Since 1990, the United States has offered a path to permanent U.S. residence for enterprising foreign investors.
In the U.S. EB-5 Immigrant Investor Program, a foreign investor commits a certain amount of capital to a project that will create or preserve a minimum of 10 full-time jobs for American workers. Successful participation in the program secures a green card for the investor, as well as his or her spouse and any unmarried children age 21 or younger. Unlike other paths to U.S. residency, the EB-5 program does not include requirements relating to age, business experience or language skills. Instead, it encourages foreign investors with an interest in residency to take steps that Congress has determined will help the U.S. economy to grow.
To begin the EB-5 process, an investor files an I-526 petition in order to demonstrate how he or she will meet the requirements of the EB-5 visa program outlined by the U.S. Citizenship and Immigration Services (USCIS). A key requirement is that the investor invest in a “for profit” enterprise that was established after November 29, 1990; if not, the enterprise must meet certain restructuring and expansion requirements. The investor must also be active in the new commercial enterprise’s management. In addition, the investor must contribute at least $1 million into the new enterprise. However, in “targeted employment areas,” that minimum investment drops to $500,000. In order to qualify as a targeted employment area, a given location must be rural – the precise definition of which varies from state to state – or must have an unemployment rate 150 percent of the national average or more.
If the agency approves the I-526 petition, the investor applies for a conditional green card, which will allow the holder to reside in the country for two years. At the end of that time, the investor files a form I-829 to demonstrate that the program requirements have been met, especially the job creation requirement.
Given the various investment criteria, the EB-5 program is clearly not for everyone, but its appeal is obvious. While the program has existed since the early ‘90s, it gained popularity after the financial crisis in 2008 as a source of capital for real estate developers when domestic funding was relatively hard to secure. While the U.S. economy has bounced back, the program remains popular. According to USCIS, the EB-5 program has resulted in $8.7 billion worth of foreign investment in U.S. businesses over the past three years, and has created over 35,000 jobs in the same period.
However, there has been some controversy around the EB-5 program in recent years. Some lawmakers have criticized developers, states or both for creative mapmaking intended to define an area as a targeted employment area — in order to reduce the minimum required investment threshold for EB-5 investors — by, for example, including a subsidized housing development near a development in a more affluent neighborhood to draw down overall unemployment. Sen. Chuck Grassley, R-Iowa, and Sen. Patrick Leahy, D-Vermont, are among those who have characterized such “gerrymandering” as abuse of the program. USCIS is considering new regulations in order to ensure more consistent criteria for designating targeted employment areas.
In addition, USCIS has said it may increase the minimum investment requirements for the program. At this time, however, no one has publicly discussed any specific amounts. While this change will take time if it does arrive, it could still be a concern for investors considering the EB-5 program in the future.
Scrutiny Of Process
Not everyone who shows up with the requisite $500,000 or $1 million will be able to apply via the EB-5 visa program. Investors must be prepared to verify the funds they intend to invest in the U.S. were obtained via lawful means. USCIS may require an investor to turn over foreign business registration records, personal and business tax returns, documentation tracing the source of funds, and certifications regarding any civil or criminal proceeding or private judgement against the investor within the past 15 years.
Even investors who can document the source of their funds may also need to consider the political situation of their home countries. For instance, some Latin American investors have encountered difficulties related to their own governments’ foreign exchange controls. These controls can limit the amount of money an investor can transfer abroad. Before applying for the EB-5 program, investors will need to be sure they can secure the necessary investment amount in U.S. dollars.
Putting these general concerns and potential future developments aside, the EB-5 program can still be an excellent choice for certain potential immigrants. However, not every EB-5 investment is alike, so investors should perform due diligence on the enterprise in which they plan to invest. Although I do not cover them in this article, investors should also be aware of the U.S. income and estate tax implications they and their family will face as permanent U.S. residents.
Choosing An EB-5 Project
Direct Investment vs. Regional Center
The first major decision an investor faces when considering an EB-5 investment is whether to invest directly or through a “regional center.” In a direct investment, foreign investors invest directly in their own businesses. Often, though not always, the EB-5 applicant will be the sole or main investor in a particular project. Examples might include restaurants, hotels, nursing homes, farms or retail stores. The investor must demonstrate active involvement in the business, either through day-to-day managerial control or through influence over policy at the enterprise level. This direct control often appeals to investors who plan to support themselves through their U.S.-based businesses if they obtain their green card.
Direct investment offers a few other advantages as well. With the proper documentation, a direct investor may be able to meet the minimum investment requirement using non-cash assets, such as equipment or inventory. However, direct investment also involves some major drawbacks. Generally, this sort of investment entails greater risk than indirect investment through a regional center; investors will also have to pay close attention to U.S. tax law requirements and shoulder a great compliance burden. They will also typically need to compile and submit a greater volume of documentation with their visa applications. The investor must be prepared to provide the required business and marketing plans and to substantiate how their business will meet the job requirements.
Regional centers are corporations, agencies or private enterprises offering an alternative to EB-5 investors who do not want to run their own businesses. Instead, regional centers allow immigrant investors to invest through a fund, which is then used to sponsor an EB-5 compliant project. Many, though not all, regional centers are sponsored by or work closely with local governments. Whether or not a regional center has a government affiliation, it is essential that a potential investor performs proper due diligence, since not all regional centers are equally attractive.
For an investor considering a particular regional center, the organization’s track record should be the first point of interest. While USCIS reviews and approves regional centers, they are not risk-free. As of this writing, there are nearly 800 approved regional centers available, with varying levels of experience and expertise. When asking about a regional center’s history, investors should find out how many of the center’s past investors filed I-526 petitions and what percentage of them were approved. Similarly, investors should know how many prior investors were approved (or denied) when they submitted I-829s. This will give the investor an idea of prior applicants’ success in obtaining their green cards by working with the regional center.
Investors should also find out what happens if the center fails to attract enough investors for a particular project. Given the two-year limit on the conditional green card, EB-5 program applicants may not have unlimited time to wait on a regional center to pursue enough new investors to move forward. For investors who may only be able to reach the $500,000 minimum, it will also be important to determine that the regional center offers projects in targeted employment areas.
USCIS keeps a list of terminated regional centers, which investors should obviously avoid. However, a center may also have received a Notice of Intent to Terminate (NOIT). Centers that have received a NOIT may continue to operate while USCIS investigates their operations, but receiving one means that either the center has failed to submit required information or it allegedly no longer serves the purpose of promoting economic growth. Either of these should serve as a red flag. Failure is not the only hazard; the Securities and Exchange Commission has filed 19 cases involving EB-5 investment offerings in the past three years, about half of which involved allegations of fraud.
One benefit of investing through a project sponsored by a regional center is the ability to consider indirect jobs. Instead of the project relying solely on the ongoing operations of the business to meet the job requirements for each investor, the project can submit an approved economic analysis to demonstrate how, for example, construction jobs from building the project will be created. An investor will want to make sure that the job analysis meets the requirements of USCIS, and that there is a sufficient cushion to cover all EB-5 investors in the project. If the job requirements are not met, the investors won’t be able to obtain their green cards.
Evaluating Underlying Investment
Investors should be aware that, historically, EB-5 investments have not provided substantial returns to investors; some estimate typical returns of as little as 1-2 percent. This is because most EB-5 investors are mainly concerned with obtaining their visas and receiving their principal back. In most cases, investment returns are a secondary factor.
While most foreign investors may be mainly concerned about securing a green card, they should not ignore the project’s investment merits. This is especially important given that the projects sponsored via the regional centers are private investments that are not regulated by the SEC.
Typically, the investments will be structured as limited partnerships, with the investors being the limited partners. The limited partnership agreement is the governing document of the investment, so it is imperative the investor understands its terms. Some key areas to consider are:
- Fees — There will be fees beyond the investor’s $500,000 or $1 million investment. Investors should inquire about additional fees, such as application fees, to ensure they know what their required commitment level is. In addition, the general partner will charge a management fee to oversee the investments in the fund. Generally, most private partnerships will charge a management fee of 2 percent and take a 20 percent share of the profits. If the fees are much higher, investors should ask why.
- Treatment Of Capital Commitments — If an applicant’s I-526 is rejected, most regional centers will return the investor’s investment and fees, but not all of them do. Investors should understand the process for recovering the investment if their application is rejected. If investor funds are held in escrow until their applications are processed, it will be easier for investors to get their commitments back. If not, they may have to rely on the fund finding other investors to take their place in order to have their funds returned.
- Distribution Provisions — These are the provisions that determine how profits and losses from the underlying project will be paid out to the investors and general partner. Because the EB-5 investment must be considered “at risk,” the general partner is generally not permitted to make distributions to limited partners for at least five years, unless temporary restrictions have been lifted and the partner has received a permanent green card. However, after this period investors should understand how profits and losses are allocated. Private funds generally provide their limited partners with a specified annual return — a preferred return — on their investment before the general partner is allowed to share in the profits of the partnership. This provides the general partner an incentive to maximize investment outcomes.
- Key Person Provisions — Key person provisions are designed to protect limited partners if a key member of the general partner is no longer able to serve. Typically, a fund’s manager is restricted from making new investments until the key person has been replaced. This protects limited partners by ensuring the fund has proper oversight. An investor should make sure the provision covers the key principals overseeing the investment and that the terms are not so broad that it renders the provision useless.
- Conflicts Of Interest — These provisions outline how individuals related to the general partner and its affiliates can interact with the fund. It outlines terms for doing business with the partnership and methods for resolving any conflicts that may arise.
Beyond the terms in the offering documents, investors should research the background of the investment managers, the developer and other parties involved. Some investors may find it useful to obtain background checks on the principals involved in running the investment. In the case of investment professionals, the SEC and the Financial Industry Regulatory Authority offer tools to check whether complaints have been filed against companies or individuals.
Investors should also ensure the project’s business plan and market analysis seem reasonable. Investors should be wary of plans that seem overly optimistic, ignore market risks and make guarantees regarding outcomes. These are all red flags. Investors should also avoid relying solely on the market and economic analysis provided by the fund sponsor. They should gather their own information and perhaps seek out professional investment counsel. Our firm’s investment advisory affiliate, Palisades Hudson Asset Management, L.P., has provided economic due diligence reports to EB-5 investors and their legal counsel.
As with any major investment decision, it is important to take the time to fully understand the potential risks and benefits involved. Most investors will want to work with a competent immigration attorney and a professional who is familiar with the tax and other financial requirements involved in the process. While the process is not necessarily simple, for the right investor, the EB-5 program can be a sensible path to securing permanent residency in the United States.