EB-5 Program Important Tool for Developers and Investors, Economic Impact Difficult to Assess

Written by Kate Haggerty

The EB-5 Immigrant Investor Program, administered by U.S. Citizenship and Immigration Services (USCIS), was designed to attract foreign investments to stimulate the national economy and create jobs.  The program grants foreign investors a two-year conditional permanent resident status in exchange for a significant investment in an eligible business or development ($1 million, or $500,000 in a designated “targeted employment area”). EB-5 projects can vary in scale from individual investments to large-scale projects like the Brooklyn Navy Yard redevelopment, which involved 120 EB-5 investors for $60 million total. ICIC has conducted previous research on the program’s potential for use in inner city development projects.

The EB-5 Program is set to expire this year, and Congress has not yet renewed it. Much of the current news regarding the EB-5 Program focuses on the program’s connection to controversial immigration legislation, or opportunities for fraud within the regulation of the program. This news is relevant for U.S. leaders as they consider EB-5’s future. However, information on the program’s ability to achieve its mission of catalyzing economic development in distressed areas is equally relevant to this policy decision.

A working paper (“A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects”), released by the NYU Stern Center for Real Estate Finance Research (CREFR) and presented at an EB-5 Summit on March 27th, describes the role of EB-5 capital in real estate development. The paper details the placement of this type of capital within the funding stack of real estate projects, and highlights an emerging trend towards the use of this type of capital as a “smaller slice” of large development projects. While the paper and the Summit did not dive into economic development issues per se, one message was clear: the economic impact of the program is hard to measure.

This message remains a constant in conversations about the program. The lack of publicly available data, an issue raised in ICIC’s 2014 report Increasing Economic Opportunity in Distressed Urban Communities, makes economic impact measurement challenging.  Another factor that challenges the measurement of impact is the definition of “targeted employment areas” for EB-5.

In order to incentivize investment in economically distressed areas, the EB-5 program allows for the lesser $500,000 minimum in targeted employment areas, which makes this type of investment popular with foreign investors. Currently, a targeted employment area (TEA) is defined by the USCIS as “a rural area or an area experiencing unemployment of at least 150 percent of the national average rate” at the time of investment. Using that definition, the boundaries for these areas are usually created under state jurisdiction; they can sometimes encompass an entire county, while other times comprising a cluster of census tracts.  The sole reliance on unemployment levels to designate an urban TEA and the lack of consistency in designations raise two questions: 1) Are these TEAs truly distressed areas? and 2) How can we better measure EB-5 investment impact on job creation and employment in these areas?

ICIC, for example, defines distressed urban areas, or the inner city, based on a formula that incorporates rates of poverty and unemployment and compares them to surrounding areas. This combination of criteria has allowed ICIC to identify not just tracts with high poverty and unemployment but also areas where those problems are particularly concentrated, compared to the surrounding metropolitan area. Only 58 percent of inner cities overlap with TEAs.

An estimated $2.6 billion was invested in the EB-5 program in fiscal year 2014, approximately 95 percent of which was invested through regional centers. However, the differing designation of TEAs and the lack of readily available data regarding the EB-5 program make it hard to evaluate the program’s impact on TEAs. An improved and more consistent measurement of TEA boundaries (e.g., adopting the inner city definition) could also tell us more about the impact of EB-5 funds on distressed urban areas.

As a panelist noted at the EB-5 Summit, it’s important that those considering utilizing EB-5 capital in real estate development, “Keep in mind the brand of the program… job creation.” The creation of American jobs, he argued, is the reason that the U.S. government is willing to trade valuable assets (visas) for capital, and job creation is increasingly relevant as the country works to recover from the Great Recession.

But where are these jobs created and who is filling them? Are they quality jobs? How many of these jobs are long-term? Because of their involvement in the application process for the program, the Regional Centers that administer the projects likely have the most reliable source of data on TEAs, job creation and local investment. With leveraged regional center knowledge and increased transparency of data from the USCIS and other applicable players, reliable third-party researchers should be able to evaluate the impact this program has had on inner cities. If data can show that EB-5 funding has indeed catalyzed major economic development in U.S. inner cities and other distressed areas, including much needed job creation, the case for renewal of the EB-5 Immigrant Investor Program can be further strengthened.