EB-5 Funding On Rise, Long Arm of Law Watchful

Applications for the EB-5 program are on the rise.
Applications for the EB-5 program are on the rise.

It started with Gary Barnett’s Gem Tower and Bruce Ratner’s Atlantic Yards. When credit tightened in 2009, some of the most respected New York developers had begun turning to foreign money to finance their construction projects via the U.S. Citizenship and Immigration Services’ EB-5 program. The federal program is designed to provide permanent residency to foreigners who invest at least $500,000 in job-creating projects. Of late, with the banking sector increasingly willing to finance projects but with the loan-to-cost of their loans languishing in the 60 percent to 65 percent range, EB-5 funding—for which interest rates are usually in the one-digit range—is becoming an increasingly popular alternative to costlier mezzanine financing, sources told Mortgage Observer.

EB-5 is being explored to partially fund construction of the $950 million project 30 Park Place and the residential tower at 855 Sixth Avenue, projects from developers Larry Silverstein and Douglas Durst, respectively. Moreover, according to persistent market rumors, EB-5 will be a tool of financing for at least one of the towers of Related Companies’ Hudson Yards.

With this popularity, though, comes an increased need for legal oversight, both on behalf of investors and developers looking to draw on the program and governmental agencies tasked with oversight.

On this front, 2013 didn’t start well for the program, which in the last few months has seen its first major scandal. On Feb. 8, the Securities and Exchange Commission announced it had pressed charges against the developer of a hotel and conference center near Chicago’s O’Hare Airport who had raised more than $150 million from more than 250 foreign investors, misleading them into believing that they would obtain profitable returns and U.S. residencies through participation in the EB-5 program.

It was the first time the SEC had pressed charges for an EB-5-related alleged fraud. Initially, the scandal caused a freeze of investments, several people with deep knowledge of the EB-5 program told Mortgage Observer.

“As a result, there has been a chill in the marketplace,” Steven Polivy, the chair of the economic development practice at law firm Akerman Senterfitt, said. “It has been more difficult to get investors to sign on for projects. I have seen that the USCIS seems to have reacted by submitting more detailed requests for evidence and has been giving projects greater scrutiny than they seemed beforehand.”

The Association to Invest In the USA (IIUSA), a nonprofit trade association that represents more than 100 regional centers—the entities serving as conduits for foreign investment—got involved in the trial that resulted from the SEC’s charges.

“We were concerned that one example of an unfortunate situation would give the perception that this was widespread,” Peter Joseph, executive director of IIUSA, said.

The organization was admitted in the Chicago trial as an amicus curiae (friend of the court)—not a party in the trial, but able to brief the court on aspects related to the case. In the last few months, Mr. Joseph twice traveled to China, where the majority of EB-5 investors come from.

After being met with serious concerns in February, by the time of his second visit this past May, Mr. Joseph found that the investors’ mood had drastically changed.

Indeed, the case had quickly had a positive resolution for the concerned investors. By April, the Chicago U.S. District Court judge who is in charge of the trial ordered the return of more than $147 million in escrowed funds to investors. The case is still ongoing.

“In fact, it really was an example of the U.S. court system working exactly as it was intended to, by protecting the investors’ capital and finding the most efficient and effective way to return that capital directly to these investors,” Mr. Joseph added.

Some of those involved in the Chicago conference center have already re-invested their capital in other developments. At this point, the EB-5 community has started to recognize that the scandal, in the end, has had some positive effects.

“To say that you can’t do EB-5 because of what happened in Chicago is the same as saying that you can’t invest in blue chip because of what happened with Enron,” Julia Yong-hee Park, an immigration lawyer who focuses on EB-5 and has just launched Advantage America New York Regional Center, said. “In the long run, I think that is the best that could have happened to this industry, because it makes people aware of the importance of structuring it right.”

Ms. Park had just started to work on her regional center’s first deals when the Chicago fraud came to light. “Foreign investors are definitely more inquisitive. They ask more questions, and they want more due diligence done than they did prior to Chicago. People asking questions is never a bad thing,” she said.

Critics of the program still think that the fraud highlights the program’s flaws. “It discouraged investors, from what I gather,” David North, a fellow at the Center for Immigration Studies, said. “It might also make the U.S. government a little bit more sensitive to this program, which tends to be very loosely administered.”

Mr. North criticized the policy for giving “green cards simply for investing money” and called projects funded via the program “second- and third-rate investments.”

And he was not done yet, saying, “Only desperate developers think about this program, because, if you have a reasonably good investor’s offer, you don’t have to offer somebody a visa to go with it. People who use this program are often desperate for capital.”

Calling developers such as Gary Barnett, Douglas Durst and Larry Silverstein “desperate for capital” is just “very wrong,” Mark Edelstein, chair of Morrison & Foerster’s real estate finance and distressed real estate practices, said, dismissing the claims. Mr. Edelstein pointed out that developers with the best track records can show their credentials to foreign investors and are more likely to be able to raise capital overseas.

To be sure, after the Chicago scandal, investors have focused more on the due diligence of projects in which they decide to invest. Many think that this might be good news for the EB-5 program.

“In the long run, the combination of the increased opportunities, the visibility, as well as the requirements of far more rigorous standards for this kind of financing, is going to attract the traditional investment banking community into this business,” Michael Bailkin, an attorney in the real estate practice at Akerman Senterfitt, said.

However, EB-5 can still be improved, in the eyes of its supporters. The program has been renewed several times and is currently due to expire on Sept. 30, 2015. In June, however, the Senate voted to make it permanent as a part of the Immigration Bill, which has been sent to the House of Representatives for consideration. EB-5 advocates say that Congress’s permanent authorization would give the program more certainty and would ease long-term planning for investors and developers.

There would be financial benefits, supporters add. According to IIUSA, since 2005, EB-5 investments have brought more than $4.7 billion of capital to the U.S., and 2013 is set to be a record year with estimated additional investments for $2 billion. “There is a limitation in the immigration law that only 10,000 visas can be issued through the EB-5 program in a year,” Mr. Polivy pointed out.  “That limit has not yet been reached, but we are getting a lot closer—it would be helpful if that could be raised.”

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