Friday, December 09, 2011

Senators show enthusiasm for EB-5 regional center program; questions raised about level of investment, length of term; a skeptic vs. Sen. Leahy

The EB-5 program of investment immigration--at least via its most popular incarnation, the regional center program--has been booming, with the number of regional centers, privately owned (mostly) investment pools set up to recruit immigrants seeking green cards, growing from some 35 to 200 in three years.

However, the regional center program is a pilot program, extended five times for 19 years, and set to expire at the end of September 2012. So Congress has begun considering making the program permanent, and the Senate Judiciary Committee 12/7/11 held a hearing on a bill (Creating American Jobs Through Foreign Capital Investment Act) sponsored by Chairman Patrick Leahy (D-VT) to do just that.

The only cosponsor so far is Sen. Chuck Schumer (D-NY), but, as at previous Congressional hearings, most legislators seemed positive about a program Leahy called “as much of a win-win program as one could think of.”

Two of the three witnesses were program boosters, and the few Senators skeptical seemed more exercised by the rare intersection between EB-5 and illegal immigration than questions of fraud and enforcement.

Still, one Senator put it plainly, that the program is selling green cards.

And the program’s one prominent critic, David North of the (right-wing) Center for Immigration Studies got his due, suggesting that the U.S. scrap the regional center program, that it delivers results that have been poorly documented, and that Senators should not be seduced by positive anecdotes. At the least, he said, the minimum investment--which hasn’t been raised since 1993--should be increased.

Program supporters pointed to the need for predictability, so regional centers and immigrants can plan. “If we do not, potential investors will be lost to Canada, the United Kingdom, Australia, and other nations that recognize immigration through investment,” Leahy said.

However, as North pointed out, other nations demand more from such immigrants.

How valuable is it?

In Leahy’s opening statement, he offered promotional boilerplate, that this year “this program is on track to create an estimated 25,000 jobs, and provide direct investments in American communities of $1.25 billion.”

Of course, the word “create” encompasses create and preserve, and create indirectly, so with projects like the Atlantic Yards EB-5 project, no new jobs would be created..

If fully utilized, he said, the “program has the potential to create or preserve 100,000 jobs per year, with contributions of $5 billion in foreign capital investment. And these benefits come at no cost to American taxpayers.”

No cost? The project is portrayed at no cost to the taxpayers, but Leahy and other boosters ignore the issue of opportunity costs, what we’re giving up by not running the program differently.

And, of course, such statements leave out how developers and middlemen can make big money.

In talking about how EB-5 has “revitalized a rural area of Vermont,” Leahy waxed nostalgic. He cited how companies like Marriott and Lennar Homes have pursued EB-projects around the country. Such programs, he said, are “why we have support from Republicans and Democrats.”

Some skepticism

Sen. Chuck Grassley (R-IA) offered some skepticism, suggesting that “we need to enact reforms to make the EB-5 regional center program worthy of its goals.”

“At the end of the day, one fact remains,” Grassley declared. “The program is simply a way for wealthy investors to buy a green card, not only for themselves but for their families. No skills or management experience is needed. One only needs to write a check... While taking a financial risk... is admirable, evidence suggests that it’s not doing enough to spur job creation.”

But he didn’t drill down very far.

Grassley expressed concern about a report that an EB-5 project in South Dakota was creating jobs for illegal immigrants. He also cited a Reuters report about deceptive marketing, and how both USCIS and the SEC claimed they were unaware of any marketing abuses.

Grassley noted that the official investment level has remained the same for some 20 years: $1 million or, when in a Targeted Employment Area (rural or high unemployment), $500,000. Perhaps, he said, the dollar amount should be raised.

An EB-5 success story

Bill Stenger of Jay Peak Resort, Jay, VT, was introduced as a personal friend of Leahy, and was highlighted in a Leahy press release.

He explained how Jay Peak, located in Vermont’s “Northeast Kingdom,” has since developed several EB-5 projects, “creating over 2,000 jobs in our region and over the next two years will create that number of jobs again.”

Affordable capital, he said, is almost non-existent in this marketplace, but Jay Peak has raised over $250 million from more than 500 investors from 56 countries.

“The EB-5 Program is a win-win-win program for all involved,” Stenger asserted, citing benefits to Jay Peak, to local workers in an area of high unemployment, and to foreign investors seeking green cards.

“I’ve met personally almost every investor participating in the Jay Peak Program and they are a group of wonderful people, so appreciative of the opportunity to live in, and contribute to, our society,” Stenger said.

And now EB-5, he said, will be used to fund a new biotech research company.

His recommendations: make the program permanent and ensure swift EB-5 case processing.

The opposition

The CIS’s North, however, called it “ a dysfunctional portion of a silly program, which should be allowed to wither and die”

His conclusions, North said, come after studying American program from the outside and being retained by the government of Australia to evaluate its program.

“The program is placed in a very odd and nonhelpfful bureaucratic location for the stimulation of international investment,” observed North. “Its scale is all wrong, we are giving away too much for too small an investment.”

He suggested the program should be run by the Treasury, State, or Commerce departments. To truly stimulate foreign investment, decisions made by foreign bankers, or by opening up an American IPO, would do much better.

He said that raising venture capital at half-million a tranche is inefficient. And regional centers “essentially undercut the more sensible million-dollar part of EB-5 program.” (Some EB-5 supporters acknowledge North makes some points worth considering.)

“Such programs, if we have them at all, should be about creating business entities, not passive investments; it should be about creating real jobs, not elaborate calculations about the indirect creation of jobs,” he said.

North said the program attracts subpar investments, and often scandals, and the program is too filled with middlemen, both public and private.

In his written testimony, he noted that jobs created via regional center investments “do not need to be identified as such, they can be calculated as ‘indirectly created’ by just about any ‘reasonable’ methodology the regional center can conjure up.”

The reason for failures--the decertification of two regional centers in California--is because EB-5 attracts “truly marginal opportunities in which the promoters have to struggle to get any money at all.”

Criticizing the middlemen, he said, “I must point out to my friends on the right that eliminating the regional center part of this program should be praised by all thinking free marketers.”

Pro and con

In his written testimony, North said that “immigration visas to this struggling, over-populated nation should be regarded as precious,” language that likely gets some to disregard his perspective.

North cited “genuine” spouses, really talented aliens, and actual refugees. “. “In this program they go to people who have nothing to offer... except a two-year investment of half a million dollars.”

Also criticizing the program was the Federation for American Immigration Reform, focusing on shady middlemen and fraud and abuse.

Meanwhile, the Fort Lauderdale Sun-Sentinel saluted the program, as did the American Immigration Lawyers Association (AILA).

What to do

The regional center program should not be streamlined, said North, criticizing “an agency that loves to say Yes to applicants,” but has a “high rates of internal denials, and for good reason.”

If the program continues, he said, the minimum investment should be raised, as with other English-speaking countries.

An official supporter

Immigration lawyer Robert Divine, former chief counsel and acting director of USCIS, and VP of the Association to Invest In the USA (IIUSA), the industry association of regional centers and other providers, was professional but slippery.

For example, Divine suggested that the recent EB-5 boom has been a result of “USCIS has been making the rules clearer and the processes more rational.

“More people have been willing to put effort and money into the process to find good projects and develop them,” he said, “and more investors are willing to invest the money and take the risk.”

How about more developers are seeking cheap capital, more regional center middlemen are making money, and more Chinese millionaires want to get their kids into American universities?

In his written testimony, Divine suggested that investment “prime small and large EB-5 regional center projects most of which would not go forward otherwise. In the current economy, EB-5 money is filling the gap in the traditional levels of equity to debt. All this occurs at no expense to the U.S. taxpayer.”

The Atlantic Yards arena, of course, was already going forward.

In his written testimony, he exaggerated the numbers:
If all 10,000 EB-5 green cards were used each year, and if half of the numbers represented investors (the rest being family), the investment would be $2.5 billion dollars and job creation might be 50,000 per year. Yet the economic impact is far greater than that.
That’s questionable. Many investors are family units, aiming to bring their children to America, so it's likely that fewer than one-half the numbers represent investors.

Raising the minimum?

Divine mused vaguely about raising the investment amount--remember, it hasn’t kept up with inflation--only to evade the question.

“Is half a million dollars enough?” he asked rhetorically. “The idea of that level was that that amount could be used if it’s in a certain targeted area of high unemployment, or in rural areas. I guess the program has worked, because almost all the investment has been spurred in those kind of areas. But half a million dollars is a lot of money. It’s a lot of money for one person to put in one risky project. And if you put together a bunch... in a pool, that can be a big project and it can create a lot of jobs.”

Thus he segued to avoid the question of minimum to emphasize the cumulative potential for investment.

Q&A

Leahy posed some softball questions to Stenger, who talked up the impact of EB-5 and, in response to North, said that EB-5 helped small companies. (All other regional centers are run by private entities, while in Vermont, it’s operated by the government, likely ensuring greater transparency and legitimacy.)

Stenger brought a photo “of just a fraction of the [550] construction workers” on the project.

“Woudl you agree [immigrants] have nothing to offer other than their money?” Leahy asked, scoffing at North’s formulation.

“I couldn’t disagree more,” said Stenger, who emphasized that he’d met nearly all the investors personally.

But he got to the meat of it, saying he couldn’t raise 50% down, the minimum to borrow money.

“You’re speaking from a real world experience, not from a think tank experience,” declared Leahy with a sneer.

Grassley asked Stenger how he policed undocumented workers, a question Stenger easily fielded, given that northeast Vermont is not a hotbed of illegal immigration.

Asked by Leahy to comment, North called Stenger’s project apparently “a successful operation,” but warned, “I don’t think the United States Senate should operate on anecdotes.”

Leahy was snarky, saying, “I realize that I may live on a dirt road... and am just a small town lawyer, but I actually read other things.”

Length of investment term

Grassley asked how many investors take their money out after two years.

Divine acknowledged that most investors prioritize getting a green card, return of their principal, and then potential return. So most would like to take their money out, but in reality very few can do so after two years.

Stenger said his programs require five years. (So does the Atlantic Yards EB-5 investment, though there’s no public explanation of how the money would be paid back, and the collateral regards future development rights.)

North, however, warned that the law allows taking the money out after two years, though in some cases, it either may not be a good idea or may not be permitted. He said he’s asked USCIS if its done research on how much money stays beyond two years, and the answer was no. “There’s sort of a lack of curiosity in the agency about those things.”

Leahy asked Divine if it has been his experience that money gets taken out after two years.

Divine didn’t quite answer the question. He mused that it’s not easy to do so, given that a project like a hotel would have to be purchased or refinanced.

“But hey, if it’s a successful project, and can be sold,” Divine said, again evading the question, “I don’t see any reasons why the investor can’t realize a return on his investment.”

Marketing abuses?

Grassley asked Divine about marketing abuses cited by Reuters. “Is it possible everyone outside the beltway is aware of these promoters but our government sits idly by?”

Divine responded piously that people are offered securities full of warnings in the placement memorandum.

“Now, what gets said on the ground, in another country, about what those documents are--is it possible that there are some promoters in China or, elsewhere, who are mischaracterizing, in Chinese, what these documents say?” he asked rhetorically. “It’s possible. If that did happen, then that would be a violation of U.S. securities laws.”

Well, what about Atlantic Yards marketing, in English, on video?

Divine acknowledged that there can be fraud, as in any offering, but USCIS, “as I understand it, “ is working closely with the SEC.

North pointed to the termination of regional centers in El Monte and Mojave Valley, California. He said “not necessarily the regional center people, but the developers in those two places were snake oil salesmen.. and USCIS sort of found out. But there are other snake oil salesman out there that have not been detected,” he said.

“I just think there ought to be more, not fewer, checks and balances.”

Broad support

Leahy made an offhand comment about fraud: “we certainly had nothing of that sort with anyone involved in our contractors in Iraq.” He placed in the record letters from those supporting the program.

Sen. John Cornyn (R-TX) introduced letters from the cities of Houston, Dallas, and Amarillo all urging making the program permanent.

Beyond those immigration organizations concerned about letting in the wrong people, there doesn't seem to be a non-ideological, good-government group criticizing the regional center program. Yet.

A key supporter

Senator Jefferson Sessions (R-AL), who’d sounded his cheer for the program in a previous hearing, again expressed support: “I think we share a common understanding that the EB-5 program can be good for America.”

“I do think we are at a point where we are probably ready to make it permanent,” he said, suggesting the opportunity to review it carefully.

What about the competition?

Sessions asked North about other countries’ policies.

Australia, North said, seeks entrepreneurs and business people, as opposed to passive investors, sets age limits (under 45 in one category, under 55 in another), and requests more money. (Here’s info on Australia.)

“If we’re going to be doing this,” he said, “I think we should be doing this at least at the million-dollar level.”

“i think it’s something we should consider,” Sessions mused, adding that “the age factor is something we should consider.”

Divine noted that Australia has both a program for entrepreneurs and a passive investor program. Canada, he said, “has beaten the U.S. in attracting foreign investors... because of the lack of risk and job creation requirements.”

Actually, it likely was because, until last year, Canada was cheaper, requiring only $400,000--but then doubled it. (Here’s info on Canada.)

“OK, that’s the program here, that’s part of the deal,” Divine said. “You can’t keep the green card if you can’t show you have created ten American jobs with your money.”

Not quite. You can preserve jobs, and you can create jobs indirectly, on paper.

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