When developer Michael Reschke opens his new hotel on LaSalle Street in Chicago’s Loop district in a few weeks, he will also be opening the door for dozens of overseas investors to live in the United States.
He raised about $8 million for the project through the federal EB-5 visa program, which allows foreigners to become U.S. residents if they invest in qualified real estate developments or other business ventures.
“It’s really a great program,” Reschke says. “There’s no downside. It costs the federal government nothing. It creates jobs, both construction and permanent jobs.”
You will hear a completely different opinion from Doug Litowitz, an attorney who represents a group of investors from China in another Chicago development backed with EB-5 money. Investors put up nearly $50 million to finance a 60-story condominium-and-hotel project in the River North neighborhood, but the New York developer who proposed the high-rise never broke ground. Litowitz and his clients are wondering where their money went. They have been fighting the developers in court for more than three years to get it back.
The program “is a complete and total disaster,” Litowitz says. “There should be no EB-5.”
It is a debate that has been raging for many years, resolved briefly in March, when President Biden signed legislation reauthorizing and reforming the visa program, which had expired last summer. Developers and other EB-5 fans argue that it is a valuable economic development tool. Detractors say it is vulnerable to fraud, does not do enough to draw money to poor areas that need investment, and allows wealthy foreigners to buy their way into the United States.
EB-5 supporters were pleased when Congress and President Biden extended the program in March, but they now face another obstacle: U.S. Citizenship and Immigration Services (USCIS), a unit of the Department of Homeland Security (DHS), that oversees the visa program. They are worried about the agency’s position on so-called EB-5 regional centers, developer-linked entities vetted by the government that handle fundraising for projects.
The agency says that all regional centers it approved before the reauthorization need to go through the approval process all over again. With more than 600 regional centers already certified, EB-5 backers argue that re-certifying them all could take many months and even years, given how slowly USCIS moves. Developers with projects that are ready to go could be waiting a long time before being able to move forward.
“The industry is up in arms, and investors are losing confidence,” says attorney Ronald Fieldstone, partner in the Miami office of Saul Ewing Arnstein & Lehr.
Several regional centers have has sued the agency over its guidance, arguing that it has overstepped its authority, and a group of lawmakers, including Senate Majority Leader Chuck Schumer, wrote a letter to DHS Secretary Alejandro Mayorkas asking the agency to reconsider its decision.
“I sincerely believe that delays are inevitable,” says Aaron Grau, executive director of Invest in the USA, a trade group that promotes the EB-5 program. “Processing times {at the USCIS} are abysmal for everything.”
Created in 1990, the EB-5 program provides permanent U.S. residency status to foreigners who invest in a business venture that creates at least 10 jobs. The legislation approved in March raised the minimum investment per person to $800,000 from $500,000 in places with high unemployment and to $1,050,000 from $1,000,000 everywhere else. About 10,000 visas have been granted through the program annually. Chinese nationals accounted for 46 percent of EB-5 visas issued in fiscal 2019, followed by India and Vietnam, both at 8 percent, according to a 2021 report from the Congressional Research Service.
The program has been especially popular with developers, allowing them to raise more than $40 billion for real estate projects, according to one estimate. In New York, Related Companies raised about $1.2 billion through the program for its massive Hudson Yards project on the West Side of Manhattan.
In Chicago, Reschke raised about $10 million in EB-5 funding for a redevelopment of a vintage LaSalle Street office building into a 380-room Residence Inn by Marriott that opened in 2015. Developers like the program because it provides them with low-cost capital. The return to investors is in the 4 to 7 percent range, says Reschke, chairman and CEO of Chicago-based Prime Group.
“It’s basically like preferred equity with a very reasonable dividend,” he says.
Reschke was so happy with the Residence Inn project that he went back to the EB-5 well to finance the LaSalle Chicago. Part of the Marriott Autograph Collection, the 232-room hotel on the upper floors of a converted vintage office building on LaSalle Street is set to open in June. Reschke is also considering EB-5 financing for some hotel projects he is considering in Puerto Rico.
Many immigrant investors do not get hung up on the return they will receive in an EB-5 project because they are more focused on receiving something else: a green card. But the program’s expiration last year left many wondering when, if ever, they would make it to the United States.
Interest in the program is especially strong in countries like India, Vietnam, South Africa, Brazil, and Mexico, says Aaron Grau, executive director of Invest in the USA, a trade group that promotes the EB-5 program. The organization is hosting meetings with prospective investors in Indian cities this week, and the events are already booked up, he says.
“Demand to participate in the program is unbelievable,” Grau says.
The changes enacted in March should encourage more EB-5 investments in infrastructure and rural projects, possibly in wind or solar farms, he says. The measure also included provisions to address concerns about fraud. One requires broker-dealers that sell the investments overseas to register with the Department of Homeland Security and provide disclosures about their fees, he says. Another allows investors to move their money more easily into a new project if the one they have invested in runs into trouble due to fraud.
Fraud “was a problem,” Grau says. “You can’t put your head in the sand and say it wasn’t a problem.”
Indeed, the program has received a lot of bad publicity over the past several years as lawsuits and criminal investigations have piled up. In Chicago, a developer received a three-year prison sentence in 2017 after pleading guilty to charges that he swindled nearly 300 Chinese investors in a $912 million hotel project near O’Hare International Airport. In April, two developers were sentenced to 18 months in prison for their role in a fraudulent EB-5 project linked to the Jay Peak ski resort in northern Vermont.
Litowitz, the attorney representing investors in the River North project, says he receives a call at least once a week from an investor who has lost money in an EB-5-financed development.
“It’s structured so that investors have a low chance of getting their money back and have almost no rights of a traditional American investor,” he says.
The Chinese investors in the Chicago project have yet to receive a penny. An attorney for the project’s developer, New York-based Symmetry Property Development, says in court last year that Symmetry had lined up a $250 million loan from a mysterious Bahraini lender to start the project and pay them off.
“They kept saying the money was coming next week, next week, next week,” Litowitz says.
But it never came, and now a judge is allowing Litowitz and his legal team to identify and eventually seize Symmetry’s assets to pay off their clients. A Symmetry attorney did not return a phone call for comment.
