Five top EB-5 economists, in an article by EB5 Investors Magazine, talk about what they’re observing in EB-5 now — and where they see the program going. While new project work has significantly slowed down, some EB-5 economists see positives like better investor returns, and a greater variety of projects and locations, especially in areas of true need.
Current EB-5 activity: slowdown with a ‘little more movement’
Scott W. Barnhart notes that there has been a “massive slowdown.” This was to be expected, given the substantive regulatory changes to both investment amounts and Targeted Employment Area (TEA) designations that took place in November 2019. Barnhart comments that the market is “still getting familiar with the new investment amounts.”
Kimberly Atteberry agrees that activity has been reduced, but offers a positive observation: “We are starting to see a little more movement.” She hopes that as the market acclimatizes (a common refrain with immigration lawyers speaking to the future of the program), activity will pick up.
TEA changes: challenges with fund raising, and a ‘competitive edge’
Barnhart states that the acclimation of the industry applies most to the the TEA changes that handed such designation over to the federal level and really tightened up qualifying criteria. “Many projects had this occur midstream during their fundraising campaign, or even after all the document preparation had been completed but prior to any fund-raising activity.”
Jeffrey Carr also points out: “The biggest areas of uncertainty in EB-5 fundraising is the concern about the new TEA rules and the inability to get a definitive answer out of the USCIS about a project’s TEA eligibility until the first formal USCIS adjudication on a project is completed.”
Economist Ismael Fernández speaks to the positive aspect of TEA projects going forward; he believes those projects will have “a considerably higher competitive edge.” And he declares, that is good news for projects in rural areas and areas of high unemployment. A constant criticism of the EB-5 program in the past has been the gerrymandering of TEA areas, so if Fernández is correct in saying areas of true need will receive more funding, that would go a long way toward EB-5 living up to its original Congressional mandate of helping U.S. neighbourhoods in true need of support.
The evolution of EB-5 projects: smaller, high rates of return, new locations
The EB-5 economists agree that investment activity is not the only factor being impacted by the new regulations; the types of EB-5 projects being offered will change as well.
Both Carr and economist Michael Kester think the type and size of projects are changing — they’re getting smaller, and moving away from traditional real estate developments. Kester foresees more rural projects, especially in the power and infrastructure sectors. With a movement away from real estate developments, Kester also predicts a move away from urban projects: “I believe we might see more project types where the site selection is more flexible than a real estate-based project, such as technology companies.”
Better returns for investors
Fernández believes the changes should result in better gains for investors: “The age of large regional centers controlling the market has ended due to the increased cost of the market. Investors are going to demand a lot more for their money, such as a larger return for being part of the project.” This sentiment was also echoed by many immigration lawyers speaking to the future of EB-5.
Low Interest Rates
The interest rates on the capital raised by EB-5 investment programs are quite low as compared to that of other forms of lending. The good news is that regardless of the state of the economy, the rate of interest on EB-5 investment remains below 10%. Plus it can be adjusted for inflation when developers seek funding.
EB-5 Trends – TEA Challenges, Rural Projects, and Markets
Now that changes in the EB-5 TEA and investment regulations have substantially reduced the popularity of the program, fewer investors will be funding projects in the US. As the investor pool becomes smaller, wealthier, and more exclusive, it also becomes increasingly sophisticated. Therefore, the requirement for protecting the investors’ interests becomes more necessary now than ever before.
Investors also look for more security and regulation centering on the diligence measures for selecting the best EB-5 projects as a way to safeguard their investments. Similarly, the more stringent rules for designating Targeted Employment Areas have translated into a higher number of rural projects qualifying for EB-5 funding.
In terms of the countries that offer great potential as markets for EB-5 investments, the new regulations and especially the global pandemic will likely lead to a change in terms of the countries with the most investors. In the past, China, Vietnam, and India were the three nations that encompassed the majority of EB-5 investors. However as the world strives to recover from the negative economic and health crisis, the scenario is likely to shift as Latin America emerges as a region with increasing potential as an EB-5 investment market. While Vietnam and India will still continue to supply EB-5 investors, the number of applicants will reduce by a considerable extent until they try to pick up the pace post COVID-19.
The bottom line
These top EB-5 economists don’t seem to share a consensus view of what this all means for the industry. Carr cites the proposed changes to the program as being an impediment for the moment: “As long as there are lawsuits to suspend the regulations and congressional legislative reform proposals pending, there will be some reluctance to jump back fully into the program.”
Barnhart encourages the notion of legislative reform, saying “positive changes will help the industry recover.”
Atteberry and Fernández offer hopeful takes on where the new EB-5 landscape, with the former reminding us, “The higher investment amount is not all bad news—investors can create more jobs with their investment at the new level.” And Fernández declares: “I try to be optimistic about the market. After all, the U.S. continues to be the largest economy of the world and the most robust in the face of uncertainty.”
Read the EB5 Investors Magazine article “Top 5 Economists”