Bursts of Dubious Creativity in the Immigrant Investor (EB-5) Program

By David North on February 21, 2012

When you dangle prospects of investment money before some capital-starved businessmen, you can be assured that the creativity juices will be stimulated.

This is certainly the case with the USCIS's immigrant investor program, called EB-5, because it deals with the fifth class of employment-based immigrants in the Immigration and Nationality Act. For more on the program generally, see CIS's recently-published Backgrounder on the subject.

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The basic formula is that the alien investor gets green cards (after a wait) for his entire family by investing half a million dollars in an enterprise that will produce 10 jobs for people other than the investor’s family. It has to be an "at-risk" investment, and not a loan. One is allowed to use "any appropriate methodology" to estimate the jobs that result, which is an invitation to creativity on the part of the alien with a little money.

Think about it – what kind of half-million-dollar investment would create 10 full-time jobs? No farming, manufacturing, or mining operation – or anything demanding a serious investment in land, buildings, or machinery – could possibly produce 10 jobs for half a million dollars.

You might start a small restaurant in a low-cost neighborhood that was, for some reason, restaurant-free and actually produce a business that had 10 low-wage jobs; or you might open a sewing factory, making something that China did not make cheaper than you could, but it is hard to imagine what that product would be.

In short, the congressional formula of $500,000 producing 10 jobs is more than a bit unrealistic. It is also a formula that is close to 20 years old, when the investment dollar went a lot further than it does today.

But just because the legal requirement is hopelessly out of touch with reality does not mean that USCIS and would-be American recipients of investment moneys and aliens who cannot get into the U.S. any other way than by buying a visa aren't all trying to arrange for these investments.

The latest bits of creativity on this front involve maneuvers around the no-loans requirement and the job-creation requirement.

EB-5 visas are not supposed to be granted to people who are simply making a loan and certainly not to those buying anything as non-risky as a municipal bond. Ah, but what if you form a company whose only business is the purchase of municipal bonds, and the transfer of the resulting interest payments back to the investors masked as "dividends"?

That is exactly what someone is proposing in Washington State, where the municipal bonds would be used to finance the replacement of a floating highway bridge over Lake Washington, according to an article in Seattle Business.

It is not clear that USCIS will buy that one.

USCIS, however, according to its own statement is open to the possibility of another kind of creative scheme. The agency describes it this way:

The "tenant-occupancy" methodology seeks credit for job creation by independent tenant businesses that lease space in buildings constructed with EB-5 funding. USCIS continues to recognize that whether it is economically reasonable to attribute such "tenant-occupancy" jobs to the underlying EB-5 commercial real estate project is a fact-specific question.

I suppose you could devise a scenario to fit this situation. Let's assume that there is a business all ready to go, one that would hire 10 people. Let's further suppose that there is no commercial real estate available to house such a business – none – and that if the business did not have the office or factory space it wanted, right where it wanted, it would simply not be born. All, I would argue, highly unlikely.

Then an EB-5 alien with half a million dollars appears, builds just enough of a building – about the size of a house in the suburbs – that allows the business to begin, and the requirement is met.

The premise would have to include the tightest of markets in commercial space, and no flexibility on the part of the new business. I can see this happening on, say, Gibraltar (where there is not much level real estate) during World War II, but otherwise it strikes me as highly unlikely. At the moment there is a generalized glut in commercial space.

Bear in mind the real job-creating consequences of investing half a million into a commercial building. There would be two or three month's worth of work for up to 10 construction workers while the building was being erected, and then there would be a part-time but continuing job for a janitor – all a far cry from ten full-time continuing jobs. Then someone else would have to invest in the creation of a business that would occupy the new space.

USCIS suggests that the job-creating results of such an investment constitutes a "fact-based question" and it seems to invite imaginative people to create their own facts.

Believe me, these are not the last unlikely economic scenarios to emerge from this troubled program.