If passed as is, new EB-5 bill could see RE deals crumble

"If it goes through in its current form, it ends the EB-5 program"

Proposed amendments to the EB-5 program could end its use in real estate, observers say
Proposed amendments to the EB-5 program could end its use in real estate, observers say

A new proposal to reform the controversial EB-5 visa program is causing alarm among real estate developers who’ve used it as a source of cheap capital for years. Some say its conditions would spell doom for the program, which has brought in billions of dollars for New York projects in recent years.

The new bill, sponsored by Congressman Bob Goodlatte (R-Va.), would raise the minimum amount investors would need to pump in to get a green card. That in itself was expected. But what makes it unusual is a provision that would require existing investors to retroactively cough up the additional amounts. It is this provision, real estate insiders say, that could cause investors to pull their money out of U.S. real estate projects, leaving developers in the lurch.

It could, they say, even spell the end of the popular program, which allows foreign investors to plow funds into real estate projects and has been one of the most popular sources of alternative financing for projects in New York, Miami and Los Angeles.

“It cannot go through,” said Mona Shah, an EB-5 immigration attorney. “If it goes through in its current form, it ends the EB-5 program. It’s as simple as that.”

The bill, proposed Sept. 9, would up the minimum investment amount for EB-5 applicants from $500,000 to $800,000 for projects in high unemployment areas. In areas with low unemployment, the investment amount would be hiked from $1 million to $1.2 million.

These higher amounts would apply to applications filed by investors starting in June 2015. This means investors who entered the program thinking they’d only have to shell out $500,000 would now be on the hook for $800,000. That could cause some to back out of their investments, and developers could find themselves without the funds to finish their projects.

Speaking from Shanghai, Shah said the bill had Chinese investors and U.S. developers spooked.

“Everybody is panicking about it here,” she said.

In a statement, Goodlatte told The Real Deal that while he supported the overall goals of EB-5 — the program was designed to generate economic activity and boost jobs — it is in desperate need of reform. EB-5, he said, is currently riddled with fraud and abuse and has strayed further and further away from the program Congress envisioned when creating the program a quarter century ago.

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Goodlatte did not comment directly on the retroactive nature of some provisions of the bill.

EB-5 in its current form was extended in December for nine months, in what was seen as a big victory for developers.  It is now likely to be extended until December so that lawmakers can come to a resolution. Some lawmakers, including senators Chuck Grassley and Patrick Leahy, have spoken out in opposition of renewing the program as it currently stands, citing fraud and abuse. Sen. Dianne Feinstein called for an end to the program altogether, saying it creates the impression that “American citizenship is for sale.”

Goodlatte also proposes increased scrutiny on investors’ source of funds. His bill would require investors to submit up to seven years of tax returns from their home countries, as well as disclose any judgements against them and any pending governmental, civil or criminal legal actions.

It would also crack down on developers’ ability to present their projects as being in high-unemployment areas by creatively cobbling together census tracts, a process some have likened to gerrymandering. Many New York developers, including the Related Companies and Extell Development, have been accused of manipulating census tracts to make sure their developments are located in “Targeted Employment Areas,” allowing them to qualify for the lower investment threshold.

Under the bill, combining census tracts would no longer be permitted. In addition, approximately 2,000 visas would be reserved for projects in rural areas, which are seen as high-risk. Those visas would not be reallocated to urban projects even if they remain unused.

Had the proposed bill been in place several years ago, many of the big-ticket Manhattan that have benefited from EB-5 would not have been eligible for funds.

“I would go so far as to say that the Goodlatte Bill would pretty much end TEAs as we know them,” Elliot Winer, an EB-5 consultant, wrote on EB5Diligence.com. “ I would estimate that about 90 percent of current TEAs would no longer qualify.”

“You’re essentially going to kill everything in big urban areas,” Winer later added in an interview with TRD. “It’s just completely absurd. I don’t think people really understand the magnitude.”

EB-5 insiders speculated that the bill is unlikely to pass in its current form.

Shah even said that some measures, particularly that of retroactive investment increases, may have been put into the bill as a “bargaining chip.”

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