NYU academics call the recent “EB-5 Modernization” bill introduced by Senators Graham, Cornyn and Round a “return to the past.” They claim it would serve big urban developers, work against areas in need, and keep investors “in the dark.” Conversely, the academics claim the recent Grassley and Leahy reform bill would bring transparency to the program and prevent fraud.
Scholar-in-Residence Gary Friedland and Professor Jeanne Calderon from the NYU Stern School of Business say the recent “EB-5 Modernization” bill is an effort to stifle TEA reform and preserve the self-interests of the big players in the game. Their critique of the bill is biting and unqualified: “we express our vehement opposition to this Bill.”
While acknowledging the bill has many problems, they cite two areas as its biggest flaws. First, they say it kills any Targeted Employment Area (TEA) incentive to investors, thus missing the original purpose of the program — economically promoting areas in need.
The EB-5 program first established the TEA incentive in 1991 to motivate Green Card by investment applicants to invest in rural and economically disadvantaged communities. But Friedland and Calderon point out that “outdated” USCIS regulations have allowed virtually all projects to get TEA designation. The USCIS rule that went into effect November 21, 2019, addresses this issue and many industry stakeholders believe this new USCIS rule will mean less than half of EB5 investments will now qualify for the lower TEA amount. But the Stern school academics say the Graham and Cornyn bill would “negate the TEA regulations and restore the same broken system sought to be remedied by the regulations.”
Friedland and Calderon state the obvious: a significant TEA discount is a real motivation to investors to choose such a project. But the Graham and Cornyn Bill reduces the difference between TEA and non-TEA investments to a mere $100,000 ($1,000,000 vs. $1,100,000 for the respective investment levels). This is a far cry from the $900,000 differential the newly established USCIS regulations create between the two tiers of investments.
The academics call this “another example of the steady deterioration of the TEA incentive,” and as such, insufficient to motivate TEA investments. They point out that if an Green Card investor has to choose between an EB5 project in rural Iowa vs. a project by a giant developer in a swanky New York neighborhood, with only $100,000 separating the two options, the urban project will almost always win.
For Friedland and Calderon the answer is clear: a significant differential between TEA and non-TEA investments is key to motivating investors to invest in rural and deprived areas.
While they espouse maintaining a large separation between the two investment levels, they are aware of widespread industry concerns that the USCIS hike to $900,000 and $1.8 million, respectively, may deter capital raising, at least in the short term. Their suggested compromise is to raise both levels by 25% from their pre-November 21 numbers to $625,000 for TEA investments and $1,250,000 for non-TEA investments. This maintains the 50% differential that USCIS preserved in their much sharper increases, and still keeps a “meaningful” TEA incentive.
In addition to critiquing the insignificant TEA/non-TEA differential proposed by the Graham, Cornyn and Rounds “Modernization” bill, Friedland and Calderon call out the bill’s inclusion of Opportunity Zones (OZ) as Targeted Employment Areas. 75% of “low income communities” do not receive OZ designation, and the census tract data that is used in OZ determination is, the academics state, outdated — gentrification has already transformed many of those communities.
Beyond the TEA issue, Friedland and Calderon, are harshly critical of another aspect of the Graham, Cornyn and Rounds “Modernization” bill: the lack of real integrity measures. Specifically, the bill’s omission of account transparency and fund administration provisions has the academics “perplexed.”
They cite the recent Grassley and Leahy reform bill as having the answer to this problem. That bill would…
In a caustic attack of the big players who have dominated the EB-5 industry as of late, Friedland and Calderon suggest that the many proponents of the so-called “Modernization” bill want to avoid such deterrence of capital misappropriation. The effective result of this would be “keeping the immigrant investors in the dark, unaware of the location of their invested funds and whether the funds have reached the project.”
The Stern School business experts end their argument with the optimistic thought that perhaps the Graham, Cornyn and Rounds “Modernization” bill was introduced to be a “negotiation tool to lead to real compromise legislation that will incorporate a meaningful TEA incentive and account transparency, as well as address other important measures.” However, they question if the EB-5 industry can fight to pass the powerful self-interest that aims to preserve the status quo in the “Modernization” bill.
Time will tell if the legislation passes that puts the interests of disadvantaged neighborhoods and legitimate investors looking for an EB5 Green Card above those of mega-developers and bad actors who would abuse the program.
Read Friedland and Calderon’s paper “Why the EB-5 Industry Seeks to Make the TEA incentive Meaningless Again and Continues to Keep EB-5 Investors in the Dark”
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