Peter Elkind and Marty Jones, Fortune, July 24, 2014
Whether you’re a skilled technology worker or a poor laborer, it’s getting harder to become a U.S. citizen. But for those with $500,000 to buy their way in, it’s a different matter. That’s just the beginning of the problem.
On Nov. 15, 2012, about 100 people gathered in a parking lot near O’Hare Airport in Chicago for a ceremonial occasion: the demolition of a fleabag motel to make way for what was intended to be a world-changing construction project. Next door to a Hooters restaurant, just off the Kennedy Expressway, was to rise a commercial and environmental wonder–the “World’s First Zero Carbon Platinum LEED-certified and 100% Allergen Free convention center and hotel complex.” Lest anyone doubt its global eco-import, the project’s developer was branding it as a “Kyoto Protocol Centre.” At a projected cost of $913 million, it was to include three connected towers–14, 17, and 19 stories tall–containing five upscale hotels with 995 suites and rooms, four levels of convention space, a green roof with a spa and yoga studio, a miniature golf course, and a 1,720-car “automatic robotic” parking garage. All this would be financed with the help of a government immigration program known as EB-5, which allows wealthy foreigners to obtain U.S. citizenship by sinking $500,000 apiece into a venture that creates American jobs. Spellbound by the sales pitch–which included “guarantees” that the project would deliver visas and juicy returns–nearly 300 eager Chinese investors had anted up a total of $147 million.
Immigration dominates the news today, and it’s just the latest crucial issue locked in a bitter Washington stalemate. The consequences have been dire. Whether it’s tens of thousands of impoverished children detained by border officials and clogging government facilities, or scientists and engineers highly coveted by technology companies who aren’t permitted to remain here, the U.S. is preventing countless foreigners from staying in this country.
Increasingly, the skilled and the poor are out of luck. But the rich are another matter. The program (EB-5 is short-hand for the government’s fifth employment-based visa “preference”) allows well-heeled foreigners to leap to the front of the line by simply plunking down $500,000.
From the law’s inception in 1990, selling potential citizenship to the rich struck many as a corruption of American ideals. “Have we no self-respect as a nation?” asked Texas congressman John Bryant on the House floor that year. “Are we so broke we have to sell our birthright?”
But that powerful objection was overcome with an even more potent counterforce: The program would generate jobs where they’re needed most. Immigrants seeking EB-5 visas must invest their half-a-million dollars in a new business that creates 10 full-time U.S. jobs in a high-unemployment or rural district. (Technically, one can obtain an EB-5 visa for $1 million with no requirement that the jobs benefit a struggling area; in reality, few apply under that provision.)
Today EB-5 commands bipartisan support–and it’s booming. Believers tout the program as a “win-win-win” that helps immigrants and U.S. workers, and provides valuable investment in American communities. A trio of billionaires–Warren Buffett, Bill Gates, and Sheldon Adelson–recently endorsed the program in an op-ed column in the New York Times.
But because the EB-5 industry is virtually unregulated, it has become a magnet for amateurs, pipe-dreamers, and charlatans, who see it as an easy way to score funding for ventures that banks would never touch. They’ve been encouraged and enabled by an array of dodgy middlemen, eager to cash in on the gold rush. Meanwhile, perhaps because wealthy foreigners are the main potential victims, U.S. authorities have seemed inattentive to abuses.
Certainly, there are thriving, completed successes (see “Five by EB-5”). An industry-funded study, using models and assorted economic-impact multipliers, claims that spending “associated with” EB-5 investors in 2012 contributed $3.4 billion to the U.S. economy and “supported” 42,000 jobs.
Others who have examined the program view it very differently. They question whether it generates many jobs–especially in needy areas. A December 2013 study by the Department of Homeland Security’s inspector general found that the government “cannot demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens.” A February 2014 paper by the Brookings-Rockefeller Project on State and Metropolitan Innovation concluded that “knowledge of the program’s true economic impact is elusive at best.”
There are two reasons for that. First, the government is exceedingly generous in its employment tally. It gives EB-5 investors credit for all the jobs theoretically spawned by a project even when EB-5 money represents only a sliver of its financing. Second, for many mainstream ventures, EB-5 money isn’t really creating jobs–it’s merely saving developers money for projects that would be financed anyway. (Indeed, those big companies are actually “hijacking” money from worthy smaller investments in hard-hit areas, argues Michael Gibson, a financial adviser who vets EB-5 investments.)
For the first 18 years of its existence, the EB-5 program was a dud. It fell dramatically short of projections that it would foster 40,000 jobs a year and never approached the program’s annual ceiling of 10,000 visas. In 2003 the government ￼issued EB-5 visas to 65 immigrants.
Raising money through EB-5 was complicated, and plenty of traditional financing was available. For their part, immigrants found the program too dicey. In Canada’s competing offering, applicants simply lent money to the government and were guaranteed its return. But in the U.S. the $500,000 investment has to be “at risk.” Immigrants first apply for a provisional green card; then, to get their permanent visas, they have to submit evidence within two years that their money has provided 10 jobs. If the project fails to do that, immigrants and their families can be deported.
In 2008 the financial crisis hit, and everything changed. With banks refusing to lend, EB-5 took off–first because it offered the only capital, then because it was cheap capital. Today the program brings about $1.8 billion into the U.S. annually. The government is on pace to grant more EB-5 visas in 2014–closing in on 10,000–than it did in its first 17 years combined.
At the heart of the program is an unusual trade: Because the immigrants care far more about getting a green card than anything else (their families get visas too), they’re willing to accept a token financial return. In fact, when “administrative” fees of about $50,000 are added, they’re typically paying for the privilege of sinking $500,000 into a U.S. venture for five to seven years–with no guarantee that they’ll ever get it back. And in part because of distance and language barriers, the targets of EB-5 pitches seem ill-equipped (or disinclined) to assess the business risks.
Though the government issues the visas, private developers reap the benefits. After middlemen get their piece, the cost of EB-5 capital runs between 4% and 6% a year–less than half of what developers would typically have to pay for mezzanine debt or to equity investors. Raising $100 million through EB-5 can add $20 million to a project’s bottom line.
The growing demand for EB-5 financing is being met largely by new Chinese millionaires, eager for greater freedom and less pollution, or to send their kids to college in the U.S. More than 80% of the program’s applicants now come from China, making it the mother lode for EB-5 prospecting.
EB-5 fundraising is a messy process, more like pitching vacation timeshares than any normal form of deal finance. Developers embark on road shows to big cities across China. With help from local “migration agents,” they use spam messages, slick websites, and telemarketing to round up potential investors for free dinner seminars featuring raffles for iPhones and lofty promises of a brighter future.
The EB-5 program isn’t overseen by a financial regulator but by the U.S. Citizenship and Immigration Services (USCIS), part of the Department of Homeland Security. Accustomed to processing visas and conducting immigrant background checks, USCIS is ill-equipped to review business plans, job- creation studies, and securities offerings. The SEC retains the power to police fraud. What that means is the agency has no mechanism to sniff out a problem until it has exploded, at which point the agency can only clean up the mess.