Deidre Woollard: Hello, real estate investing Fools. In this spotlight we're going to talk about a program that I've covered for years, but wanted to learn more about EB-5. EB-5 is the program that allows foreign investors to get visas when they fund job creating projects. A lot of those have been real estate developments. EB-5 has been used to fund some of the biggest projects in recent years. Our guide today for learning more about EB-5 is Aaron Grau who's the head of Invest in the USA, which is the trade organization for EB-5. Hi,Aaron.
Aaron Grau: Good morning. Hello, Deidre. How are you?
Deidre Woollard: Doing great. Can you explain the basics of what EB-5 is?
Aaron Grau: The EB-5 visa program was began many years ago as an investment tool for the United States in all honesty, an economic development tool. This was never really intended to be an immigration program per se. It began meeting with some success and then Congress decided to juice the program by creating a regional center program that allowed authorized organizations around the country, they're private, they're public, they're public-private organizations in some instances that can pool EB-5 investment dollars from immigrant investors around the country. Then these regional centers can then make those dollars available as part of the capital stack in any real estate development project or frankly, in any infrastructure or project, otherwise. It would simply be a matter of determining the best use of the money and what an investment would look like for the investors. But the dollars at the regional centers pool simply become placed in the capital stack of typically in regional real estate development program and the dollars can be very significant, hundreds and hundreds of millions of dollars.
Deidre Woollard: As I understand there's a difference between the EB-5 regional centers and the main EB-5 program, but the regional centers is actually where the bulk of the money is being collected?
Aaron Grau: That's right. Any immigrant investor can apply for an EB-5 visa directly, meaning they take it upon themselves to place the dollars in an economic development project or real estate development project, and it would be up to them to prove to the Department of Homeland Security that their investment has generated or saved 10 or more US jobs. There are also several other requirements that go along with making that investment. It can be something of a heavy lift for someone who is abroad. Then they also may or may not have as much insight into their investment itself, into the project itself. It's available to people, however, because of the difficulties, I would say 99 percent of the investments that go through EB-5 are facilitated by regional centers because they take on the bulk of all of the administrative lift that would allow an investor to demonstrate that his or her investment is meeting the federal requirements, job creation being the biggest one. That being the case, the regional center program is also responsible for actually placing 98, 99 percent of this money into projects.
Deidre Woollard: There are special areas for this, right? There is targeted employment areas as I understand. It seems to be a little bit like the opportunity zones, but not quite the same kind of thing.
Aaron Grau: I think from a public policy perspective you can definitely paint opportunities zones and targeted employment areas as being equivalent. They're definitely not equivalent. The devil's in the details with regards to how opportunities zones are created and how TEAs, targeted employment areas are created. However, the purpose of a TEA is to incentivize investment into areas that would otherwise not likely receive investment. We're talking about rural communities or urban distressed communities, and that's where you get the similarities between OZs and TEAs. But the nature of how each are derived is very different.
Deidre Woollard: So developers use EB-5 funding as the equity portion of building a project out, is that correct?
Aaron Grau: Yeah. It can be debt or equity actually. It depends on the offering statement and it depends on the project. Some regional centers their default is to create equity opportunities. Others prefer a debt model. It just depends.
Deidre Woollard: As we're taping this at the end of June, the regional center part of the EB-5 program is set to expire. Can you explain a little bit about what this means?
Aaron Grau: Sure. Well, it's not set to expire. Actually, it'll expire today as a matter of fact. To answer the question what it means that's a tough one because everybody is really scratching their head. I suppose technically what it means is that regional centers per se, the program we were just talking about, no longer have a federal authorization to operate. Which calls into question all sorts of concerns about investors, their investments, their place in line with regards to their application for a visa. It also calls into question the status of these investments in the capital stack of projects across the country. I don't think that when this program expires today at midnight, I suppose, that the bottom immediately drops out. The program is significant and the federal government realizes its significance. So I'm quite certain that because there has been some precedent in the past for dealing with a lapse in the program that the US citizenship and immigration service, which is the part of DHS that governs this program, they will be publishing guidance as to how to deal with all the questions that people are starting to ask.
Deidre Woollard: Yeah, I'm sure there's a lot of questions. What about applications that are currently in the works? What about projects that may be half funded? Do you think some of the rules will start to figure out what's happening there?
Aaron Grau: I certainly hope so. I suppose it's worth noting the difference between a lapse and an expiration. Really it's something that's more of a footnote than anything to raise huge concern about. But it will dictate how the department handles their guidance. Previously, the regional center program has always been attached at the end sections of appropriations bills that fund the Department of Homeland Security or earlier the Department of State. These bills had to pass. There was never any question that the federal government wasn't going to fund DHS or wasn't going to fund the Department of State. However, as I'm sure your listeners understand in the past there have been debates over whether this is appropriate or that priority is appropriate, and as a consequence these appropriations bills languished. In some instances we've even seen government shutdowns because there was no money to pay for federal operations. In those instances, because the regional center program was tied to those, what are called must pass bills, so went the fate of the EB-5 Regional Center program. But because we always knew that those bills would eventually be passed, we considered the termination of the program or the lack of authorization of the program in those instances as a lapse. There was never any question that the program would be reauthorized. It had to be as part of a bill that had the plus. This time it's different. The debate wasn't about the underlying appropriation's bill. This time the debate was about the EB-5 Regional Center program itself. The program was not attached to any must pass piece of legislation. It was stand-alone, meaning there was no safety net. This time when the program lapses it's really technically more of an expiration because we don't know how or when the program will be revised. We simply have a great belief that it will be given all of the questions that are out there and the fact that nobody on Capitol Hill wants this program to go away. So that nuance will come into play as the Department of Homeland Security determines what its guidance this time will be. In the past they have always held applications that are in the pipeline in abeyance for a reasonable amount of time, easy enough to define or not define because they always knew things would come back. This time I imagine the guidance will look and feel a little bit different. But I do have confidence that the Biden administration and everyone on Capitol Hill will identify a solution and we'll get past this setback.
Deidre Woollard: There are a couple of bills in both the Senate and the House to potentially reform EB-5. What's the status of those and do you feel like those have potential to pass?
Aaron Grau: I do eventually, hopefully this summer in fact. On the Senate side, Senator Grassley and Senator Leahy and they were later joined by Senator Coons from Delaware, they introduced the EB-5 Integrity and Reform Act. It was labeled S831, just the number it was given. Not long after that Representative Fitzpatrick from suburbs outside of Philly and Representative Stanton from Phoenix, Arizona, they introduced HR2901, which is essentially the exact same bill as what Grassley and Leahy introduced. The nature of the bills are simple. The nature of the bills seek a long-term reauthorization of the programs so that we don't keep knocking our heads against a brick wall every year. But it also included integrity measures or what are colloquially referred to as integrity measures, which are intended to protect good faith investors from any bad apples or fraudulent activity that occur with their money in the United States. It also provides some reasonable oversight of the program. IIUSA, the organization I work with, we've been firmly behind these since Day 1, 100 percent. It's not because the association doesn't want to address other issues the program faces. For example, this program desperately needs additional visas for its growth to ease the backlog of visas and applicants that have already made investments. We desperately want to address that and there are a lot of ways to do it. These bills didn't include that. We didn't like that it didn't include that. But to your point a moment ago, Deidre, there's no other legislation out there. This was the hand that we were dealt. There was no one else to dance with. Senator Grassley and Senator Leahy and many others on Capitol Hill were very reluctant to address hardcore immigration related policy issues like the number of visas available in a bill like this because it would surely become a poison-pill. Too many people would just glam onto that and say, "We're not addressing immigration policy when we've got the Biden administration's comprehensive immigration policy coming down the road, we're just not going to do it." When we realize, when IIUSA realized that we had one pathway, just one to secure that reauthorization that we desperately need, we asked to those concerns and we backed SA31 and HR2901. It may be that in negotiations that will start hopefully after the 4th of July recess when there's a realization that we told you so that this thing was going to expire. That there may be some willingness to address additional issues that would improve the program, and we certainly hope so. But for right now, those two bills are right where they were when we left them. Three sponsors in the Senate, 25 or so in the house. Both bills bipartisan.
Deidre Woollard: EB-5, it seems like has been a little bit controversial, partly immigration, controversial last few years. But also, the idea of, is it being used in the way that it's supposed to be? Same thing that we've seen with opportunity zones is it benefiting the areas that it's supposed to. Is that something that you are addressing? I know there have been some plans that failed like the Staten Island Wheel, for example, that used EB-5. What's the status of the controversy around it right now?
Aaron Grau: Let me preface my answer by saying that the association represents 250 plus member organizations across the country and really more than a handful around the world as well. It goes without saying that we represent urban interests, we represent rural interests. We represent the gamut of the industry and the EB-5 community. To say that we fall on one side or the other would be a complete mischaracterization. That said, there is a constant to beat that IIUSA is a part of as to whether or not the dollars are flowing to the places that are most in need. I would argue that Senator Grassley and Senator Leahy, both coming from fairly rural states, Iowa and Vermont, that they see that realization and they would like some of the dollars to be used to improve their communities in their states. It all boils down to the definition of a targeted employment area. That area which to your point is likened or see that encourages investment by lowering the threshold of the investment amount. If you invest in a TEA, the investment amount is only $900,000. The regulations have been thrown out, however, so that it's now down to $500,000. To invest in something that's non-TEA will cost an investor significantly more. It's a tug of war because there are big city developers. A handful of them, really, not many at all, that are working very hard to identify the definition of a TEA that works best for them. That's certainly their prerogative and they have the ability to do so. But we definitely feel that a handful of big city developers should not be the ones determining policy for the rest of the country. As I said, IIUSA represents regional centers and developers in a lot of big cities, including New York, and Miami, and Houston, and, Dallas, and LA, and Seattle. We are not simply towing the line for the little guy, although we do. It's just that there are a handful, small handful, two or three maybe big city guys feel differently. We're working hard to be sure that things are equitable across-the-board.
Deidre Woollard: Makes sense. When I was doing some research on EB-5, I noticed that there's a lot of other countries that have similar programs to encourage development. Is having EB-5, is it considered a competitive advantage for the US?
Aaron Grau: I would think so. I would like to hope so. I mean, what we're talking about here is non-tax revenue that's built into the capital stack of economic development or real estate development projects that otherwise would not be available to developers. But for the interest in these immigrant investors coming to the United States. Not only that, but once an immigrant investor has a green card, has gone through the process, demonstrated job creation, 100 percent of his or her global assets become taxable to the United States. You're not just talking about an initial investment, you're talking about ultimately expanding the tax base considerably for the government. Is that a good thing for the United States? It definitely is. Congress recognize that early on because as I said when we started, this is an immigration program, yes, because it facilitates a visa. But it's an immigration program painted with an economic development brush. This was not something that was created for the purposes of facilitating mass immigration to the United States. This was done for the purposes of leveraging those dollars. It's doing a fantastic job. I mean, over $40 billion into the US since its inception, the Regional Center program. So yes, it's definitely competitive advantage for the United States and we need to recognize there are other countries out there with these programs as well.
Deidre Woollard: Excellent. Yeah, really good point on the tax base. The final question for you, foreign real estate investment dropped in 2020, of course, because of the pandemic. What are you seeing right now in terms of foreign aid, real estate, interest in investing? Do you think that's part of what might be next for EB-5 is that there is that money waiting to invest here?
Aaron Grau: Well, we think there is that money waiting to invest. We've recognized the downturn as well. A lot of it's been because of COVID. I think a lot of it has been because the program itself has sort of been, I don't want to say in turmoil, but we have been going through these debates with regards to the Regional Center Program. People are probably hanging tight before they make an investment. But we do see a lot of money on the sidelines. The anecdotal evidence that we have is that even at the $900,000 level, there isn't a huge interest from places across the world in investing in the United States if we can reduce the wait time that people have. That's a big if and there are a lot of ways to do that. We can certainly work with USCIS to help their processing times. We can certainly identify ways to increase the number of visas, so that people get this as more quickly. As I said, those are both things that we are committed to working on and simply couldn't do because of the parameters of this last bill negotiation. But we do see a lot of money on the sidelines, a lot of money that's ready to come into the country, but we need a program in order to facilitate it. That's what these negotiations starting Tuesday are all going to be about.
Deidre Woollard: Excellent. Well, thank you for your time today, Aaron. I think you really helped me understand at this. [MUSIC] I think listeners will benefit too. Reminder to everyone, if you want to learn more, Aaron's organization is Invest in the USA, that's IIUSA.org. Stay well, and stay invested.