A controversial investor visa programme that brought scandal to US President Donald Trump’s in-laws faces an uncertain future as US$17 billion in Chinese investments sits in limbo for longer periods due to a processing backlog in the popular programme.
With a sharp uptick in Chinese applications for the visa programme known as EB-5, waiting times for applicants to obtain US residency have tripled to as long as 15 years. But the programme has no clear guidelines about what happens to the investments during that time, creating more risk.
“It’s a guessing game. Everybody is trying to figure out what to do and it’s a huge problem,” said Stephen Yale-Loehr, a lawyer at Ithaca, New York-based law firm Miller Mayer and an immigration law professor at Cornell Law School.
Created in 1990, the EB-5 visa programme allows a foreign national who makes an investment of at least US$500,000 that creates 10 American jobs in a high unemployment or rural area, to become a permanent resident, along with his or her family, usually in five to seven years. The capital, typically in a five-year loan, is returned to the applicant once the residency is granted.
Because real estate projects create jobs, first through construction work and then through service employment, many EB-5 visa investments go to those developments. EB-5 investments are allowed to be pooled together in “regional centres”, often financial services firms that sponsor EB-5 projects and act like bank underwriters to syndicate the loans for the projects.
Redeployment – that is, reinvesting the capital after the real estate projects are completed and the money is no longer in use – is only the latest challenge for EB-5, which has often faced questions about the source of certain funds as well as allegations about questionable projects.
One flap last year concerned Nicole Kushner Meyer, the sister of Jared Kushner – Trump’s son-in-law and senior adviser. She was found to have promoted the EB-5 programme in a presentation in Beijing to wealthy Chinese to invest in a New Jersey luxury apartment building that her company planned to develop. Her presentation mentioned her brother’s White House role and featured a photograph of Trump.
The ensuing outcry – US Senator Dianne Feinstein called it a “stark conflict of interest” and demanded the programme’s elimination – forced the company to apologise “if that mention of her brother was in any way interpreted as an attempt to lure investors”.
In June, US Senator Chuck Grassley wrote to Trump, calling the EB-5 programme “riddled with fraud.” That same month, Lee Francis Cissna, director of US Citizenship and Immigration Services (USCIS), the agency overseeing EB-5, conceded in Congressional testimony that EB-5 was in “dire need of reforms”.
But because a comprehensive reform plan has yet to materialise, the programme has been extended multiple times to allow more time for discussions, including the most recent extension about three weeks ago. The repeat extensions added another layer of uncertainty to the programme.
In this new problem, missteps in reinvesting these idle funds could lead to big losses and cause a backlash from investors concerned about preserving their capital. The uncertainty, alongside the long wait that has already tempered appetites, could further disrupt a programme that supporters say has helped create millions of American jobs and attracted billions of dollars of foreign investment to the US.
In roughly three decades, the EB-5 programme has helped finance projects for hotel corporations like Hilton, Hyatt, Marriott, Starwood, among many others. In return, tens of thousands of foreign investors have become green card holders.
The programme has proven particularly popular in China. As the country became increasingly wealthy in the last decade, more Chinese investors have sought to move their money out of China and into other markets.
Chinese families who aspired to have their children educated in the US also found the visa programme a cheaper way to gain access to American high schools and universities. The cost of tuition for a permanent resident is a fraction of that for a foreign national.
Indeed, as much as US$11.4 billion was added to the American economy in 2015 from the fees paid by roughly 370,000 students from mainland China to American high schools and universities – six times more than that of a decade earlier, according to the US Commerce Department.
For the EB-5 programme, this has meant a huge surge in Chinese applicants. More than 80 per cent of the 10,000 visas issued annually have gone to Chinese applicants since 2012, up from just 25 per cent in 2008, according to the State Department. The department also estimates that processing new Chinese applicants will take up to 15 years, potentially causing more billions of dollars of investment to stagnate, in addition to the US$17 billion already sitting idle.
“A lot of funds would love to get that money,” said Christine Chen at CanAm Enterprises, a regional centre that has raised more than US$2.7 billion in EB-5 investments. “But putting the capital into hedge funds known for making high-risk bets can mean losing the principal.”
“Most of our clients are not looking for returns, their priority is to preserve the capital,” she said.
CanAm set up a specific unit this autumn to focus on redeployment of EB-5 funds. About US$20 million will be reinvested by the end of this year in a combination of municipal bonds and infrastructure notes – securities that carry relatively low risks.
Investors are happy to have the money just sit in a bank account, EB-5 advisers said. But they have been told a bank deposit might not meet the requirement of risk, they added.
So far, USCIS only requires the capital to remain “at risk”, a vague phrase. What level of risk is acceptable remains unclear, the advisers said.
EB-5 groups have engaged with USCIS – as well as the Securities and Exchange Commission – for years seeking clarity.
In a letter to the immigration agency last year, Peter Joseph, executive director at Invest In the USA, a trade organisation that represents more than 280 regional centres, contended that “in the event the initial investment successfully creates jobs and is then repaid”, the investment ought to only have to remain “sustained” and not “at risk”, which would allow managers to hold the money in cash or risk-free financial assets.
In a meeting with USCIS this fall, the EB-5 community again advocated for investment options that are less risky than the original projects, said Chen, whose company attended the session.
“But since it’s a relatively new problem, the agencies are still developing and evolving their own policies,” Chen said.
As Yale-Loehr put it, “the industry and investors need clarity, but nobody is holding their breath. They desperately need Congress to act on increasing quota to alleviate the backlog, but that’s not anywhere on the horizon either.
“Unfortunately, I don’t see the light at the end of the tunnel.”