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EB-5 Visa Program Boosts Employment

EB-5 Visa Program Boosts Employment

Today, the Wall Street Journal published a cover story seemingly designed (especially if one only read the front page and early analysis on page A12) to leave a bad taste in readers’ mouths concerning the EB-5 Visa program. http://www.wsj.com/articles/how-immigrants-cash-funds-luxury-towers-in-the-u-s-1441848965#livefyre-comment

The author seemed to mistakenly draw the conclusion that a program designed to help the poor and unemployed and under employed was being abused to build luxury condominiums and office buildings for the super-rich in New York, Miami and Los Angeles.  This conclusion suffers from multiple logical fallacies and is not supported.  None-the-less, it is also the story of Sen. Patrick Leahy and the Secretary of Homeland Security.

The EB-5 program is designed to bring foreign investment into the United States for the specific purpose of increasing employment among U.S. Citizens and lawful resident aliens who are permitted to work.  The theory being that if we can generate additional employment opportunity using capital that would otherwise never be available, we have essentially a zero (or actually because of the necessary bureaucratic structure a minimal) cost stimulus program.  In order to bring in more money, two additional avenues are available for the investor.  If the investment is in a location that is plagued by high unemployment (the area is defined by states) or is rural (as defined by federal regulations) the investment threshold is lower.  Second, foreign investors are currently able to pool their investments with regional centers, which then magnifies the economic and employment impact of each investment.  Each investor must generate 10 full time jobs for other people legally authorized to work in the United States; employing oneself or one’s family does not count.

States and promoters have taken to gerrymandering the areas in order to lower the threshold investment.  This is the primary complaint of the Secretary, and is a part of the “abuse” about which Senator Leahy complains.  However, such complaints show a complete lack of understanding of economics, business incentives, and how business and investment decisions are made, as well as an ignorance of how the EB-5 program actually helps the poor and unemployed and under employed.

First, if the threshold for the projects in which foreign investors are interested was higher, the market for such investment (the pool of potential investors) would be substantially smaller.  Additionally, for many who still had the means to invest, the cost would be too high.  So much so that actual investment would decline substantially.  This ultimately would hurt the people that Sen. Leahy and the Secretary are pretending to champion, as many jobs that could have otherwise been created will not be.  It is simple economics to note that higher cost will reduce the marketability of a product that is not a necessity.

Second, most projects generate jobs for the working class folks who have suffered the most recently, and are having the hardest time returning from the 2008 recession.  The projects are largely construction projects and a substantially smaller number of manufacturing projects.  Gerrymandered areas  must remain contiguous.  Even though often many miles separate the highest unemployment sectors of a Targeted Employment Area (TEA) from the actual development, the project will still draw on the labor pool of that contiguous area.  This means that even if the project is to build a hotel that has an average nightly room rent of $15,000.00 per night or condominiums with a minimum price of $1,000,000.00, the people that build it and work there once it is built will benefit.  The fact that they cannot afford to stay there immediately when the project is complete or afford to purchase even the entry level efficiency apartment is of absolutely no consequence when considering whether the economic impact of the project benefited those who built the hotel or tower, and those who will staff the project.  In fact, chances are many of the investors who had to put up $500,000.00 to become an investor will also not be able to afford to stay at such a hotel or purchase the $1,000,000.00 condo.  But that is likewise irrelevant.

Third, providing cheaper money to developers and manufacturers, when compared to the interest rates, collateral requirements and guaranties that banks require in such a circumstance encourages entrepreneurial risk taking, which necessarily benefits the entire area’s economy, and by employing people who were outside of the labor force or otherwise unemployed generates a ripple effect that impacts entire communities.  If the laborers return to their neighborhood with money in their pockets, they will spend it and save it at home, increasing economic activity and creating or saving additional jobs in their own neighborhood.

Fourth, a lesser used aspect of the EB-5 program is for the benefit of distressed businesses.  Distressed businesses are usually at the end of their ropes and close to closing their doors.  They cannot obtain traditional bank financing; and oftentimes, if any sort of financing is available, the interest rates border on usurious and the collateral requirements create a situation where the note could be called at any time, especially when accounts receivable come into the mix.  In such a situation, the employees of the distressed company are all at risk, and likely their community, including the corner grocer, gas stations, bars and all of their employees, would suffer and potentially close if the distressed business shut down.  EB-5 Investment and an appropriate turn-around plan can be used to protect not only the jobs, but also the community from which most of the workers come, even if the plant is located in a zip code or census tract with extremely low unemployment, next to one with higher unemployment.

The EB-5 program is good for the United States.  The use of regional centers to pool investment exponentially magnifies the impact of foreign investment.  The use of gerrymandering to ensure that investments are attracted and more investors put skin in the game of making America better, provides jobs to the exact people the program was designed to help.  Any attempts to make it more difficult or expensive to obtain Visas through this program will have a substantial negative impact on the poor, the un-employed and the under-employed, particularly in America’s largest cities.  What is sad is that those who claim to be champions of the poor, the unemployed and the underemployed, are the exact people advocating changes to the program that will harm those they claim to care about most.