What is the Potential for EB-5 as a Vehicle for Impact Investing?

Written by Kim Zeuli, ICIC

Impact investing holds significant promise for directing more resources to America’s distressed urban cores. The EB-5 program could be an effective investment tool to achieve this goal but remains underutilized. The U.S. government established the program in 1990 to improve economic conditions, especially in high poverty and high unemployment areas, by attracting foreign capital to support investments that create local jobs. Interest in EB-5 as a new investment tool was relatively limited until the recent recession and subsequent contraction of more traditional sources of capital. Today, there are approximately 440 EB-5 regional centers operating across the country. Last year the government received over 6,300 applications to the EB-5 program.

The EB-5 Immigrant Investor Program, as it officially is titled, is administered by United States Citizenship and Immigration Services and housed within the Department of Homeland Security. The program’s “visa-for-dollars” moniker describes the fundamental incentive within the program: EB-5 visas are granted to foreign nationals who make a significant investment in a business that creates at least 10 full-time jobs.

The minimum investment requirement for EB-5 is set at $1 million, or $500,000 if the business is located in a targeted employment area (a rural area or an area with an unemployment rate of at least 150 percent of the national average). The investors and the project are subjected to scrutiny and must meet several criteria, including securities regulations, before the visas ultimately are granted. Once an EB-5 investment application is approved, the investor also must secure conditional residency status before ultimately receiving permanent residency status. The visa approval process is handled by the U.S. State Department.

Since its inception, the EB-5 program has attracted investors from numerous countries but is increasingly dominated by investors from China. In 2013, over 80% of EB-5 visas were issued to Chinese investors. The program also attracts investors from South Korea, Taiwan, the United Kingdom, India, Mexico, Iran, Canada, Venezuela and Japan, among other countries.

During the past year, we interviewed over 50 EB-5 experts and economic development professionals to better understand the opportunities and barriers to using EB-5 for impact investing in the inner city. The government does not release data on EB-5 investments, which makes it difficult to analyze the impact of the program on the nation’s most economically distressed areas.

Our extensive research identified 178 EB-5 projects across the U.S. located in distressed urban areas. We ultimately chose five as subjects for in-depth case studies:

• University of Miami Life Science and Technology Park: Miami, FL
• NYLO Dallas South Side Hotel: Dallas, TX
• Bright Oaks Memory Care Centers: Chicago, IL
• E3 Cargo Trucking: Indianapolis, IN
• Education Fund of America Charter Schools: Arizona

Each of the five cases represents a different successful model for using EB-5 funding to increase employment and revitalize urban areas.

In spite of these findings, the EB-5 program largely seems to have been overlooked by city governments, economic development corporations, foundations and other organizations actively promoting inner city investment. This may be due in part to the complexity of the program. The program also unfortunately suffers from a negative reputation due to a few high-profile cases of fraud and the bureaucratic labyrinth associated with many government programs.

We developed the following set of recommendations for the community of organizations engaged in impact investing to help them fully leverage EB-5 to maximize economic opportunity in distressed urban areas:

• Develop an educational campaign to increase awareness about the opportunities and challenges of the EB-5 program, particularly in connection with traditional economic development tools;

• Build a nexus of EB-5 experts that could be leveraged in urban areas across the U.S. to provide the necessary technical assistance;
• Broker and invest in EB-5 projects to direct more projects to distressed urban areas, accelerate EB-5 deals in target neighborhoods, and ensure successful outcomes.

Additional insights from our research, which was supported by the Surdna Foundation, the Garfield Foundation and the Boston Foundation, will be published in a forthcoming report Increasing Economic Opportunity in Distressed Urban Communities with EB-5.

The research also will be featured at an impact investing event on July 1st at the Harvard Kennedy School: Putting Foreign Capital to Work through EB-5.