Although proposed changes to the EB-5 foreign investment visa program might create new challenges for hotel development projects, experts advise that Congress might not take action any time soon.
REPORT FROM THE U.S.—The latest attempt to reform the EB-5 immigration visa program has stalled in Congress, and signs point legislators will approve another temporary extension.
The EB-5 program, administered through U.S. Citizenship and immigration Services, allows foreign investors and their families to apply for green cards in exchange for investing in a commercial enterprise in the U.S. if the project creates or maintains 10 permanent, full-time jobs for U.S. workers. Recent moves to change the program would increase the minimum amount of investment as well as reconfigure the program’s Targeted Employment Areas, or TEA. The program provides 10,000 visas annually.
While he did not have a figure for the number of hotel projects that use EB-5 investments to fund development projects, John Barrett, partner and cofounder of Performance Economics, said his conservative estimate is that 70% to 75% of EB-5 projects have hotel components.
One of the issues facing the EB-5 program is the existence of regional centers, which are organizations that help investors and companies complete projects through the EB-5 program by setting up investment funds in which investors can purchase equity stakes. While the overall program started in 1990, the centers popped up two years later as a pilot program and were never made permanent part of the law, said Jim Butler, partner at Jeffer Mangels Butler & Mitchell
Butler said the centers bring together capital for projects from more than one investor and can help count toward the indirect jobs for the economic formulas.
“The regional center is what needs to be renewed or sunset,” Butler said. “After 30 years, you would think they have a good idea how the pilot works and would make it permanent. It is a critical part of the EB-5 structure.”
On 28 September, Congress passed an extension of the EB-5 program as it currently exists through 9 December, effectively pushing off any decisions on reforms until the lame-duck session following the presidential election. Butler said the main reform bill under current discussion, introduced by U.S. Rep. Bob Goodlatte, R-Virginia, is similar to the one discussed in late 2015 before Congress gave it another temporary renewal.
“There does seem to be widespread support for EB-5 in both parties on both sides of the aisle,” Butler said. “It’s not a highly controversial idea granting a limited number of visas for foreign investors to create 10 new jobs.”
Challenges for hotel industry
While some may believe the Goodlatte bill is a step in the right direction, Butler said it is too restrictive and would not maintain a viable EB-5 program.
The current program requires a minimum of $1 million in investment from foreign investors, he said, unless the commercial project is located in a TEA, which requires a minimum investment of $500,000. Butler said more than 90% of the visas issued came from investments meeting the $500,000 requirement. The Goodlatte bill would raise the minimum investment to $800,000 in TEAs and $1.2 million in nontargeted areas.
The goal of TEAs was to focus on rural areas with less than 20,000 people or areas with 150% of the federal unemployment level, he said. Currently, state governments can determine what counts as a TEA based on U.S. census tracts. Some states, like New York, let legislators combine any number of tracts together to come up with their model, which Butler compared to gerrymandering legislative districts. The California model requires tracts be contiguous and must be a rational grouping with fewer tracts combined, he said.
Under the Goodlatte bill, only rural areas with fewer than 20,000 people or “essentially single-tract, high unemployment areas or urban projects” would fall under TEAs. On top of that, 20% of the 10,000 visas would be set aside for projects in rural areas and 20% in urban areas.
The U.S. Department of Homeland Security would be in charge of determining all TEAs instead of state governments, Barrett said, and the department promises a 60-day timeline to verify TEA requests.
“You have one department responsible for all TEA requests,” he said. “That would be a logistical problem to get them all turned around in 60 days.”
Most hotel developers don’t want to get involved in projects in rural areas, he said, as they’re more likely to pursue projects fitting under the urban priority criteria.
“If the TEAs prove to be tougher than they were like we anticipated, it could slow up the pace of investment in the project,” he said.
From a lending perspective
For the most part, the changes proposed to the EB-5 program are positive, said Michael Maguire, managing director of Aileron Capital Management. Over the years, his company has been involved in about $250 million worth of EB-5 lending to hotel projects, with the individual projects ranging from $10 million to $25 million. About 90% of the company’s EB-5 lending goes toward hotels and hospitality in general, with the balance going toward senior living facilities and other special-purpose projects.
Maguire doesn’t believe the increased investment requirements will impact on investors, as they have enough liquidity that another $300,000 shouldn’t deter them.
“It helps put more money to work per project, which is helpful for borrowers,” he said.
Requiring that 10% of the jobs created from the project must be directly created shouldn’t be a problem for a viable hotel project with the staffing required at properties, he said.
Maguire said the geographic constraint on the TEAs is probably the biggest drawback the proposed bill, and he is unsure how the gerrymandering will go away.
It’s difficult to understand when dealing with Washington, D.C., how the drafts of documents change and how to take the information to apply it in practice, he said.
“D.C. is notorious for not defining the criteria and coming back to say you’re doing it wrong,” he said.