Investment Visas: Abandoning Boat People for Yacht People

Huddled masses versus moneyed classes. Guess which group gets fast-tracked to US citizenship?

Under President Obama’s deportation deferral program, which began accepting applications last week, qualifying illegal immigrants that were brought to the United States as children — and meet an extensive list of conditions — may be granted a two-year stay.

If accepted, a person’s legal status will not change; their expulsion from the country will simply be put off for a defined period, after which the political winds will determine his or her fate.

At the other end of the spectrum lies anyone with a half-million bucks to spare.

No longer relegated to Micronesian islands and other far-flung locales, “economic citizenship” is alive and well in America. As former Western regional INS commissioner Harold Ezell said back in 1991, “We’ve done a great job on boat people. I see no problem with a few yacht people.”

Money Changes Everything

The sentence at the top of a website run by one of the approved “economic investments” prospective citizens can write a check to, Sugarbush Ski Resort, reads simply:

“Obtaining legal permanent resident status (“Green Card”) in the United States for you and your family can be as simple as making a one-time investment of $500,000. And, these immigrant visas are issued as quickly as nine to 12 months.”

While Americans like to think of our country as the world’s de facto safe haven for the persecuted and the penniless, the so-called masses increasingly find themselves “stuck in line” for years, waiting to get in. But, as Sugarbush explains in its pitch to moneyed foreigners, those with $500,000 to spare qualify for green cards (as do their spouses and all unmarried children under 21) simply by writing a check.

“Never Before Has Such a Concept Been Embraced by Immigration Law”

Established in 1990 as a component of the Immigration Reform Act, signed into law by President Bush, and known technically as the EB-5 Immigrant Investor Program, 10,000 foreign nationals per year have been permitted to invest their way into the United States for over two decades. Intended to require a $1 million floor, investors need only put up half that if the investment is made in a “targeted employment area,” or “TEA,” where the jobless rate is higher than 150% of the national average.

Michelle Hua, managing partner of the Hua & Murga law firm in New York City, says the EB-5 program is, at its essence, “about job creation.”

“EB-5 is meant to stimulate the economy and create American jobs which must be held by American workers,” Hua tells me. “It creates a legal way for people to come to the US as immigrants — presumably people of high net worth who will buy things, pay taxes. The law says if you invest in America, you can get a green card. If you follow the rules, this is the result.”

Other immigration lawyers with clients not eligible for EB-5 take a different perspective.

“It just doesn’t seem fair that some rich person can come along and buy residency,” Matthew Guadagno, an immigration attorney in private practice, tells me. “I suppose there’s the view that you’re purportedly helping the economy, but for a guy who represents regular people, it feels wrong.”

In the words of Vernon M. Briggs, Jr., Emeritus Professor of Industrial and Labor Relations at Cornell University in his paper The Immigration Act of 1990: Retreat from Reform which was published in the journal Poplulation & Environment:

The new statute…is ill conceived, deceptively designed, poorly timed, and subtly racist. Despite the chronic need for reform, the Immigration Act of 1990 cannot possibly be described as being in the national interest. It perpetuates and expands the worst features of the existing system while introducing new features that are both counterproductive and, in parts, unethical in the principles it projects.

Briggs zeroes in on the EB-5 program, calling it, among other things, “a source of shame” and presciently predicting that it would be virtually unenforceable:

In addition to its general misdirection, the Immigration Act of 1990 includes a host of dubious categories of workers to be admitted at part of the 140,000 work-related immigrants. For instance, it reserves 10,000 visas a year for the admission of millionaire “investors” who “promise” to create at least 10 jobs. This should be viewed as a source of shame. It introduces the principle that the rich of the world can buy their way into the United States. Never before has such a concept been embraced by immigration law. Aside from the fact that it will be almost impossible to enforce, it represents a reward of privilege that is unworthy of legal protection. The major beneficiaries of this new entry standard are the nation’s immigration lawyers who were its chief proponents. Rewarding personal greed should have no place in the nation’s immigration system.

There’s the Truth, There are Lies, and Then There Are Statistics

Twenty-two years on, EB-5 projects take many different forms. Some projects are set in motion and later financed — in full or in part — by EB-5 investors. There have been bio-fuel refineries, meat packing plants, even renovations to the Watergate Hotel financed with EB-5 money. Then there are the projects that are created with the EB-5 in mind — and EB-5 promoters looking for projects.

Here’s how Tampa’s Atlantic American Partners describes its Atlantic American Opportunities Fund:

Atlantic American Opportunities Fund is an investment vehicle for the Florida Overseas Investment Center, a Regional Center authorized by the United States Citizenship and Immigration Services (USCIS). The Florida Overseas Investment Center assists foreigners and their immediate families in obtaining permanent US residency (green cards) through the USCIS’s EB5 investment visa program, while assisting our own economy through the creation of new, sustainable employment opportunities.

As part of our underlying structure, our fund only makes investments in Florida-based businesses and real estate projects that are located in Targeted Employment Areas (TEAs) within the state.

Why? There are more people with $500,000 in investable assets than people with $1 million. And, since an EB-5 investor’s priority is generally a green card and not a true “investment,” putting up less, rather than more, is a more palatable choice. Almost all EB-5 projects in the State of Vermont, for example, qualify for funding at the lower level. As the state’s Agency of Commerce and Community Development explains on its website, “The largely rural nature of our state means that nearly the entire state qualifies as a targeted employment area.”

Now, suppose the area you’ve chosen for your project isn’t sufficiently downtrodden to be considered a TEA. Whatever. Boca Raton’s Evans, Carroll & Associates, the self-described “leading firm” in “providing the underlying economic analysis for EB-5 programs,” spells out exactly how easy it is to beat the system:

In that case, we will attempt to construct a TEA by combining that census tract with contiguous census tracts that have higher unemployment rates, such that the average unemployment rate in the combined area exceeds 14.4%.

Some states will then certify these results by writing a letter stating that the appropriately authorized agency of the state has verified that the area in question is a TEA.  Some states, such as Florida and New York, are very helpful about writing such letters.

Helping Those Who Need It Least

Constructing a TEA to suit its needs is how developer Forest City Ratner attracted EB-5 investors to help finance the Atlantic Yards, the complex that includes the Brooklyn Nets’ new Barclays arena.

In addition to the $5 billion in government subsidies watchdog group Good Jobs First estimates were given to FCR, the firm wanted as much additional cheap financing as possible. Although the site “abuts well-heeled brownstone neighborhoods,” freelance journalist Norman Oder, who maintains the exhaustive Atlantic Yards Report blog, points out that “two New York State agencies helped gerrymander a map of Brooklyn unemployment… omitting more affluent census tracts nearby, and extending east to encompass poorer tracts in Bedford-Stuyvesant.”

Oder contends this expanded the pool of potential investors exponentially and “helped FCR save more than $140 million, by my estimate, on a $249 million loan.”

As mentioned earlier, since an EB-5 investor’s primary concern is a green card as opposed to a substantial return on his investment, the money comes cheap. According to the JMBM Hospitality Group, a California law firm specializing in the hotel industry, the “EB-5 investor is not looking for a high return on their investment — some investments offer only a 1% return on the investment — just a return of their original capital.”

Such a circumstance is one of the reasons Matt Kitzi, the Missouri Securities Commissioner and chair of the enforcement section for the North American Securities Administrators Association, says EB-5 investors must be extremely diligent when selecting a project.

“If you have EB-5 investors and other investors in one investment, you have two different sets of people incented in two different ways,” Kitzi tells me.

This alone is not a recipe for disaster, though Goldman Sachs customers were none too happy to discover Blankfein & Co. betting against the housing market during the 2008 financial crisis while encouraging clients to do the opposite. As Kitzi says, “We’ve seen what can happen when you have two differing interests operating at once.”

Boat People Don’t Finance Ski Resorts

According to the Hurun Research Institute, there is now one multi-millionaire in China for every 1,300 people. The number of Chinese billionaires has hit 63,500, an increase of 5.8%. Most importantly, 60% “of Chinese rich are considering emigrating abroad.”

To that end, 78% of all EB-5 visa applications in 2011 were made by Chinese. Kristen Williamson, press secretary for the Federation of American Immigration Reform, finds the reliance on such sources of funding troubling.

“As opposed to a bank, which will ask lots of questions, someone trying to get a green card will not be as rigorous,” Williamson tells me, emphasizing that if an EB-5 immigrant’s project goes under or fails to create the requisite number of jobs, they get shipped back to their home country.

It comes as little surprise that any combination of green cards, Americans, and money would foment all manner of chicanery and deceit. And to varying degrees, those looking to finance their projects with EB-5 dollars know precisely which buttons to push when meeting with EB-5 investors.

“In many cases, people will use the government connection to the EB-5 as a way to bolster their credibility,” a regulatory source who spoke on condition of anonymity, tells me. “You know, ‘It’s been around for 20 years, it’s backed by the US government’ — we’ve seen it hundreds of times, where someone will use that as a way to provide false comfort.”

False comfort or not, it works. After being denied a $250 million bank loan to expand his business, Bill Stenger, president of the Jay Peak Ski Resort in the targeted unemployment area known as Vermont, turned to the EB-5 program. Knowing how important the role of guanxi, or, a personal network of connections, is to the Chinese, Stenger made sure to emphasize Jay Peak’s ties to impressive-sounding names in his pitch:

“Jay Peak’s relationship with the EB-5 program dates back to 1997,” Stenger says in the video, which is dubbed into Chinese. “I had an opportunity at that time to work with our governor, Howard Dean, and the Secretary of Commerce, Bill Schultheis, to create the Vermont Regional Center.”

His audience’s appetites surely whetted, Stenger goes on to say that he is “lucky to have Senator Patrick Leahy, the senior Senator from Vermont and the second-ranking Senator in the United States. He’s the Chairman of the Senate Judiciary Committee, a tremendous supporter of the EB-5 program, and a great ally of ours here at Jay Peak.”


“If gaining access to a green card is something you and your family would like to do, then the Jay Peak EB-5 programs may be what you’re looking for.”

Interestingly, the North American Securities Administrators Association points out that, while “unscrupulous promoters may seek to prop up the plausibility of their scheme by highlighting a connection with a federal jobs program,” domestic investors “may be intrigued by the prospect of big funding from investors in China or other foreign countries with traditional or growing economic power.”

The EB-5 warning on NASAA’s list of potential investor threats for 2012 continues:

In a recent case, the developer of a failed artificial sweetener factory planned for a small Missouri town sought Chinese investors through the EB-5 program, and made that a key component in pitching and then selling the underlying government bonds issued for the project. While the existence of Chinese funding may have seemed promising to the city issuing the bonds and the investors who bought them, the developer defaulted on the first bond payment, leaving the city and investors out millions of dollars.

The Vagaries of Measuring Job Creation

Per data from the Brookings Institution, the EB-5 investor visa program has improved the economy precisely this much: $2.2 billion has gone toward projects that have created or preserved 43,280 jobs.

Or has it?

According to Peter Joseph, executive director of the Association to Invest in the USA, EB-5 investors receive credit for all jobs created on their project even if their financial contribution is a small fraction of the total. And, as Liz Jones of Washington State NPR affiliate KUOW discovered, the techniques used to measure EB-5-related employment don’t inspire a great deal of confidence.

Here’s Jones speaking with Chris Bentley, press secretary for US Customs and Immigration Service.

Bentley: “We rely on the economic models and on the economists that we employ actually looking over and making sure the models, the business plans themselves, are viable.”

Jones: “What type of evidence is required to prove that those jobs were actually created?”

Bentley: “It’s taking a look at two key terms when we’re looking at this information. Making sure that the business is viable, and then making sure that the information provided is verifiable.”

Jones: “So it sounds like there’s no direct proof; it’s just based on the theory of a solid business plan?”

Bentley: “Correct.”

The Evans, Carroll & Associates website provides some more detail on the job creation mandate (emphasis theirs):

This requirement has led many investors — and some EB-5 developers — to assume that in fact they must produce documentary evidence for all direct  permanent full-time jobs in the form of W-2s, I-9s, and quarterly payroll tax  records. That is indeed one way to meet this requirement. BUT IT IS NOT THE ONLY WAY. Immigrant investors — and hence their lawyers and EB-5 developers — may also meet this requirement by showing that the total amount of construction expenditures, and the total amount of gross (top-line) revenues that have been achieved are equal to or greater than the amount of  expenditures or revenues that were stated in the original proposal. In other words, verification can be made on expenditures and revenues as well as direct employees.

Indirect and induced jobs also count, further diluting the number of “real” employment.

Purchases made at a local Home Depot by a contractor working on an EB-5 project? Indirect job.

Garbage getting picked up from your EB-5 development by Waste Management? Indirect job.

People employed by the company financed by EB-5 money buying their daily lattes at the neighborhood Starbucks? Indirect job.

The Future of EB-5?

The EB-5 program, not having ever been made permanent, is still considered a “pilot program,” and is set to expire on September 30. The Senate has approved a three-year extension, something the House will vote on when legislators return to Washington next month.

Michael Wildes, managing partner of Wildes & Weinberg (and a former federal prosecutor) sees the EB-5 program as something that is “working well” and should be “expanded further.”

“We’re not selling our souls for this, we’re getting people to invest in America,” he tells me. “This is a mechanism to give companies the cash infusions they require.”

He calls EB-5 “entrepreneurially-spirited” and emphasizes the appeal of certain “American” industries in which new immigrants can take part.

“We have clients in the movie industry who are involved in getting financing this way because there are people out there who love movies and want to be a part of that,” he says. “Fashion, hospitality, this is what America is all about.”

Less impressed with EB-5 is David North, a fellow at the conservative Center for Immigration Studies. Writing recently in the National Interest, North expressed disappointment in the overall outcome of what the EB-5 program has financed.

“As a one-time publicist for government agencies, I am surprised by the total lack of success stories coming out of this program,” he wrote. “After 20 years of investing, one might expect some useful drug would have been found, or some desolate coal town converted to an arts-and-crafts resort, or some successful computer app written. But apparently nothing like this has happened.”

Or, lawmakers might do themselves a service by taking the advice offered by Ann Lee, a senior fellow at New York public policy think tank Demos, in a recent New York Times op-ed:

Aside from accusations of outright fraud, there is also a clear lack of understanding among government administrators about how to manage an investment program. As a result, they often approve businesses that are simple to understand, like a condo development or a grocery store, but whose business models don’t generate enough profit to hire workers, while rejecting more sophisticated businesses that stand a greater potential of generating profits and jobs.

Lee also calls on the federal government to “rein in freewheeling brokers with heavier penalties for misrepresenting investments” and to “make the entire process more transparent, so that applicants know why their money was accepted or rejected.”

And then, a suggestion quite radical, given the all-or-nothing nature of modern American political discourse: “Rather than end it, let’s fix it.”