America is a nation of immigrants and yet immigration has become a major hot button issue. Billionaire Donald Trump rocketed to the top of the Republican presidential contenders’ list with a few incendiary remarks about Mexican immigrants. Immigration reform, which would legalize the status of some 11.4 million illegal aliens residing in the United States, has been deadlocked in Congress since the last Bush Administration.
For all the different ideological positions on immigration, there is no question that immigration has contributed to the U.S. economy’s growth over the past half century. Based on Census Bureau data, the share of foreign-born Americans rose from a low of 4.7% in 1970 to nearly 13% in 2010. This translates into a 30 million boost to the U.S. population, accounting for more than a quarter of the population growth in that period.
Actually, since immigrants tend to have large families, their contribution is greater still: more than 20% of Americans speak a foreign language at home, or close to 70 million — more people than live in France or the U.K. That means immigrants have opened opportunities for trade and investment with their former countries. Plus, immigrants are disproportionately entrepreneurial. A 2011 study found that almost 20% of new Fortune 500 companies during 1985–2010 had an immigrant founder.
Florida was one of the worst-hit states in the subprime mortgage crisis but in recent years, Miami has enjoyed an unprecedented real estate revival. Prices of land, apartments and construction have been going through the roof. And yet, in the rest of South Florida, some 17% of homeowners remained under water as of early 2015.
The reason for this selective prosperity — focused on exclusive neighborhoods and surrounding communities — is the massive influx of foreign money. Latin America still leads the pack in terms of who buys costly Miami properties, but there are buyers from Russia, the Middle East, China and Western Europe. They bring with them other businesses; downtown office blocks are chock full of firms serving the international high-net-worth set — selling and managing their real estate, investing their money, providing tax advice, leasing boats and private airplanes, etc.
Over the past two decades, the number of people with money to invest skyrocketed around the world. The development of large emerging economies, primarily China but also India, Brazil, Mexico, Indonesia and others, created substantial national upper middle classes practically from scratch. At the same time, high prices for oil and other commodities enriched the well-connected in commodity-exporting countries such as Russia and Venezuela.
China has been a world leader in creating the newly wealthy, thanks to the sheer size of its population. It now has over a million millionaires, most of whom have investable assets of between $1.5 million and $5 million.
However, growing global prosperity has not brought about a more stable world. On the contrary, instability has increased and in many countries people with money no longer feel comfortable. Even in China, the older generations still remember the years of starvation during Mao Zedong’s rule and the Cultural Revolution in the 1960s. They’re looking for a place to keep their money, and as they survey the troubled globe, they find that the U.S. is by far the safest alternative. Thus, the dollars shipped abroad by means of the U.S. trade deficit are finding their way back to these shores in the form of investments by wealthy foreigners.
Immigrants for a Price
If foreigners are worried about the safety of their money, they are even keener to ensure their personal safety as well a happy future for their kids. They’re looking for citizenship, or at least a residency permit, in a safe-haven country.
The government in Washington has been attuned to global demand for U.S. citizenship and has been willing to provide supply — at a price. In 1990, Congress created the Immigrant Investor Program, better known as the EB-5 visa program, which grants permission to apply for a green card — and gain an accelerated path to U.S. citizenship — to foreign investors as well as their spouses and unmarried underage children. All you need to be eligible is a $1 million investment into a project that creates 10 U.S. jobs for a period of two years.
In 1992, it was supplemented with a pilot program designed to provide more targeted benefits for the economy by setting aside some EB-5 visas for investors into economically disadvantaged areas. Applicants could invest half as much money, or just $500,000, through an authorized regional center, which develops designated targeted employment areas (TEAs), mainly rural areas or urban areas where the unemployment rate is at least 150% of the national average.
The program has been regularly reauthorized ever since, under different administrations. Interestingly enough, the current gridlock on Capitol Hill notwithstanding, the latest regional centers pilot program was extended just before the 2012 presidential election with all but unanimous support from both chambers of Congress. This extension runs out on Sept. 30 and unless Congress acts to reauthorize it again, it will sunset.
Regional centers attract an overwhelming majority of EB-5 investors: 94.6% in fiscal 2013 and 97.1% last year. In fiscal 2014, over 10,000 EB-5 visas were granted, which, given the predominance of TEA investments, meant that only slightly more than $5 billion in direct foreign investment was attracted. That might seem like a drop in the bucket, considering that in 2013 overall foreign direct investment to the U.S. measured $236 billion, but it was a significant source of funds for real estate projects in depressed areas. And, some 100,000 jobs were generated, or around 3.4% of all jobs created in 2014, the best year for jobs since 1999.
Only a few years ago interest in the EB-5 green card program was lukewarm. In fiscal 2006 and 2007, fewer than 1,000 investors took advantage of the program. However, in 2010–12 the number of such visas kept doubling every year as growth in demand for immigration correlated with extremely loose U.S. monetary policy. As the Fed pumped trillions of dollars into the global economy, the number of millionaires around the world grew.
China has a large number of potential investors, and even so Chinese immigrants are disproportionately represented among EB-5 visa recipients. Their share rose from 80.5% to 85.4% from 2013 to 2014. And now awareness is rising in other countries as well, and the number of applicants is likely to snowball in nearby years.
This may require changes in the regional centers program. Some changes being mooted include tightening the definition of TEAs and boosting the minimum sum required to $800,000. But there are greater and more entrenched problems with the system that will only intensify as demand for visa grows. More than 600 regional centers have been authorized by U.S. Citizenship and Immigration Services and these are handling an increasing amount of money. However, until recently, regulatory oversight has been lax. There has not been an emphasis on compliance, and the Securities and Exchange Commission has neglected Regional Centers even though they sell securities to their investors and should fall under the Securities Act of 1933.
Unlike standard investors who are interested in a return first and preservation of capital second, the priorities of EB-5 investors are different. They are primarily concerned with EB-5 eligibility, with the second most important issue being the safety of the investment. While a positive return over the lifetime of investment is desirable, it is less important to the typical EB-5 investor.
A relationship between a foreign investor and a financial advisor can potentially be even closer than the conventional advisor-client relationship. Foreign investors tend to be less knowledgeable about the U.S. and to rely more on the advice of finance professionals whom they meet through immigration in other matters. In most cases, they’re bringing a lot more money into the U.S. than they need to obtain a green card.
They are also going to be making major purchases such as real estate and cars, and sending their kids to college. They may need tax advice since becoming U.S. citizens will have tax implications for them. There are opportunities for advisors to build close lifetime relationships and become true life coaches.
John O’Shea is chairman of Global Alliance Securities, which recently helped arrange a $2 million offering by foreign clients for the construction of restaurants in the Cleveland area. He says that his firm refers its clients to immigration lawyers and, since it doesn’t manage money, it has fee-sharing and other remuneration arrangements with investment management firms.
On the other hand, a cross-border, transcultural relationship also creates tailor-made opportunities for abuse. Especially since being accredited as a regional center is a relatively straightforward procedure, open to public or private entities that don’t necessarily have specialized finance expertise.
In September 2013, FINRA issued guidelines for broker-dealers on engaging in the sale of EB-5 investment instruments. The USCIS and SEC have recently stepped up their efforts to crack down on shady practices and fraud in the EB-5 segment. The SEC recently took its first actions against firms it accused of acting as unauthorized brokers, and charged a law firm for defrauding a group of EB-5 investors. These moves are likely necessary for Congress to extend the pilot program, especially amid current anti-immigration sentiment.
O’Shea believes greater accountability is overdue, and that it is best achieved if professionals involved in the EB-5 program are required to be registered. In any case, providing a welcoming system for immigrants who want to invest in the U.S. is an important goal for public policy, and very much in the interests of financial advisors.