High numbers of Chinese applications may create a logjam in the federal EB-5 immigrant investor program. The number of potential Chinese investors has exceeded the program’s yearly cap on applicants from a single country — a first in the program’s 24-year history.
Review of EB-5 immigration applications from China have been put on hold, even though the Chinese EB-5 market shows no sign of slowing. Reviews will resume on Oct. 1, at the start of the federal fiscal year. But immigration specialists are predicting the limit for Chinese investors will be hit again next year, potentially as early as May, when reviews could be suspended again in a process known as “retrogression.”
The impact in Vermont won’t be immediate, but the resulting slowdown could put some EB-5 projects at risk of default and make it harder to solicit investors from the very place with the most investors to court.
EB-5 in Vermont
The federal EB-5 Immigrant Investor program is an important part of Vermont’s economic development strategy, with six active projects aiming to bring nearly $400 million in capital to the state.
When immigrants invest $500,000 or $1 million through the EB-5 program, they get a place in line for conditional visas — for themselves and immediate family members — to live and work in the United States. If 10 jobs’ worth of economic activity can be attributed to each investment within two years, the conditional green cards become a pathway to permanent residency.
Jay Peak Resort’s transformation from a small ski area to a four-season destination has largely been funded by EB-5 investors, and it is credited with rejuvenating employment in downtrodden Orleans County. Jay Peak is also using EB-5 money to build out a sister resort, Q Burke Mountain, and to establish the Korean biotech company AnC Bio in Newport. Still more EB-5 developments by Jay Peak’s owners are planned for downtown Newport, though real estate complications have slowed progress.
Other Vermont companies have followed Jay Peak’s lead: the Trapp Family Lodge, Mount Snow, and the Quechee Lakes residential development are also pursuing immigrant investor funds. Recently, Stowe Aviation got the green light to raise EB-5 funds to expand the Morrisville-Stowe State Airport. A still-unnamed seventh project is about 90 percent through the application process, according to Brent Raymond, executive director of the state-run EB-5 hub for Vermont.
Why retrogression matters
Raymond said the regional center’s first concern about hitting the visa cap is informing investors, especially those from China, about the risks from retrogression.
Essentially, the federal government’s review of EB-5 visa applications from the affected country are put on hold, even if investments from that country don’t slow down.
This is of particular concern for would-be immigrant families interested in American college educations for their children. Only those below age 21 are eligible for the family visa. If the application review takes too long, the children could age out of eligibility, thereby rendering moot the parent’s primary motivation for making the investment in the first place.
The current retrogression, which started in August, is thought to have little impact because it happened near the end of the fiscal year. But if it happens sooner next year, the subsequent backlog from months of stalled reviews could be significant.
Jay Peak president Bill Stenger said it’s an issue he’s watching closely, and a risk his projects mitigate by recruiting from diverse regions around the world.
“If you rely 100 percent on the Chinese market, it could have an effect,” Stenger said.
About one out of every four or five of Jay Peak’s investors are Chinese, he said. Jay Peak’s investors come from 74 countries.
Jay Peak primarily brings EB-5 investors into an equity structure, meaning the immigrants actually own a piece of the enterprises they buy into. Most EB-5 projects nationwide, including others in Vermont, use a loan structure. Both types of EB-5 funding could be vulnerable, in varying degrees, to complications arising from retrogression.
Repayment of EB-5 investments never can be guaranteed, but many immigrants hope to recover their capital after securing U.S. residency. Often, the contracts include plans to pay interest on the principal. More often than not, both the equity and loan structures involve a timetable for repayment and interest. Federal regulations prevent EB-5 investments from being paid until investors’ permanent residency is granted.
Review of conditional visa applications already were taking one year to 18 months, even without retrogression. Once conditional green cards are granted, investors must wait two years to file for permanent residency. Retrogression could slow the entire process down so much for Chinese investors that their repayments could come due before the EB-5 projects are legally allowed to repay them, Raymond says.
At a meeting of the Vermont Commission on International Trade and State Sovereignty on Thursday, Raymond said there’s one project in Vermont structured around a five-year loan, with the option to extend that to six or seven years.
“After the seventh year, if it doesn’t pay off those investors, it’s considered in default,” Raymond told the commission. The interest rate a project owes investors could be set to increase after five years, he said, though that could prove costly for developers.
Raymond is working to develop recommendations for Vermont EB-5 projects. He said language specifically addressing retrogression isn’t included in existing offering documents for projects, so notification will have to be provided to current and future investors about the risk of a longer loan period. Even in the case of equity structures with loose language about a five-year exit strategy, he said, material disclosures should also state the potential risks. In some cases, the communication might necessitate an amended offering memorandum.
“It’s easy enough to build it into future projects that might be approved,” Raymond said. “But it’s messier for those already approved.”
Since it was established in 2007, Vermont’s Regional Center has emerged amid a burgeoning landscape of regional centers that compete aggressively for investors. Retrogression is a challenge they all face, and it puts the American EB-5 program in stiffer competition with similar immigrant investment programs in other countries.
Johannes von Trapp, of the Trapp Family Lodge in Stowe, is still recruiting investors for his resort’s expansion, which includes construction of a brewery and European-style beer hall. For him, retrogression is less of a concern than the federal agency’s general lag in processing times.
“The big issue in this whole EB-5 thing is the United States government’s … inability to process (applications) in a prompt manner,” von Trapp said. His first investors have been waiting 15 months for their conditional visas to be reviewed. The delay causes other potential investors to be wary of investing in the same project whose job creation plan is not yet received federal approval.
