Global hotel developers and investors have reason to rejoice. Only a day before the expiration of the EB-5 program, which grants foreigners a green card for themselves and their families if they invest at least $500,000 or $1 million (depending on the area) in a business that creates or preserves at least 10 jobs for U.S citizens or permanent residents, Congress has extended it until September 30, 2016, with no changes.
Many in the industry believed the program was going to be extended, but amended. This would have included an increase of the minimum threshold for investment and a change to the rules about where development projects could be built. However, several proposed changes derailed consensus among lawmakers who were voting to renew the program.
The program has been put to good use in the hospitality arena by both U.S. and global investors, particularly, of late, from China. It allows U.S. hotel developers/investors to fill a void in the capital stack, while giving investors outside U.S. borders the opportunity to not only invest in an overseas project, but to gain a pathway to live in the U.S.
Rife With Fraud?
The program, however, has come under scrutiny of late. Federal auditors have expressed concerns that the program is vulnerable to abuse and fraud. A U.S. Government Accountability Office (GAO) report said some investors may "be involved in schemes to fraudulently portray job creation or economic activity."
One example of this is the O’Hare Hotel and Convention Center, which was to be built on now-vacant land located in Chicago. In 2013, the Securities and Exchange Commission sued the project's developer, Anshoo Sethi, accusing him of scamming more than 250 EB-5 investors, most of them from China.
In November, California Sen. Dianne Feinstein called for an end to the program altogether citing that "it sends a message that American citizenship is for sale." Iowa Sen. Charles Grassley is just as vocally opposed to it, and former New York Governor turned developer Eliot Spitzer has gone on record saying that EB-5 "rubs him the wrong way."
Feinstein's state has looked to tighten the noose around EB-5's neck. The state now defines a targeted investment area as 12 or fewer contiguous census tracts with a total average unemployment rate of 150 percent of the national average. A census tract can be as small as a city block to as large as a county in sparsely populated areas.
Had a compromised bill passed, it would have adopted the California definition nationwide and raised the minimum investment required in such areas to $800,000.
Meanwhile, a recent Cornell study makes the case that "despite the growth of the program, the EB-5 market is opaque and inefficient, and availability of EB-5 financing may encourage development of speculative (and potentially economically marginal) hotel investments.
"This program has attracted considerable attention from foreign nationals, particularly those residing in China, and we've seen considerable recent growth in investment volume," said the study's co-author Arian Mahmoodi. "But without proper checks and balances, we believe that the availability of EB-5 financing may encourage development of speculative hotel investments."
Yet, Here It Stays
Still, the program remains. According to the GAO, EB-5 has produced $11.2 billion in investments in the U.S. since its launch in 1990. The lion’s share of which have come from China, accounting for about 85 percent of all visas granted through it last year.
Many in New York champion the program, including real estate investor Steve Witkoff, who, as The Real Deal reports, is raising $220 million from EB-5 investors for his 1 Park Lane development. Meanwhile, Related Companies has raised more than $600 million from EB-5 investors for its Hudson yards development.
The program will undoubtedly be put to task again once next fall rolls around. As Barry Johnson, the founding executive of SelectUSA, which seeks to attract foreign direct investment, said, EB-5 is more an immigration play than an investment play.
In any case, the next year gives investors and developers the same chance and rules to use EB-5 to their benefit.