A 1990s-era cash-for-visas program was designed to lure foreign investment to distressed communities. Instead, it subsidizes luxury real estate. Congress and President Trump can either reform it, scrap it—or shore up the status quo.
By the time the mid-2020s roll around, the Hudson Yards development will have completely upended New York City. Sixteen skyscrapers, one taller than the Empire State Building, will encompass more than 17 million square feet of new residential, commercial, and retail space. The mega-development will also feature two soon-to-be architectural stars along Manhattan’s West Side: a slick performing-arts venue dubbed the Culture Shed, designed by hot-shots Diller Scofidio + Renfro, along with Thomas Heatherwick’s Vessel, a towering honeycomb stair-step pavilion.
At a total cost of $25 billion, the new heart of New York may be the biggest real-estate undertaking in American history. Hudson Yards is also a milestone for another reason: This city-within-a-city is likely to be the single greatest beneficiary of the EB-5 immigration program in the country. The developer for Hudson Yards, Related, raised more than $600 million in its first phase through the EB-5 Immigrant Investor Program, which essentially allows foreign investors to trade capital for visas. Phase two is targeting another $600 million.
Here’s how EB-5 works: Foreigners who invest between $500,000 and $1 million in projects that create U.S.-based jobs are allowed to apply for permanent resident status for themselves and their families. Visa petitioners can invest the lower amount if they finance projects in rural or economically distressed areas. The idea behind the program is to help spur job-creation in places that desperately need investment.
Plainly, Hudson Yards is nobody’s idea of disadvantaged: The median price for a condo north of 20th Street near the High Line is $6 million. And yet it qualified for the underdog deal.
How in the world did a program designed to draw badly needed economic development to disinvested neighborhoods wind up paying for skyscrapers in Manhattan’s glitziest new haunt? That’s a question members of Congress are starting to ask. As it stands, the EB-5 looks like a form of reverse-Robin Hooding: Developers in wealthy districts tap unemployment in poorer ones in order to unlock foreign capital intended for distressed areas. Wealthy aliens get visas, developers get cash, and cities get luxe towers that only the global elite can afford. In a civic sense, something about this is ... untoward.
Recent efforts by lawmakers to reform the cash-for-visas model, however, may be cut short: President Donald Trump, whose family enterprises have made use of EB-5 capital, might prefer to preserve the status quo. Trump recently lent his name to a Jersey City tower built with EB-5 financing (and developed by his son-in-law and consigliere, Jared Kushner). Bloomberg Politics unearthed a promotional video soliciting investors for the Trump Bay Street project, subtitled in Chinese and scored with the theme song from The Sopranos, because of course. A different pitch targeting Chinese investors, this time for a hotel that might be built in Austin, also bears the Trump brand. And Trump Hotels is now planning a major expansion for its U.S. portfolio. The dream could well be to build hotels and make China pay for it. Thanks to EB-5, that dream can be made a reality.
Publicly, President Trump may lock horns with China and issue orders barring refugees, but in EB-5 he may have found the kind of immigration program he can get behind—the kind that serves to channel the plight of poorer communities into mojo for high-end real-estate developers.
Why ‘greenbacks for green cards’ isn’t working
Congress created the EB-5 program as part of the Immigration Act of 1990, the law that categorizes permanent-resident visa status by employment. The EB-2 category, for example, secures the immigration of aliens with advanced degrees or unique skills; EB-3 provides visas for employment sectors with labor shortages; and so on. Under the law, EB-5 could be considered an entrepreneur class: immigrants willing to invest $1 million in a project that creates at least 10 U.S. jobs.
Then there’s the second, lower-threshold track for EB-5 investment. Visa petitioners can qualify with an investment of $500,000 if the investment falls into a certain geographic area known as a targeted employment area, or TEA. TEAs were designed with two kinds of places in mind: rural areas and distressed urban areas. The law sets requirements for the former (areas falling outside a metropolitan statistical area) and the latter (areas with 150 percent of the national average for unemployment). But lawmakers failed to define what serves as an “area”—how much geography could be folded into the watershed of a single real-estate development for the purposes of securing EB-5 funds.
In 1992, Congress launched a regional center pilot program to try to spark interest in EB-5 investment. Regional centers can be public or private or partnerships; think of them as local gate-keepers that sherpa both domestic developers and foreign investors through the process. The bill further eased the jobs requirement: Projects associated with regional centers could qualify under TEAs (the easier $500,000 investment track) even if they created jobs indirectly (construction jobs, for example).
For more than a decade, neither EB-5 nor the regional centers were much of a going concern. By 2007, there were just 16 regional centers operating across the country, one for every year of the program’s existence, according to the Brookings-Rockefeller Project on State and Metropolitan Innovation.
Then the global financial system cratered.
The Brookings-Rockefeller report showcases the national explosion of regional centers during the Great Recession. That trend has only continued through the recovery. All told, the U.S. Citizenship and Immigration Services (USCIS)—the agency that oversees both EB-5 and the regional centers—has approved more than 865 centers, with locations operating across all 50 states and the District of Columbia.
Those regional centers helped developers find financing when credit was tight. Accordingly, areas with high levels of development and immigration boast the densest concentration of regional centers. Think Houston, New York, coastal Florida, Southern California. Once obscure, EB-5 has since emerged as a mainstream financing option in these places and beyond.
“Usually tax credits like [low-income housing tax credits] are comparable, providing the gap between the cost of the project and the affordability component,” says Dekonti Mends-Cole, director of policy for the Center for Community Progress. “EB-5 looks like a gap funding source, if it were used for affordable projects.”
Far from transforming life in rural or poor America, however, the greenbacks-for-green-cards program has mostly benefited wealthier areas. States had a lot of leeway under the 1990 law to define TEAs. Developers of luxury projects, given a long leash from the states, have proven most adept at capturing investment from abroad, namely China—all while purportedly bringing jobs to high-unemployment areas.
In many cases, they do it via packaging up adjoining Census tracts in order to create an impression of economic distress. This kind of developer-led gerrymandering in New York is how unemployment in Harlem makes the case for high-rises in Midtown.
How to gerrymander your way to EB-5 success
Given two tiers of investment for visas—$1 million or one-half million—visa petitioners have sensibly sought out the lower-cost option. Foreign investors may live anywhere with their visas, so the controlling factors for their investments are cost and risk. (Chinese nationals, who often seek visas so that their children can receive an American education, account for some 90 percent of EB-5 investors.) The process for defining TEAs, under which developers (or regional centers) qualify for that lower threshold, guides the flow of foreign capital.
Different states define TEAs in various ways, setting different standards for how many Census tracts can be gerrymandered into a larger area of economic impact. Some states statutorily cap the number of tracts, while others leave the formula open to the discretion of relevant state authorities.
California’s method for calculating TEAs is more transparent than most. The Governor’s Office of Business and Economic Development limits gerrymandered TEAs to 12 tracts. There’s a case to be made for this approach. After all, not every retail or construction job created by a development will go to someone living within the same single Census tract as the project in question. Most jobs will go to workers living nearby-ish.
California offers a mapping tool to help would-be developers apply for TEA consideration. Under the right circumstances, a developer (or regional center) can qualify an EB-5-funded project in a tony neighborhood as a TEA by hopscotching across the city’s tracts. So long as the TEA bundles enough distressed communities to achieve, in aggregate, the necessary unemployment target—150 percent of the national unemployment rate—then it doesn’t matter if the project will be built in, say, Beverly Hills.
Gerrymandering shows how the Waldorf-Astoria Beverly Hills near the intersection of Wilshire and Santa Monica boulevards qualified for EB-5 funding in January 2016. The map above reconstructs one of two possible TEAs whose unemployment, in aggregate, would reach more than 150 percent of the 2014 national unemployment rate. While the 90210 Census tract where the hotel is being built had an unemployment rate of 1.3 percent at the time the developer applied for EB-5 in 2015, the gerrymandered TEA nevertheless met the much higher 9.3 percent target threshold. The Waldorf-Astoria Beverly Hills received $150 million in EB-5 financing, providing visas for up to 300 investors and their families.
In New York, the matter of defining TEAs falls to Empire State Development, the economic development agency for the New York state government. Unlike California, there’s no limit to the number of Census tracts that can be gerrymandered to justify EB-5 funding for a project. Edward Kowalewski, director of international investment programs for Empire State Development, says that the agency determines whether a project meets a TEA threshold based on its address alone.
“Obviously, if the Census tracts went from downtown Manhattan to Albany, that would stretch reason, but several adjoining Census tracts would still qualify,” Kowalewski says. “We try to use good judgment. Is somebody going to get on a train or a bus to get to a particular work site?”
Manhattan developers don’t need to go as far as Albany to bolster their unemployment figures. North of 96th Street will do. Gary Friedland, scholar in residence for the Stern Center for Real Estate Finance Research at New York University, flags the TEA that qualified 1 Park Lane, a skyscraper along Billionaires’ Row, for some $200 million in EB-5 financing. (Note that the EB-5 capital raise for 1 Park Lane was eventually suspended, as the project was entailed in the sprawling Malaysian embezzlement investigation.)
While the skyscraper is located on one of the priciest blocks in Manhattan, at the foot of Central Park, the TEA takes a trip through Central Park to East Harlem, where the Carver Houses public housing project provides the qualifying jolt of unemployment. So instead of requiring $1 million investments, 1 Park Lane qualified for the $500,000 level—a better bet for foreign investors. The economic distance between Billionaires’ Row and the Carver Houses, however, is vastly larger than the TEA suggests.
Similarly, the TEA for Hudson Yards—probably the highest-octane real-estate development in American history—snakes up Central Park and snares several high-unemployment Census tracts, including some in East Harlem dominated by public housing. This map shows the tracts used by Hudson Yards in 2016 to qualify as a TEA for its second tranche of funding, per records obtained under a Freedom of Information Law request.
Manhattan is not alone in funneling hundreds of millions in capital meant for distressed areas into opulent projects. The Century Plaza Hotel in Los Angeles has raised $450 million in EB-5 financing. The same goes for Skyrise Miami ($258 million in EB-5), The Wharf in Washington, D.C. ($115 million), and the Brooklyn Public Library redevelopment in Brooklyn Heights ($110 million)—all rich developments, all boosted by capital raised through visas. Then there’s the granddaddy of them all: Resorts World Las Vegas, a mega-resort and casino complex that has assembled an astonishing $999 million in EB-5 financing toward its $4 billion estimated project cost.
As often as not, the argument that these developments will affect low-employment areas is a stretch. As a study by the Government Accountability Office demonstrates, 97 percent of visa petitioners elected to invest in a TEA at the $500,000 distressed or rural level. More than 90 percent of the TEAs for qualifying EB-5 projects combined Census tracts. Of this gerrymandered set, one-quarter combined 11 to 100 areas, and 12 percent stitched together more than 100 tracts.
“The TEA, originally intended as a limited exception, has become the rule and thus rendered meaningless,” Friedland says.
That’s why some members of Congress have settled on reforming EB-5. They want to bring the program back in line with its original legislative intent and streamline or eliminate the gerrymandering process.
Other critics say the U.S. shouldn’t be in the business of disbursing 10,000 visas a year to foreigners just because they can afford to cut a check—no matter where the investment winds up. Accusations of fraud, abuse, and even potential penetration by foreign intelligence services bolster the case for fixing EB-5 or eliminating it altogether. USCIS has drawn loud criticism from both Congress and the U.S. Department of Homeland Security.
Two weeks ago, USCIS proposed several rules changes to partially answer its critics. The new dispensation would raise the minimum EB-5 investment from $1 million to $1.8 million for regular developments and from $500,000 to $1.35 million for TEA developments. The rule would also do limit gerrymandering: For urban developments, a TEA would be limited to the Census tract within which a development falls and contiguous tracts “in which the new commercial enterprise is principally doing business.” States would be out of the business of defining TEAs altogether. This rules change has a long way to go until it becomes permanent: The public comment period closes April 11.
How EB-5 could instead boost poor and rural places
To see the kind of problem EB-5 was originally designed to solve, see the Hardesty Federal Complex. Once home to the Kansas City Quartermaster Depot, this set of hulking federal warehouses in an 18-acre brownfield adjacent to the Kansas City Terminal Railroad has sat mostly vacant since 2002.
Where Hardesty looms today, however, Northwest Missouri State University will soon offer its students the opportunity to pursue a degree in urban agriculture. It will be the first-ever urban agriculture degree program in the nation, in fact, and it’s steering the relocation of the Maryville, Missouri-based university’s agricultural sciences department to Kansas City.
The new university campus will serve as the anchor for an ambitious project that now includes a culinary school, commercial retail, seven acres of rooftop farming, and a food hub: a smorgasbord of programming in an area that Kansas City Mayor Pro Tem Scott Wagner has described as a food desert.
Asian Americans for Equality, a New York-based nonprofit organization, closed on the Hardesty site in November 2011. Hardesty Renaissance will be the fourth development project undertaken by AAFE, and the group intends to use EB-5 financing to make it happen.
“Through EB-5 financing, in this blue-collar, low-income community in the historic northeast of K.C., we’re now able to advance the development of a new university, the food hub, small-business retail, rooftop farming—of course with the goal of creating jobs,” says Ernesto Vigoreaux, chief development officer for AAFE.
The Hardesty site qualifies as a TEA on its own, as a single Census tract, opening the investment opportunity to the $500,000 level. So do the other three development projects in which AAFE is involved, all of which are located in New York: a supermarket and retail center in the Far Rockaways to replace a grocery store destroyed by Hurricane Sandy; One Flushing, an affordable housing complex designed around feng shui principles in Queens; and a flashy entrepreneurship center, designed by the firm Leong Leong, also in Flushing.
Financing under EB-5, Vigoreaux says, is “simply put, meant to help other [community development corporations] with gap financing that they may need.” He adds, “We’re looking really to utilize this financing vehicle for its original intent, which is to channel or funnel foreign equity investments into distressed communities.”
Vigoreaux says that the financing is necessary for acquiring properties that are harder and harder to come by in the private market. Rents for a nonprofit housing development increasingly cannot cover the acquisition costs for a site or the debt service associated with the purchase. “It’s what got us into EB-5 to begin with,” he says. “There was a time when properties were given away to CDCs for a dollar.”
Alexandra Loveless, the director of the North Dakota/Minnesota EB-5 Regional Center in Grand Forks, North Dakota, says that she wants to see reforms to make the program work the way it was always meant to. The regional center she runs is part of the EB-5 Rural Alliance, an inter-state affiliation of regional centers working to steer foreign capital toward rural America. Only 3 percent of EB-5 petitioners elect to invest in rural opportunities, according to the GAO.
“There’s definitely some issues with the ways that unemployment TEAs are currently being classified that allows the majority of the investment to go into areas that are really much more affluent than they appear to be,” Loveless says.
Rural EB-5 projects look a lot different than those in Kansas City or California. The North Dakota regional center sponsored the construction of an ethanol plant, for example, as well as an oil and gas exploration project. Loveless says that EB-5 financing has been critical for natural resources in particular. After gas prices crashed in 2009 (and dipped again in 2014), banks tightened lines of credit to oil companies. So EB-5 offered a form of gap financing at a time when bank confidence in domestic oil projects was low.
Loveless points to one development as impossible without financing through foreign investment. In 2014, a Plymouth, Minnesota-based company called Ultra Green Packaging opened up a manufacturing facility in Devils Lake, North Dakota. The company turns wheat straw, an abundant agricultural byproduct, into biodegradable food packaging—picture eco-friendly take-out clamshells. Using EB-5 funds, Ultra Green opened a plant that promised some 300 green jobs in a lake town with a population of just over 7,000 people.
In the end, the plant didn’t work out. It closed only a year later, as the Devils Lake Journal reports, leaving bales of moldering wheat straw and 40 frustrated former employees in its wake. Still, for the foreigners who invested in the project, it registers as a success: Loveless says they all received conditional residency (the first step in the visa process). And the plant itself might still land in the win column for Devils Lake. A different company, Bio Fiber, just signed a lease on the facility, promising green jobs that will transform cow manure into flower pots and structural materials.
Investment in rural communities under EB-5 works the same way it does anywhere else. An employee at the regional center in North Dakota works with an agency in China to draw investors; otherwise, the center works in tandem with migration agents in China. Yet there is a steeper sell involved in drawing investments for a plant that manufactures biodegradable baskets for Chipotle than there is in garnering funds for a hotel with a global name brand like Trump. (One of Related’s home pages features a splashy picture of Hudson Yards and a live EB-5 chatline.)
“It’s so difficult to compete on an even playing field with New York or L.A. or Miami,” Loveless says. “If you say [to Chinese investors], would you rather invest in a project in New York City or in Bismarck, North Dakota, they would be like, ‘I don’t know what Bismarck, North Dakota, is. Tell me about New York City.’ I get it. There just needs to be a reason for them to want to hear about North Dakota.”
EB-5 can work better for North Dakota (and for China, too)
One story from rural Vermont dominated headlines in Burlington last year. In Jay—a tiny Vermont hamlet tucked away in the state’s Northeast Kingdom, with a population just a scratch higher than 500 people—developers built a sprawling resort complex that soaked foreign investors for more than $200 million through the cash-for-visas program.
Where a single ski lodge stood a decade ago, Bill Stenger and Ariel Quiros built the Jay Peak Resort, a glorious retreat featuring hotels, a water park, and a convention center—all using EB-5 financing. The project was profoundly unsustainable. In the end, the Jay Peak Resort drew the wrath of the Securities and Exchange Commission. A photo that emerged in April 2016 from the SEC investigation depicts a chart tracking how Stenger and Quiros diverted the flow of foreign capital through various entities to realize their fantasy; the exhibit looks like a plate of spaghetti. The Jay Peak backers even planned to build a biotechnology campus—in rural Vermont—with help from China.
Jay Peak is the biggest scandal in the history of the EB-5 immigration program, but it’s not an isolated one. Visa petitioners make for extremely vulnerable investors: They tend to be unsophisticated about U.S. real estate laws, focused on securing visas rather than maximizing their return. Plus, as Friedland and Jeanne Calderon explain in a report for the Stern Center, in EB-5 deals, the developer often serves as both lender and borrower, setting terms for the loan it both generates and receives.
“The fraud uncovered to date spans all parts of the nation,” Friedland and Calderon write.
High-profile fraud cases associated with EB-5 have given opponents of the program, particularly anti-immigration advocates, plenty of ammunition. The Center for Immigration Studies, which the Southern Poverty Law Center describes as “the anti-immigrant movement’s premier think tank” and whose founder is a prominent white nationalist, has committed ample resources to tracking alleged examples of fraud within the program.
Certain necessary reforms for the EB-5 program are already in the works. After the Jay Peak scandal, House Judiciary Chairman Bob Goodlatte and Ranking Member John Conyers added an Account Transparency Requirement to H.R. 5992, an EB-5 bill that also reforms the gerrymandering process. And USCIS, under the Obama administration, issued its own tentative rules change easing gerrymandering. Other fixes are on the table. The Brookings-Rockefeller report on EB-5, for example, recommends that the U.S. Department of Commerce play a separate oversight role to guarantee standardized data and program monitoring.
There’s no consensus, though, on what EB-5 ought to do, exactly. Senators Chuck Grassley and Patrick Leahy have long argued that the EB-5 program is so deeply flawed that if it cannot be reformed, it should be scrapped. Last week, Senator Grassley and Senator Diane Feinstein even proposed a bill to mothball the EB-5 program and reallocate its visas to the other employment-based visa categories. On the other hand, Senate Minority Leader Chuck Schumer, who has seen the benefits of EB-5 up close in Manhattan, supports tightening up security but otherwise remains a staunch defender of the program.
Congress was due to reevaluate the program before its authorization expired in September 2015. Instead, the legislature kicked the can down the road, renewing the heart of the program several times under the continuing budget resolution (most recently in December). Congress will get another crack at EB-5 reform this spring. But it remains to be seen where the Trump administration will come down on the question. (The White House did not respond to requests for comment on this story.)
“We get calls on a pretty regular basis about projects, but we can’t take anything on until we see a long-term reauthorization, which is why I was so disappointed when there was another four-and-a-half month extension,” Loveless says. “I think a lot of the regional centers and developers in the EB-5 marketplace are really feeling the same way. There’s so much uncertainty, it’s really difficult trying to structure a project right now.”
Exchanging cash for visas raises questions about immigration, development, inequality, and national identity. It’s an enormous business: In 2016, Chinese foreign direct investment in the U.S. topped $45 billion, three times what it was in 2015, with real-estate transactions (buoyed by EB-5) leading all other categories. If EB-5 is to be preserved—a big if, and one that deserves no small amount of soul searching—here are some ways that Congress could retool the program.
1: Cap or scrap gerrymandering. Hudson Yards was always going to be built, visa financing or no. The goal of soliciting foreign capital ought to be to ensure that this financing goes where it’s needed most and hardest to come by—places such as Harlem or Kansas City or rural North Dakota, not Beverly Hills or the High Line.
Distinguishing distressed urban communities from thriving urban communities can be a task. Reforms pondered by Congress include taking into consideration the poverty rate and area media income alongside unemployment (which, by most measures, is down). Under certain scenarios, these categories could in fact make it easier to designate a TEA even in parts of Manhattan, since unemployment is falling nationwide but income disparity there is especially sharp.
H.R. 5992, from the 114th Congress, leaves it to DHS to define what qualifies as an urban TEA or a “priority urban investment area.” Limiting the number of tracts that can be gerrymandered was the solution that the Obama administration arrived at (perhaps too late). There are other approaches, though, such as a “cluster” strategy that weighs all of a project’s adjacent tracts to come up with an unemployment average. A “good neighbor” approach would qualify a project tract based on a single adjacent Census tract’s unemployment rate, poverty rate, or area median income. Friedland and Calderon proffer a decision tree as a way to qualify a project.
Capping gerrymandering, adopting new criteria, or using different data could help keep EB-5 capital from flowing uphill to luxury developments. (If that is even the goal; it may not be one shared by Senator Schumer.) Stricter standards—including the rule proposed by USCIS—will not necessarily divert these funds to East L.A., Southeast D.C., or other deserving areas. But the financing is more likely to wind up where it’s needed if it’s not pooling in the lap of luxury.
2: Direct the flow of investment with visa reserves and set-asides. The EB-5 program is immensely popular with Chinese nationals. USCIS faces a huge backlog in visa petitions, one made worse by a rush of applications in the face of the program’s original expiration. Renewing EB-5 will only mean adding to that queue, unless Congress thinks strategically about where to prioritize investment. Letting petitioners who agree to invest in rural or distressed areas jump to the front of the line could create a fast-track lane for targeted investment.
Visa set-asides, specifically, could boost the cause of rural investment, since rural areas are easier to define than distressed urban areas. Prioritizing projects that qualify on the basis of a single Census tract could also steer capital in the right direction. And Congress could direct foreign investment toward projects that benefit the public, including transit and infrastructure, by setting visa reserves for these categories.
Vigoreaux even suggests that visas could be allocated to whole regions, encouraging more EB-5 investment in places where it is lagging—namely the Midwest. He also suggests a visa set-aside for nonprofit or community-driven projects seeking foreign investment: a do-gooder provision.
“We’re hoping that increases the confidence of investors, who see that, while they’re not as attractive as a Hilton hotel or a baseball or football stadium, the government partnership and mission-driven aspect of the project will ensure that the project will get built and completed,” Vigoreaux says.
3: Raise the limits for minimum investment . . . The extraordinary queue for visas in China suggests that investors would be willing to pay more for the opportunity. Legislative proposals include raising the lower band to $800,000 and the upper band to $1.2 million, while the provisional USCIS rule raises the bar even higher.
4: . . . or raise the annual cap on visas. Raising investment minimums is one way to address the supply-and-demand mismatch. The other way is to tackle the supply side by opening up the number of visas available. Congress could raise the ceiling on its annual allocation of 10,000 visas through EB-5, perhaps by allowing 10,000 families to receive visas instead of counting spouses and children as individuals against the total.
Fixing EB-5 will mean answering some fundamental questions about what kind of country the U.S. wants to be. For the White House’s part, President Trump has an opportunity to do one of three things: He can take action to make the investor visa work for this base: economically anxious urban and rural communities. He can ensure that it continues to work for his cohort, the luxury real-estate developers that EB-5 has served best. Or he can give the thumbs down to the program entirely.
For those closest to EB-5, at least in the rural expanses and struggling corners where support for Trump ran the strongest in the 2016 election, the answer is plain, Hudson Yards be damned.
“I think everyone in EB-5 would be very happy with increased [immigration] levels above 10,000 visas,” Loveless says. “I just don’t think there’s an appetite now within Congress.”
This post has been updated to add information about proposed regulations.