Analysis of the New EB-5 Rules: Useful Improvements on a Flawed Design

By David North on March 11, 2022

The House and the Senate have now approved — in one of those “must-pass” pieces of legislation that fund our government — language reviving and reforming the main part of the EB-5 (immigrant investor) program. The president is expected to sign it today, Friday, March 11. The full text can be seen here.

The new language, which first surfaced in a bill offered by the House Rules Committee, but was primarily written in the Senate, offers some serious improvements on a bad design, in my eyes, while preserving a marginal program. On the other hand, the new provisions apparently are not welcomed by the industry, either; their press outlets have been oddly silent in the last two days.

There is always the possibility that legislation that makes nobody happy is exactly what is needed.

The extensive work on the EB-5 program took place in a strange legislative process in which two key senators and a lot of hardworking staff people produced a long text (more than 100 pages) that first went public in a House document days before the final votes. The usual bill introductions, House and Senate committee hearings, and floor votes on the specifics were missing. The two key senators in this long-running drama, both of whom have much experience with the program, are Chuck Grassley (R-Iowa) and Patrick Leahy (D-Vt.); the latter's state has seen massive EB-5 corruption. Should such a secretive process be used for a controversial public program?

Putting process aside, there is one fundament EB-5 question: Should aliens with nothing but money be allowed to buy their way into the country and thereby needlessly expand our population? There are two other important areas in which we see some limited but useful progress and a full-scale, highly commendable effort to root out the program’s corruption. An interesting mix.

Background. The main part of the immigrant investor program gives wealthy aliens and their families a set of green cards if they provide a defined amount of money to DHS-recognized middleman regional centers for pooled investments; the EB-5 designation comes from this being the fifth class of employment-based immigrants. A little less than 10,000 visas a year are allocated to the program; given that an average EB-5 family is 2.5 people, this produces 4,000 investments a year and a relatively tiny part of the annual net overseas increased investment in our economy.

Most of the visas in the past went to aliens from China. Most of the pooled investments in the past have gone into urban real estate ventures in big cities. There has been much corruption in the program, with citizen shysters cheating the often-gullible aliens. The pooled investment program has always been a piece of temporary legislation; last June the Senate allowed it to lapse. Once the president signs the bill, EB-5's regional centers get another five years of life.

The Basic Question. The fundamental policy question in this arena is: Should some aliens be allowed to buy their way into this country in exchange for cash for private projects in this country? This question has largely been ignored in the recent process. Some other nations, notably Canada in a now-extinct program, allowed aliens to subsidize provincial governments instead of glitzy, downtown, privately owned real estate ventures.

In the just-passed legislation, the answer is yes, aliens can buy their way into the country.

Two Other Significant Questions. There are two other significant questions that the House bill addresses in more or less useful ways. They are:

  1. What price should the green card-producing investments be?
  2. Who decides where these investments are going to be located? What roles do regional centers and the government play in these decisions?

Let’s look at each of these issues.

Price. Back in the 1990s, when EB-5 first became part of the law, the minimum investment was set at $500,000, with the provision that each investment was supposed to create 10 or more jobs for people outside the investor’s family. Both the Obama and Trump administrations sought to raise that to $900,000, and for a while, that was the required figure. Then a civil servant, sitting as a federal magistrate judge, reduced the number to $500,000 again last summer.

The new minimum is now $800,000 for pooled investments in areas defined as depressed (a subject to which we will return). If the investment is not in one of these “targeted employment areas” (TEAs), the minimum is to be $1,050,000. The new provisions call for automatic increases in these minimums in the future, a good notion.

Clearly, $800,000 is better than $500,000; I would have preferred the Trump-Obama number of $900,000.

Location of Investments. Under the old rules, the regional centers proposed TEAs, each of which was supposed to have an unemployment rate of 150 percent of the national average. On the other hand, the regional centers wanted to put the EB-5 investments in prosperous downtown areas, which did not have the required levels of unemployment.

The result was a series of skillfully drawn (one might say gerrymandered) TEAs in which a project site, such as Hudson Yards on the west side of Manhattan, was joined by strings of census tracts, including the empty ones in that city’s Central Park to distant parts of Harlem, which supplied the needed levels of unemployment. State officials were then asked to judge the appropriateness of the TEAs and they, unanimously, accepted them — the alternative would be that the aliens’ money might go to some other state.

The new provisions for TEAs include a rule that no state official shall have anything to do with the TEA lines (not that they were significant players in the past) and that the lines must be approved by the Department of Homeland Security, but based on proposals from the (clever) regional centers.

At page 2612 of the text we see this provision:

The Secretary of Homeland Security ... may designate, as a high unemployment area, a census tract, or contiguous census tracts, in which ... the new commercial enterprise is principally doing business.

Later it is made clear that an additional adjacent census tract may be added to the earlier defined area.

I worry that the “principally doing business” language could be used to augment, to the regional council’s advantage, the definition of “contiguous census tracts” to include marginal project activities (like a repair shop) conveniently located in a nearby high unemployment area. I hope I am wrong.

In stark contrast to earlier governmental efforts to relieve poverty in a given location, the EB-5 program leaves the selection of the site of activity to the regional center, as confirmed by DHS. In other, earlier programs, using federal money as opposed to aliens’ money, such as those of the Appalachian Commission and Model Cities, the government (I think appropriately) played a much larger role in deciding where the money was to be spent.

Rich guys trying to become richer are thus still given wide latitude as to where EB-5 investments will do the most good for the unemployed; making such decisions is really not in their skill sets.

The Integrity Package. Much of the text of the new legislation is given over to what has become known as the EB-5 Integrity Package. This is a series of efforts designed to reduce the widespread corruption in the program.

The package contains an impressive set of requirements for audits and investigations, reports, reviews, and on-site inspections. If someone wants to participate in the program, they must submit fingerprints to check on criminal records.

There are provisions for what appear to be additional fees to give DHS more funds to investigate and even a clause giving the staff that will do this work higher salaries than before, an unusual requirement in my experience. Investigators are given powers to check out certain variables that previously were beyond their realm.

There are many efforts made to prevent aliens from getting green cards by simply making guaranteed loans, rather than putting up the money at risk, as one does on the stock market.

All of this is good news for citizens, and perhaps one of the reasons why the industry has been silent in the last 48 hours.