Two events have recently impacted the popular EB-5 program and many are anxious to understand their impact. The Chinese economy has slowed from a dizzying double digit annual GDP growth rate, down to about 7.5% and, as a result, real estate prices have slowed. In addition, the anti-corruption campaign has caused anxiety among many potential Chinese investors who are nervous that they may have to explain where and how they obtained their investment funds. These events, combined with the inevitable establishment of a cut-off date and waiting line for Chinese investors, are the two most critical aspects likely to impact the EB-5 program in 2015
EB-5 China Cut-off to Be Established May or June 2015 (or possibly July 2015 if you believe in luck)
On August 23, 2014, I moderated a panel with Charles Oppenheim, Director of the US State Department Visa Control Division where he announced for the first time that EB-5 visas would be unavailable for Chinese born applicants, for the remainder of fiscal year 2014. The announcement was merely a warning as to what to expect because his statement, coming so close to the end of the Immigration Fiscal Year on September 30, 2014, meant Chinese EB-5 applicants who had already been scheduled for interviews could still proceed, and any delays would only be minor as the new Fiscal Year 2015 quota of 10,000 visas became available October 1, 2015.
Of greater significance is the fact that the Chinese EB-5 quota will become backlogged for the first time soon, “… definitely NO later than July ” based on communication between Mr. Oppenheim and the author of this article. (Emphasis in original). Mr. Oppenheim is presently assessing dates for the April 2015 Visa Bulletin and it appears likely that the China cut-off will be established in June, or maybe even as early as May 2015.
Even after the Chinese EB-5 quota becomes backlogged, Chinese investors can still file their I-526 investor petitions and USCIS will continue to adjudicate them, but until a Chinese investor’s number becomes current, as explained in the Visa Bulletin, a final interview cannot be scheduled. If the investor is in the US lawfully, it will not be possible to file an adjustment of status application; instead the applicant must wait until his or her visa number becomes current, as listed in a subsequent Visa Bulletin. It is estimated that the “cut-off” will be about 2 years, so those cases that have been stuck with long delays, will actually be less affected. This is because the derivative beneficiary child can deduct all the time taken by USCIS to adjudicate the petition from their age under the Child status Protection Act (CSPA). Considering current adjudications times are 14 months, and many cases are issued Requests for Evidence that add 2-3 months of wait time, those cases that are delayed in adjudication may only have to wait an additional 6 to 8 months extra to be scheduled for an interview as a result of “retrogression”.
Therefore the problem is unlikely to be too serious in Fiscal Year 2015 because a new supply of 10,000 visas will become available on October 1, 2015, only a few months after retrogression begins. After October 1, 2015 and an additional 10,000 visas become available, there will be an anticipated 2 year wait, from the time of filing the I-526 petition. However, the wait line could stretch to 3 years or more by the end of the Fiscal Year 2016, unless Congress, or President Obama acting unilaterally, provides relief. This will be necessary as there are already 3 years’ worth of cases in the pipeline and at about 1,000 more being added every month.
President Obama’s Executive Action Proposals Made on November 20, 2014 are Vital to the EB-5 Program
On November 20, 2014, President Obama announced proposals, which if put into practice, would greatly help EB-5 investors. The President’s proposal may allow persons with approved EB-5 petitions to be paroled into the U.S. Ordinarily; such paroled individuals can obtain travel and work permits.
This becomes critically important for direct EB-5 investors who need to enter the U.S. to run their businesses. Principal Chinese investors in the U.S. with valid nonimmigrant visas such as F-1 students, or L-1 company transfers or H-1B professionals may also be allowed to file adjustment of status applications, even though visa numbers are not available.
This is hugely important for at least two reasons. The filing of an adjustment of status application permits a derivative child’s age to be frozen. The biggest problem with the establishment of a China cut-off date is that derivative beneficiaries can only deduct the time the petition was pending. When visa numbers are unavailable after the petition is approved, the child continues to age, and may “age-out”. The President’s proposals, if brought into effect soon, may allow some of these children to “freeze” their age, thereby protecting them from “age-ing” out for as long as necessary until a visa number is available.
I recently had a Filipino derivative, whose mother adjusted status to permanent residence in the U.S., scheduled for a final derivative interview in Manila, even though he was 26 years old. Thanks to CSPA, his age was frozen under 21 years.
We can only hope the proposals will also provide unrestricted work authorization and travel authorization, thereby providing almost all of the benefits of a green card to those caught in this visa quota backlog.
So far, the news regarding the establishment of a China cut-off date has not substantially impacted the popularity of the EB-5 program in China. For the first quarter of Fiscal year 2015, from October1, 2014 to December 31, 2015, 2,941 new I-526 cases were filed, for a total of 13,526 petitions pending as of the end of 2014. Therefore, filings continue at the rate of approximately 1,000 a month, or 12,000 annually, whereas the annual quota only provides visas for about 3,500 families. With approval rates at over 90% of filings, it appears there is a need for at least 3 times the current annual quota. 36,000 visas, or 3 ½ years of the current quota, will be needed to clear the existing pipeline of cases.
It’s possible, although unlikely, that Congress might provide EB-5 relief, as it needs to act to extend the Regional Center program that expires September 30, 2015. Since the extension is required for several other laws, including the enforcement oriented E-Verify Program (a sure thing); Conrad 30 for underserved areas needing physicians; and for certain Religious Workers; it’s very likely Congress will provide another extension for Regional Centers for three years to September 30, 2018. Hopefully, Congress will use the opportunity to make the Regional Center program permanent, but that is unlikely.
The Regional Center program, which allows for “indirect and induced jobs” to be counted, is likely to get another extension but this may come with conditions. The investment amount of $500,000 was set about 25 years ago in 1990. That amount presently has the purchasing power of only $275,235, when adjusted based on the Consumer Price Index. Will Congress increase the amount? We don’t know but it’s possible that this will be the price to pay for pushing an extension through Congress. While the Senate passed an EB-5 bill at the end of 2013, and other bills have been introduced in the House, most likely we will only get an Extender Bill at the last minute, with a three-year extension of the Regional Center Program to September 30, 2018.
Source of funds, Path of funds and Chinese Currency Restrictions Update
Source of Funds
Many Chinese investors make their EB-5 investments based on the sale or mortgage of assets, such as homes, or with loans from a business. Previously USCIS tended to accept that it’s hard to get bank or other records from more than 7 years ago. Unfortunately, many recent Requests for Evidence have been based on these new unpublished guidelines. Now, USCIS requests evidence proving how the investor obtained the money to buy the home, even though tax, bank and employment records may not be available from 10 years ago. Moreover, if the money was gifted, the investor must show where the giftor obtained the money, even if it is more than a decade since the property was purchased. USCIS stated that it will consider the length of time the property was owned when requesting older records which are often difficult to obtain. However, it would not provide specific guidance on how far back it could request documentation. In these instances, investors should provide objective evidence confirming that records are no longer available.
Additionally, USCIS is strictly enforcing the position that the collateralized property must be in the name of the actual investor, or proceeds of the sale or loan must be gifted to actual investor to count as an “at risk investment.” Often, parents put property in the name of a child, or another relative who “nominally, although legally owns the property.” Alternatively, sometimes children put property in their parent’s names. Now this can lead to a Notice of Intention to Deny (NOID), which is often very difficult to correct, even though the transaction clearly places the actual investor or true owner’s money at risk.
Path of Funds
The Chinese government has a $50,000 annual limitation for each citizen on international currency transfers. Previously, the Bank of China, China CITIC Bank, as well as other banks, piloted the “youhuitong” programs, allowing unlimited transfers of funds in a single remittance. That has now been suspended.
As a result, investors have had to resort back to the traditional method of “10 family & friends” who each receive the Chinese equivalent of $50,000 from the investor, convert $50,000 into U.S. currency, and then re-transfer the funds for re-aggregation into the investor’s U.S. dollar accounts outside of China. At the recent February 26, 2015, USCIS Stakeholder’s meeting; the Immigrant Investor Program Office (IPO) indicated that it is not legally necessary to source the administrative fees, usually in the amount of about $50,000, that is customarily added on to each investment. This is contrary to what former Director Mayorkas had categorically advised, so investors must be careful. It is impossible to know whether the USCIS will change its position again, without notice, leaving applicants with denials that are effectively unchallengeable outside of Federal District Court, as the Administrative Appeals Office (AAO) dismisses about 98% of EB-5 appeals.
A variation of this methodology has also recently occurred with some private banks in China agreeing to transfer $150,000-$200,000 to Hong Kong or Macau accounts of the principal investor. This requires just 3-4 friends or relatives to transfer money to the investor’s Hong Kong account, instead of the usual 10 or 11 individuals.
The author in no way recommends any of these methodologies and encourages investors to ensure their investment meets all current Chinese and U.S. legal standards. Investors are encouraged to consult with Chinese legal and accounting specialists to ensure compliance with Chinese law, although that is not easy.
The EB-5 program has grown by over 700% in the past 7 years, from a mere 1,258 petitions in 2008 to over 10,923 petitions filed in Fiscal Year 2014. Since each petition requires on average 3 visas (for the investor, spouse and child), 10,000 petitions require at least 30,000 visas, or 3 years’ supply. So far in 2015, an average of 1,000 new petitions are being filed every month, with 2,941 filed for 1st quarter of 2015, which is about same as 2014. The appeal of filing with Regional Centers that allow for indirect and induced job creation to be counted is obvious. 97% of EB-5 investments are now in Regional Center projects with only 3% in Direct or Stand-alone projects.
In the first quarter of 2015, an average of 550 Form I-526 petitions were approved monthly, and only about 44, or less than 10% were denied. In the same period, 810 Form I-829 Applications to Remove Conditions were received with 69 approved and none denied.
2016 will present a challenge for Chinese nationals because of the waiting line. We don’t know if a 2 to 3 year wait will discourage Chinese investors, but if the waiting line extends to 4 years, it will.
President Obama’s business proposals must be implemented to allow approved non-current EB-5 petitioners and family to work, travel, and file I-485 adjustment of status applications. With over 13,625 petitions pending, there is over $6 billion dollars in the pipeline at stake. With petitions taking 5-7 years to complete, there will be at least $25 billion in deal flow impacting thousands of new jobs. The financial viability of many projects in the hospitality, elderly care and other vital sectors will be affected.
The EB-5 market is presently flooded with good projects, and we presently have a “buyers’ market.” Investors now have a broad selection of projects, where the investor is put in first position ahead of other creditors like banks, and where the developer or project now has to place a substantial amount of its own capital at risk, providing the EB-5 investor with collateral if the business fails.
The options for EB-5 investors have never been better. In the early days of the program, most EB-5 investors where pure equity investors and even after the final I-829 was approved, there weren’t many ways to exit and have their funds returned. Now the opposite is true and most investors expect a return of their capital after 5-7 years. No wonder the EB-5 program has become so popular, not only among Chinese investors, but increasingly among others seeking to live the American Dream.
With many parents wanting to provide the best opportunities for education and quality of life in the U.S., the EB-5 program has been booming. For those who don’t have close relatives, or aren’t able to obtain employment sponsorship, the EB-5 visa remains the most certain option to immigrate to the U.S. So while the impending Chinese quota backlog and Chinese currency restrictions remain key issues, they have not yet slowed interest in the program, and demand continues to be strong as the quality and number of projects to choose from increase.