo. The risk for cities is that raising millions in capital, managing dozens of foreign private investors, understanding the intricacies of the EB-5 process, and ensuring a successful visa application for clients all fall outside of the expertise of local economic development officials.
“We keep a tight rein on our quality-control process,” says Angelique Brunner, president and founder of EB5 Capital, a Washington, D.C.–based regional center operator involved with the Baywood hotel project. EB5 gives investors a list of well-vetted partners they will need for the immigration procedure. “If I get a check from them, and nothing else works, then I have failed the client,” she adds.
Since banks were less inclined to underwrite risky projects following the 2008 credit crunch, developers and economic development agencies became interested in EB-5 as a tool to reignite stalled projects. One such project is the Alexan Trinity Apartments, a 166-unit apartment building in the North Oak Cliffs neighborhood of Dallas, which began construction in February 2013. The project includes 34 affordable units, defined as annual rent being less than 30 percent of the median income in the area.
Alexan Trinity needed EB-5 capital to make the project feasible. Twenty percent of the development’s funding came from tax increment financing (TIF), which was used to pay for pedestrian linkages, public infrastructure, and overall project feasibility. The project will also be served by Dallas’s future streetcar line.
Alexan Trinity, a Trammell Crow multifamily joint venture, is exceeding its pro forma and achieving rents above $1 per square foot in the area. The project was also successful from an EB-5 perspective; 180 direct and indirect jobs were created, and ten investors are awaiting permanent residency.
Now that leaders in the public and private sectors have seen a variety of successful projects across multiple industries, interest in and comfort using the program are growing. In 2012, the Washington State Regional Center established a company to buy bonds to replace an aging bridge, bringing $48 million worth of EB-5 investment to the project from 95 investors, mostly from China.
The project initially met with difficulty with USCIS because buying bonds did not satisfy the “at risk” condition (a requirement of the EB-5 program is that regional centers cannot guarantee return), but the project was ultimately approved.
“The EB-5 program has now become a tangible capital market, so there is a diversification in industries that are now benefiting from it,” says Peter Joseph, executive director of IIUSA. Joseph notes that EB-5 can induce regional economic development through the creation of public/private partnerships.
The Baywood Hotel Experience
In 2012, when institutional investors had little interest in hospitality projects, Baywood found EB-5, which began to be an attractive financing option. “EB-5 funds do not carry the same covenants or constraints one might get from a typical lender, so they were perceived as more flexible dollars. There was a lot of interest in the industry,” says Beau Athia, who is vice president of strategic development for the firm. As a number of high-profile brand-name hotels including Hilton, Marriott, and Hyatt began using EB-5 financing, comfort levels among developers increased.
The $59 million project in Washington, D.C., will be 67 percent financed by 78 individual EB-5 investors, mostly from China, who brought $39 million to the project. The investors will make a five-year loan to finance the project’s construction. The project is expected to create approximately 800 jobs.
EB5 Capital, based in D.C. and San Francisco, has clients from more than 40 countries and claims a 100 percent approval rate for I-526 Petitions, which are a conditional green card, and I-829 Petitions, a permanent green card. The company relies on word of mouth in an increasingly competitive industry. “We do not advertise; we do not hold events; [an investor] can barely call our office and get a person to talk to unless [he or she has] been referred. Our client [investors] really call us for our track record,” says Brunner.
Athia says one constraint of the program is timing. “If I wanted to put a shovel in the ground and start construction, there is a small amount of lag time between starting a project and how quickly EB-5 funds can be raised,” he says.
Promotion outside the United States
Economic development officials and regional center representatives from across the country travel internationally to develop relationships with potential EB-5 investors.
On these trade missions, local officials bring developers, regional center leaders, and other economic development officials to help promote interest in regional center projects. Most EB-5 investment missions take place in China, and for good reason: at present, 81 percent of all program participants are Chinese investors. Other major origin countries for EB-5 investors include South Korea, India, Canada, and Brazil.
The Chinese are the most frequent participants in the program for a number of reasons. “You are looking for a country with a lot of new millionaires, a lot of wealth, who value education, but who currently live in a less-than-ideal environment,” says Brian Ostar of EB5 Capital. While China has been the most heavily recruited nation in recent years, as other emerging countries grow wealthier they become prime candidates for the program as well.
EB-5 projects with government support and subsidy as part of the capital stack are more palatable for foreign investors. The higher the level of government, the more appealing the project. Debt financing is more typical than equity in EB-5 projects since investors want to get their visas and have little, if anything, to do with the project.
Growth and Fraud
As the program has grown, a number of high-profile cases of fraud have been exposed. In February 2013, the U.S. Securities and Exchange Commission (SEC) uncovered a Chicago regional center owner who fraudulently sold $145 million in securities and took $11 million in fees from more than 250 investors. The SEC froze the assets of the would-be developer, and all of the investment funds were returned to investors. Nonetheless, the case has been a cautionary tale for the EB-5 community. In response to the Chicago case and other cases of fraud, IIUSA has responded by creating tools to help self-police and create trust with the public sector.
Other critics argue that cases of fraud are a symptom of DHS’s inability to properly administer the program. The Brookings Institute released a report in February that finds that despite efforts to ramp up USCIS staff with a business background, DHS is the wrong institutional home for such a complex program. The report recommends creation of an oversight role for the U.S. Department of Commerce; creation of incentives for partnerships with local economic development authorities, much like the CDRC; and generation of a public database that can help investors and officials evaluate regional center projects. At present, USCIS offers limited benchmarking on regional center statistics.
Yet the popularity of the program is representative of the deficiencies in U.S. immigration policy, says Angelique Brunner of EB5 Capital. “We have clients who are PhDs who received their education from American schools, who weren’t able to find jobs to stay in the U.S.,” she says. “They met their wives here, had their children here, and then had to leave the country, and the only way to get back was to use EB-5.” EB-5 visa applications fast-track the immigration process. EB-5 investors typically are granted temporary status within 12 to 18 months and permanent residency in just 2.5 to three years as opposed to six to ten years in traditional visa applications.
The EB-5 program is clearly gaining interest from the real estate and construction industry. The growth of regional centers and foreign investors has brought about changes in federal regulation and innovative public/private partnerships at the local level. As more developers decide to go it alone, there are more opportunities to gain access to capital at a reduced price through the program. However, the program’s steep learning curve and the dependence on federal approvals for visas should serve as a caution for developers simply looking to the program as an opportunity for easy money. As foreign investors become savvier and expect more from deals, project promoters may have to look harder and farther for willing investors in the future.
Alex Hutchinson is a Baltimore-based urban planning/real estate development practitioner and freelance writer who specializes in public/private partnerships, economic development, transportation, and transit-oriented development.