The story of the Great Recession’s effect on development is well-worn by now: Banks stopped lending, so developers couldn’t get capital to build, so construction and real estate shed workers. Unbuilt projects changed hands until someone had the capital to finish them.
But in hindsight, some say the recession launched a previously unpopular program of the U.S. Customs and Immigration Services into the mainstream — and in return, foreign investors buoyed development, especially in the Inland Empire.
That program was the Immigrant Investor Program, better known as EB-5. Through it, the government awards green card applications to wealthy investors who pour $1 million into development projects and create 10 permanent, full-time jobs.
“At the time that the (county) was starting to pursue EB-5 (investment), our region desperately needed job creation as well as development,” said Heidi Marshall, commissioner of foreign trade. “We were looking at any way that we could create new jobs because in 2009, we were still bleeding jobs.”
The Inland Empire wasn’t the only region pursuing EB-5 during the recession. In 2007, the U.S. Customs and Immigration Services awarded 806 EB-5 visas. In 2010, they handed out 3,688 EB-5 visas, according to the Department of Homeland Security’s annual Yearbook of Immigration Statistics.
From October 2013 to October 2014 USCIS awarded 10,667, reaching the limit for the visas for the first time.
Invest in the USA, an advocacy group representing investors and the organizations that facilitate investment, boasts that EB-5 has attracted more than $9 billion in investment nationwide and created more than 180,000 jobs since 2005. In the next few years, developers hope to use this funding to create jobs in the Coachella Valley.
Detractors, however, say the program needs serious modifications. A 2013 audit by the Department of Homeland Security found that the government doesn’t have the power to dissolve third-party organizations that help administer EB-5, even when they’re concerned about fraud or security risks.
One investment advisor said sometimes projects billing themselves as development in blighted areas are, in fact, in bustling downtowns. A Brookings Institution report in 2014 found that the federal government makes very little data about the program available to the public, something that attracts criticism.
Despite its flaws, EB-5 has funneled money into southern California in the last decade, and experts believe the cash flow is likely to continue.
How the process works
Most EB-5 projects begin with conversations between developers who need funding and groups called “regional centers,” which are public or private organizations that facilitate EB-5 investment. In some cases, developers who plan to use EB-5 investment in a number of different projects become regional centers themselves, said Michael Gibson. Gibson manages U.S. Advisors, a consulting firm specializing in EB-5 investment and immigration.
Next, immigration consultants working abroad find investors. At least 85 percent of EB-5 investors come from China, according to Cornell University immigration law professor Stephen Yale-Loehr. Part of the appeal of immigrant investor programs such as EB-5, he explained, is that investors can secure visas not only for themselves but for their families.
“It’s hard to emigrate to the U.S. from China in other categories. It’s relatively quicker to go the EB-5 route,” Yale-Loehr said. Further, he added, “the network (of migration agents) in China allowed developers a relatively efficient way of finding large numbers of investors quickly.”
Potential investors sign on to projects, then apply for visas. According to the U.S. Customs and Immigration Service, they must provide evidence that they earned their money legally and that their investment will create 10 permanent, full-time U.S. jobs. They’re also vetted by the Department of Homeland Security.
At the same time, development begins.
If investors are approved, they and their families receive conditional visas, according to the U.S. Customs and Immigration Service. Then, two years later, they must prove they made the promised investment and they’ve created those 10 jobs. If their second application is approved, investors and their families (spouses and children) can receive green cards and permanent residency status.
According to the U.S. Customs and Immigration Service, it currently takes about 14 months for the office to process investors’ initial applications and about 15.5 months to process the second applications, which verify that investments were made.
Further, Gibson explained, investors only have roughly a one-in-three chance of successfully migrating to the U.S. Many applications aren’t approved, and many projects fail.
“About a million people a year immigrate to the U.S. through various kinds of green cards, and only 10,000 of those — basically one percent — come in through EB-5,” Yale-Loehr said. Because investors also secure visas for their families, “there’s only maybe 3,000 to 4,000 investors who can get EB-5 green cards every year.”
EB-5 in the Inland Empire
In 2009, longtime medical developer Al Rattan put together a company to start buying up distressed assets. Banks were happy to be rid of the projects, but Rattan couldn’t get loans to push the projects forward.
So he looked to investors from China, Vietnam and Taiwan — and they started talking about EB-5.
The U.S. government started the visa program in 1990, in hopes of competing with a successful Canadian investor visa program, several experts said. But the program was little-known — just 129 visas were awarded in 2004, for example, less than one percent of the 10,000 available — before recession hit the U.S. in 2008.
At that time, the Chinese economy was booming, according to Gibson
“Developers were running around looking for cheap sources of capital, so they found out about this program, and here they are,” Gibson said.
With the help of advisors, Rattan created a regional center — an independent body that connects interested investors to projects that need funding — aligned with his development company. Gibson estimates that 90 to 95 percent of EB-5 investments are made through these regional centers. Invest in the USA counts 295 such centers across the U.S. Rattan estimates there are more like 700.
In an August 2013 county report, officials found there were more regional centers authorized to build in Riverside County than any other county in the nation. Plus, all of Riverside County was a “targeted employment area” — a region where EB-5 visa applicants only had to invest $500,000, not a full $1 million, to be approved.
“That made us the blue-light special,” county foreign trade specialist Richard Dozier said.
“That’s what made several investors seek us out.”
Inland Empire economist John Husing said he was consulted on several EB-5 projects around 2010. One, which was successful, installed electrical and water infrastructure at a site near Norton Air Force Base, meaning industrial facilities could be built on the land later. Another, a shopping center in the high desert town of Phelan, was not approved.
“It’s hard to prove that the jobs will be permanent,” Husing said. “That’s… one of the things that’s becoming harder for our area, as the unemployment rate has come down.”
Rattan’s Murrieta-based company, USA Continental Regional Center, believes it will create 1,000 jobs across its first four EB-5 funded projects. The company has completed a medical plaza in Murrieta and a senior living community called “Renaissance Village” in Moreno Valley. Another Renaissance Village community, which features memory care facilities and skilled nursing staff, is under construction in Murrieta. A third is planned for a site in Indio near Sun City Shadow Hills.
The first three projects “sold out” to EB-5 investors, Rattan said. The company raised $22 million from 44 immigrant investors.
“For us, (EB-5) was an opportunity because we were raising equity,” Rattan said. “Our portfolio now is over $150 million. We wouldn’t have been able to do that (in 2010) if there weren’t EB-5 dollars out there. There are a number of good projects that have EB-5 in them or they wouldn’t have been able to go forward, because there were no loans.”
Riverside County foreign trade specialist Dozier said that 36 projects in the county have had EB-5 investors apply for visas since the beginning of 2014.
Since then, Dozier said 21 projects have submitted figures about the cost of development and the number of jobs they’ll create. As of Oct. 7, those 21 projects earmarked nearly $600 million for spending (in total project costs, not just EB-5 investment) and planned to create 9,878 jobs.
Though many parts of the county now require investors to spend $1 million to qualify for EB-5 visas, Dozier believes investment “has not slowed down. Instead, those people that were looking to do projects in Riverside County simply had to rethink how they were going to do them and where they were going to do them.”
The Coachella Valley’s first EB-5 projects
Only a handful of Coachella Valley communities — namely Desert Hot Springs, Coachella, Mecca, Thermal, North Shore and Oasis — still qualify for that “targeted employment area” designation. Projects in the desert’s remaining communities would require investors to spend the full $1 million to qualify for EB-5 visas.
Many Coachella Valley projects are also a little too small to warrant EB-5 money, Rattan said. Remember, only about 4,000 individuals can invest through the EB-5 program each year. High-profile projects in world-renowned cities may catch investors’ eyes first.
“For EB-5 to really work effectively, you need to be above $10 million, because there’s a lot of work” to secure investors, Rattan said. “There’s also a lot of competition for funds. The larger projects coming out of New York and Century City, hotels, huge things, half-a-billion-dollar offerings.”
Renaissance Village in Indio will likely be the first project built with immigrant investor dollars. Developers believe it will feature skilled nursing and memory care for around 500 residents. Rattan estimated that staffing the facility will require at least 400 people, many of them healthcare professionals.
The 20-acre site is already entitled, but the company wants to finish building the Murrieta project before seeking investors for Indio, meaning construction is still several years away.
Rattan hasn’t sought investors yet, but said he isn’t worried about increased competition for EB-5 money.
“We’ve not had any problems. Murrieta (Renaissance Village) is completely sold out, and it’s only 20 percent under construction,” he said. “This project,” he added, gesturing at the exterior of his medical office buildings in Murietta, “is kind of an EB-5 poster boy.”
County officials said EB-5 money is common in large-scale solar projects, such as the SolarMax plant in Riverside, but couldn’t point to specific Coachella Valley projects funded this way.
A listing on the California Real Estate Regional Center website states the Hyatt Andaz hotel planned for downtown Palm Springs has closed $29 million in EB-5 investment and will create 594 jobs. A representative of the regional center did not return a request for comment.
In 2009, a pair of Canadian investors bought the Desert Dunes golf course in Desert Hot Springs. In 2011, they told The Desert Sun they planned to use EB-5 to raise between $40 million and $50 million to develop condos and homes on the land surrounding the course. Neither investor responded to requests for comment on this story. Those homes have not yet been built.
In February, when developers proposed the Aztlan Entertainment District for Coachella, they mentioned EB-5 as a possible funding source. At the time, developers said they had raised $70 million to cover the first phase of the project.
“From the development side, EB-5 is also a small drop in the bucket of overall economic development activity in the U.S.,” Yale-Loehr said. “But for certain projects, it can be crucial. … Often, EB-5 will be the small but critical part of the capital stack that will allow the project to go forward.”
The part of the EB-5 visa program that created regional centers — through which 90 percent of investment passes today — is due for reauthorization by Congress in December. Yale-Loehr, the Cornell law professor, is confident the program will “definitely” continue, but not without modifications.
For instance, states can decide how to define “targeted employment areas” where investors can spend less money. In some states, like Washington, developers can call bustling downtowns TEAs if they’re surrounded by neighborhoods with high unemployment. Gibson said that practice keeps investment out of the neighborhoods that really need it.
“The program’s been hijacked by these large developers that have figured out a way around this rule,” Gibson said. Imitating a developer, he explained, “What we’re going to do is gerrymander, combine all these poor census tracts, and say the people coming to work for us are coming from these areas.”
Experts also expect Congress will raise minimum investment levels. According to Yale-Loehr, “what $500,000 could buy in 1990 really is more like what $800,000 or $900,000 equals today.”
There are three proposals before Congress to update the law. One would raise investment levels to $800,000 in targeted areas and $1.2 million outside them, along with increasing Department of Homeland Security oversight: another would define targeted employment areas to encourage development there. A third would permanently reauthorize the Regional Center program, making no changes except upping the number of visas available.
The current program has been extended until Dec. 11.
Rosalie Murphy covers real estate and business at The Desert Sun. Reach her at firstname.lastname@example.org or on Twitter @rozmurph.