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Lawsuits, Backlogs Threaten to Sink EB-5 'Cash-for-Visas' Development Program

Long Waits, Legislative Paralysis, Mounting Fraud Accusations Undermine Interest in Once-Popular Initiative
October 5, 2018
Investors in the New York Wheel, a proposed 630-foot-tall tourist attraction funded in part by EB-5 capital, said they will have to sell the project for parts this month without city financial support. Image credit: New York Wheel LLC

As Congress extends the popular but criticized EB-5 immigrant visa program that has helped finance major real estate developments such as New York's Hudson Yards, industry insiders said long wait times, mounting legal issues and political neglect are discouraging investors and developers from participating in the initiative in a way that could hinder developments across the country.

Congress is extending through Dec. 7 federal spending including funds for the EB-5 immigrant visa program that offers permanent U.S. residency via a green card to foreign nationals who invest in job-creating businesses or real estate projects in the United States.

The extension, which carries the funding past the midterm U.S. elections, was the 14th temporary extension by Congress in the past three years for the program administered by U.S. Citizenship and Immigration Services.

The authorization of the EB-5 program, which has been criticized as a "citizenship for sale" scheme, was set to expire Sept. 30. It is responsible for processing visas to foreign nationals who agree to invest at least $500,000 into a U.S. real estate development project or other job-creating businesses. Congress first authorized EB-5 as a pilot program in 1992, but the initiative failed to gain traction until a few years ago when administrative changes smoothed the application process, leading to a burst of interest among U.S. real estate developers and visa applications by foreign investors.

Now, the application barriers and legal problems has dulled interest in the program, particularly among Chinese investors who have historically been the main applicants for EB-5 visas.

Ronald Fieldstone of the Arnstein & Lehr law firm, who represents investors and operators of regional centers that collect investor funds and review visa applications as part of the EB-5 program, said the mood among attendees at a recent EB-5 industry conference in Los Angeles was mixed, reflecting discouragement over a significant slowdown in the number of new EB-5 transactions this year. Notably, the number of Chinese nationals has sharply decreased this year.

"My impression from the conference is that new EB-5 legislation seems to be stalled and is unlikely to gain traction by the end of the year, or even early the following year," Fieldstone said. "There are just too many other issues that Congress is dealing with, especially when it comes to immigration."

While responsible for only a tiny portion of the record $530 billion in commercial real estate loans originated in 2017, EB-5 has become a major source of alternative capital for many development projects over the past seven years. Developers, who used only $800 million in EB-5 funds for U.S. commercial projects in 2011, increased that to $3 billion in 2014 and $5.5 billion in 2017, according to Invest In The USA, known as IIUSA, the main trade group for the EB-5 industry.

Commercial property lobbying group Real Estate Roundtable has supported the program as an important source of gap financing for real estate projects, noting at one point in 2015 that loss of the program could cost almost $7 billion in foreign investment and 136,000 U.S. jobs.

About $13 billion of EB-5 funding will become eligible for redeployment over the next few years into other ventures. That far exceeds the anticipated amount of newly originated EB-5 capital, Fieldstone added.

"The conference gave me an opportunity to speak with foreign agents who help connect EB-5 investors with U.S.-based EB-5 projects, as well as professionals in the industry," Fieldstone said. "And their feedback was not good."

Big real estate companies like New York City's Silverstein Properties and Related Cos., developer of New York City's $25 billion Hudson Yards master development, have raised billions of dollars from foreign investors. The long waits, coupled with concerns about high-profile cases of wrongdoing by some operators, have prompted federal officials to strip some regional center operators of their funding authorization, while others have voluntarily dissolved, said Jessica A. DeNisi, attorney for Klasko Immigration Law Partners.

"Such terminations, while purporting to protect the integrity of the program and its many participating investors, often result in fatal harm to the immigration goals of innocent investors," DeNisi said.

In addition to large megaprojects like Hudson Yards, developments financed at least in part by EB-5 range from a pair of Hyatt-branded hotels proposed near Los Angeles International Airport to a proposal by private investors to build a retail and entertainment center around a 630-foot-tall, 1,500-passenger Ferris wheel on Staten Island in New York City to boost tourism.

The six-year effort by New York Wheel LLC to build the massive wheel on a site near the Staten Island Ferry terminal has stalled over various issues, primarily the city's refusal to issue tax-exempt bond financing, that the investors said will force them to auction off parts of the wheel this month. EB-5 investors have committed to nearly half the estimated $450 million cost of the project. New York Wheel LLC did not return a request for comment.

However, critics have derided EB-5 as a "citizenship for sale" program and implicated it in a number of money-laundering and securities fraud schemes, which has led to lawsuits against several EB-5 regional centers around the country filed by foreign investors, including by Chinese nationals also disgruntled by slow processing times that have delayed citizenship applications for up to 15 years.

The Department of Homeland Security shut down a regional center in Vermont in July after a group of investors alleged in court papers that the state program was “the largest EB-5 fraud in U.S. history.” The U.S. Securities and Exchange Commission has accused the Vermont operators and several other regional centers around the country of running a Ponzi scheme.

A group of 450 Chinese EB-5 investors in turn sued the federal government in July to speed up processing of a growing backlog of visa applications. IIUSA, the trade group representing regional centers, filed a brief in late September supporting the lawsuit.

"Finding a workable solution to the visa backlog would be of benefit to not just the EB-5 industry but the entire country as it makes available more visas, which in turn means more investments to important local economic development projects," said the group's president, Robert Kraft.

Numerous allegations of fraud and corruption by U.S. operators who critics say are using the program for personal gain by inducing foreign nationals to invest in real estate projects have prompted bipartisan efforts by lawmakers to either fix the EB-5 regional center program or let it expire.

California Democratic Sen. Dianne Feinstein and Sen. Chuck Grassley, a Republican from Iowa, have introduced legislation to terminate the program. The efforts to reform or kill the program remain in limbo as Congress has tackled other issues.

"Amid repeated calls from Sen. Charles Grassley, R-Iowa, and others for stricter accounting and deeper background checks to reduce the prevalence of fraud, the EB-5 lobby suggests rearranging deck chairs on the Titanic," said Bob Dane, executive director of the Federation for American Immigration Reform, a group that seeks to curtail both legal and illegal immigration.

"From New York to Virginia to South Dakota to Nevada, EB-5 projects have been embroiled in legal contests," Dane said. "An online search of EB-5 lawsuits yields 9,900 results and EB-5 bankruptcy nets 1.52 million hits."

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