The EB-5 Immigrant Investor program is approaching yet another critical extension deadline. If Congress sticks to its recent pattern, it is likely to make an 11th hour move to approve a short-term extension while it continues to negotiate reforms to the program. Yet that strategy of kicking the can down the road may be putting the program in jeopardy.
“Over the last few years, the EB-5 program has been plagued by these very short-term renewals,” says Jim Butler, chairman, global hospitality group, at the law firm Jeffer Mangels Butler & Mitchell LLP in Los Angeles. “That creates a lot of uncertainty and makes it very difficult for all the players in the industry to know what’s a sound move,” he adds.
EB-5 is an incentive program for foreign investment into the U.S. that essentially provides a fast track to green cards for capital investment that creates new jobs for U.S. citizens. Foreign nationals can qualify for a visa by investing a minimum of $1 million in a development, or $500,000 if it is invested in a qualifying Targeted Employment Area (TEA). Another stipulation to the program is that each investor must also prove the investment created a minimum of 10 new jobs.
EB-5 was first introduced in 1992 as a pilot program. Because of its “temporary” status, Congress has been periodically voting to renew and extend the program for the past 25-plus years. Generally, those renewals have been ranging from three to five years. Since 2015, EB-5 has been stuck in a loop of short-term renewals that have lasted anywhere from one week up to nine months as Congress has worked on reforms tied to making the program permanent.
Most recently, Congress approved a short-term extension of the EB-5 until March 23rd as part of its short-term spending bill that passed in February. “It is very difficult to predict what this Congress will do,” says Julian Montero, a partner and vice chair of the business and finance department at Saul Ewing Arnstein & Lehr in Miami. However, if Congress follows its recent pattern, they could very well pass an extension that runs through the end of the current fiscal year, which ends Sept. 30th, he adds.
Developers move to the sidelines
EB-5 is facing some big stumbling blocks. At the top of the list is uncertainty created by the short-term extensions and lack of progress on program reforms. The main sticking point is disagreement between urban and rural interests on how to define TEA districts. Other proposed reforms would raise the minimum investment amounts and introduce more oversight to reduce incidents of sponsor fraud or misappropriated funds.
That uncertainty is pushing some developers to the sidelines. Since it first turned to EB-5 as a capital source in 2011, Florida-based Riviera Point Development Group has used about $60 million in EB-5 money to help finance several projects. Currently, the company has $12 million in EB-5 money committed to develop a 200-room hotel project in Orlando that is set to break ground in April. However, that project is likely to be the last—at least for now.
Riviera Point has changed its finance structure and removed EB-5 from the capital stack for additional projects in its pipeline. “The uncertainty limits you on your actions,” says Riviera Point president and CEO Rodrigo Azpurua. “We will not use an EB-5 component until we have either a longer extension or an approved bill so that we have certainty of the playing field for the next two to three years.”
There is less activity from developers given the next looming deadline is now less than two weeks away. “Most potential developers are not keen to undertake a project involving EB-5 until there is a little bit more certainty about what will happen,” says Montero. However, if there is a new extension, Montero believes it will release some pent-up demand from developers who will move to take advantage of that new extension horizon.
Visa backlogs deter investors
Another sizable stumbling block for the EB-5 program is a growing backlog of pending EB-5 visas that is creating a deterrent for new investors. The problem is more pronounced for Chinese investors, but delays have been expanding to also impact investors from all countries.
The maximum number of visas the EB-5 program can issue each year is 10,000. Prior to three years ago, the EB-5 program was not hitting that cap. However, a surge in demand from Chinese investors pushed the program to its limits with the Chinese accounting for 80 to 85 percent or between 8,000 and 8,500 of the EB-5 visas eligible to be issued each year.
In order to deal with the imbalance, U.S. Citizen & Immigration Services (USCIS) in essence created a separate EB-5 visa “line” for the Chinese and another line for people from other countries. The problem is that USCIS has not been able to process the visas fast enough, and there is now a huge backlog in pending applications. Chinese investors now coming in at the back of the line with new capital are facing a wait of more than 10 years to process their U.S. visas. “Many are deciding that the wait is simply not worth it. So the Chinese investors have decreased dramatically,” says Butler.
Some EB-5 companies have been developing capital-raising channels outside of China, in places including India, Vietnam, Korea, the Middle East and South America. “I think they can and will be successful in creating investor interest in these new markets if they get enough encouragement. The problem is how much time and money can you invest when you don’t know the viability of the program?” says Butler.
It is also taking longer to process visas from investors in countries besides China. Wait times that used to be six to eight months several years ago are now at about two years, adds Azpurua. “Now when you tell someone that they have to wait two years to see the result of an effort from $500,000, they really get discouraged,” he says.
The USCIS could fix the backlog by allocating more resources or changing the process. However, there are any number of hurdles to do that, including critics who want even more layers of oversight and reporting, and a current administration that is working to tighten immigration policy, notes Butler. “This is a difficult context in which to tell someone to speed it up and streamline the process,” he adds.
Combined, these challenges do pose a real threat to the viability of the EB-5 program that a short-term extension may not be able to fix. “There could be light at the end of the tunnel, but I hope people realize the seriousness of the situation. We are in a dire situation where it is going to be make or break very shortly,” says Butler.