EB-5 has been a hotly debated topic in Congress for the past six months as some legislators proposed changes that would significantly revamp the 25-year old investment program. In the end, they decided to “kick the can down the road” for another year.
Congress passed the Omnibus Bill on Dec. 15th to fund the U.S. Government. That bill included an extension of the EB-5 program—exactly as is—until Sept. 30, 2016. The move represents a seismic shift from previous discussions. Congress had been working to introduce extensive changes to the EB-5 program along with the usual five-year extension.
In the end, Congress could not reach an agreement. Discussions broke down, and legislators chose to push the debate off for another year.
“Really what happened here is that certain people in Congress tried to ram this thing down people’s throats without any opportunity to review it,” says H. Ronald Klasko, a managing partner at Klasko Immigration Law Partners, LLP in Philadelphia. For example, the bill went through three different draft revisions over the weekend prior to the vote, he says.
The extension is good news for a program that has surged in popularity in recent years, with funding going to a wide range of construction projects ranging from hotels to high-rise condos. “In the real estate community, I think it is considered a win for all of the pending projects or projects that scrambled to file an exemplar,” says Debbie A. Klis, a partner in the Washington, D.C. office of law firm Ballard Spahr LLP. “Those projects already pending know that they can keep going and raise the money,” she adds.
In most cases, EB-5 money is used to provide mezzanine financing at a rate that is lower than financing from traditional mezzanine sources. The EB-5 program generated a minimum of $5.2 billion in private investment between 2005 and 2013, according to a 2015 economic study commissioned by the EB-5 Investment Coalition.
Originally created as part of the 1990 Immigration Act, the program is aimed at boosting job creation, economic development and investment in urban and rural areas that are blighted or suffering from high unemployment. Effectively, the program offers a strong incentive for foreign investment in the U.S. by trading green cards for capital. In order to qualify for a visa, foreign nationals need to invest a minimum of $1 million, or $500,000 if it is invested in certain qualifying Targeted Employment Areas (TEAs) and also create a certain number of new jobs.
The program has drawn criticism in recent years from program administrators and legislators over concerns related to fraud and abuse of the program as EB-5 projects were being granted in areas that were not blighted or struggling with high unemployment. The bill proposed a number of changes related to raising the minimum investment thresholds, changing definitions of TEAs and adding more oversight.
One of the points that was agreed on was to create more oversight for regional centers that manage project funding. However, the bill ran into stumbling blocks related to how TEAs are defined.
“I think it was the more radical ideas that bogged this down, because there was so much lobbying against it that it was never going to be passed,” says Klis.
The lead senators, Senator Leahy (Vermont) and Senator Grassley (Iowa), wanted to make the definition of TEAs more narrow, with the premise that it would drive development to more deserving areas. “For some of these cities that really rely on the surrounding areas to qualify, the proposals were so narrow that it would basically make it obsolete,” says Klis.
Another stumbling block was the addition of carve-outs on how the visas were allocated. Currently, the cap is 10,000 visas issued annually. The lead senators added a provision for “reserve visas” that would require 2,000 of the visas to be allocated to projects in rural areas and another 2,000 for urban impoverished zones.
“That is not where people are building buildings,” says Klasko. So the concern was that many of those visas would go unused and make the wait list even longer, he says.
It is expected that the Senate will pick up efforts to make significant changes to the program again in 2016.
Hopefully, legislators learned a lesson about being very transparent with what is proposed and giving people ample time to review and comment on it, says Klasko. “There are lots of people affected by this, and I think (legislators) will be smarter next time and will solicit input from the industry and give industry time to comment and make changes,” he says. “If they do that, I think we will end up with a pretty good bill.”