Regardless of who wins the November election, San Diego’s next mayor has promised to use an obscure immigration program to attract foreign investment as a means of spurring the local economy.
For all their disagreements, embracing the EB-5 program is one area of agreement between the city’s polarized mayoral candidates, Republican Councilman Carl DeMaio and Democratic Rep. Bob Filner.
The EB-5 foreign investor program gives wealthy foreigners looking to come to the United States an opportunity to invest $1 million in a commercial project in exchange for a three-year temporary work visa. At the end of that time the investor gets a permanent visa if they can demonstrate the project created 10 jobs.
At a recent small business-focused debate, both candidates said they see the program as a tool for attracting capital to San Diego.
DeMaio was the first to make the case for EB-5 loans.
“I think that that’s an untapped element of funding, and we’re going to be looking at that for microfinance, microloans for startup companies, with the city of San Diego taking a partnership role in facilitating that,” he said.
Filner piggybacked; he likes DeMaio’s idea and will pursue a similar strategy if elected, he said.
But the EB-5 program has increasingly become the subject of concerns in recent years, as a lack of availability for traditional capital caused investors to look to EB-5 loans to close financing gaps.
Among the program’s problems are inflated job creation projections and a flawed immigration process that has left participants and their families without visas, according to a recent Bloomberg investigation of lawsuits and interviews with participants in the program.
Adopted by Congress in 1990 and buried within the federal immigration policy as a way to attract foreign investment, the EB-5 program was scheduled to sunset in September of this year, but Congress renewed it before its expiration.
Hopeful foreigners can invest in individual projects anywhere in the country, or in projects located within specified Immigrant Investor Regional Centers.
For projects not located in regional centers, the investment must create 10 direct jobs within the project where the capital was invested. In a project within a regional center, the 10 jobs created can be “indirect,” meaning they arise because of the commercial enterprise, but aren’t necessarily in the project itself.
Three years later, investors send in another application. If the project created the promised jobs, their conditional visas become permanent.
In high unemployment or rural areas, investments can be for $500,000 instead of $1 million.
The investor’s spouse or unmarried children are given their own temporary visas as well, and can work or attend school while they await their permanent visas. As currently constructed, the program caps participation at 10,000 visas per year.
But only in recent years is the program experiencing widespread adoption.
One way to track program participation is through the U.S. Citizen and Immigration Services’ (USCIS) record of application approvals for conditional visas at the onset of an investment, and for approved applications to remove those conditions after three years. The former measures investors that entered the program, the latter those who completed it successfully.
From 1991 through 2008, the total number of temporary EB-5 applications across the nation exceeded 500 in only two years, with a low of 44 new program participants in all of 2001.
But in 2008, the number of new participants jumped to 640. It nearly doubled the next year and has remained above 1,000 ever since.
Participation really spiked in 2012.
In the first three quarters of this year, there have already been 3,002 accepted new participants into the temporary phase of the program.
As capital has become harder to come by during the recession, the EB-5 program has grown into an increasingly attractive option for developers. In California it’s a particularly attractive program in the aftermath of the demise of redevelopment.
DeMaio and Filner, then, are riding a national trend by proposing increased EB-5 usage in San Diego.
But the program’s history suggests not all of those new participants will see their investments turn into permanent visas.
During the EB-5’s 20-year history, the USCIS has granted 4,798 permanent visas out of 12,904 conditional visas issued.
Marie Thérèse Sebrechts, a southwest region spokesperson for USCIS and the Department of Homeland Security, said it’s misleading to look at those numbers and presume that only one out of three investors eventually received a permanent visa.
Primarily, that’s because 8,000 of the 12,904 conditional visas were issued in the last three years. Because those investments haven’t reached the three year point, they aren’t qualified for permanent approval in the first place.
She also said many participants simply decide to return to their home country without pursuing a permanent visa, or get married to an American citizen during their three-year conditional period and are able to stay through other parts of the immigration code.
USCIS estimates that the program throughout its history has generated 48,330 jobs through the $6.4 billion in investment it’s attracted.
A 2005 Government Accountability Office report, however, questioned USCIS’s job creation numbers. It said there’s no way of knowing if EB-5 investors are getting credited for a project’s total employment even though theirs wasn’t the only capital injected into the program.
“During the application review process, USCIS adjudicators only ensure that each business created the minimum requirement of at least 10 jobs but do not apportion the creation of additional jobs between EB-5 investors and non-EB-5 investors,” the report reads.
The report also attributed the program’s then-low participation to pending regulations and an onerous application process.
Since the publishing of that report, however, USCIS has quadrupled the size of its adjudication team and hired in-house economists dedicated to the program to assess the viability of projects and grade their job creation metrics. The first EB-5-specific economist was hired in 2011.
DeMaio said his administration hopes to write a national blueprint for cities to take a role in implementing the program on a broader scale.
“We’re looking at the city specifically taking on the role of vetting and oversight,” he said. “We have to do this right. We’re looking at that possibility and talking to experts. It’s one option.”
Specifically, DeMaio said the city’s role would be to verify job creation metrics, assess the necessity of proposed projects and assist with the application process.
Filner, at a press conference during which he said EB-5 loans would be part of an effort to assist capital-strapped San Diego businesses, admitted he was hearing about some of the issues facing the program for the first time, but said his administration’s involvement would be directed at making sure it was used effectively.
“I’m not familiar with (those issues) but they should be looked at,” he said. “It shouldn’t be like this Solyndra thing. It’s got to be well- vetted, and the projects, they’ve got to be accountable and produce the jobs.”
Both Filner and DeMaio said they’d prefer establishing a regional center in San Diego to facilitate EB-5 investment.
“The EB-5 program is a win-win,” DeMaio said during the small business debate. “We get great human capital, we get these business people to come in, we get their children to come in and study at our universities, and we also receive financial capital of investment in our communities. We’re trying to make sure that that investment isn’t just in some big project, but rather, in my administration, our concept would be microloans, microfinancing for small businesses and startups.”
In a later interview, he said he’d use the program for both small investments and large-scale projects, such as a Chargers stadium.
Assemblyman Nathan Fletcher, during the mayoral primary, also floated the possibility of using EB-5 loans to help pay for a football stadium.
“Where I’ve seen it not be well-focused is on small businesses, but I want to make sure San Diego is a pioneer in that area,” DeMaio said.
The city has seen new EB-5 financing in recent months, as two hotels have been funded in part by foreign investors, according to DeMaio.
The USCIS does not keep track of all EB-5-assisted projects, but a search of projects associated with regional centers with a geographic area including San Diego turned up a few recent ones.
One local project funded in part through EB-5 loans came through the Century American Regional Center. The Columbia Towers Hotel in downtown San Diego at the corner of A and Columbia streets is projected to create 1,700 total jobs.
It’s also a project of the Centre City Development Corporation (CCDC). The project’s developers didn’t immediately respond to a request for comment.
Other local projects to receive EB-5 financing include the Wave House bar and nightclub in Mission Beach, and a 250,000-square-foot LEED certified office building elsewhere in the county.
Lynn Reaser, chief economist at Point Loma Nazarene University's Fermanian Business & Economic Institute, said the program in general boosts the U.S. economy by bringing in foreign investment, but said a specific region benefits from foreign investment no differently than it does from out-of-region domestic investment.
Foreigners are motivated to invest during an era of extremely low interest rates, she said.
“Clearly, San Diego will benefit from a freer flow of goods and capital, and this is one program that can facilitate that more open stance to trade and investment,” she said. “California has suffered from a lack of ability of foreign investors to help the economy because of a lack of awareness of how to navigate what can be a confusing and complicated set of barriers. This opens up a clearer channel for some opportunity.”
Critics of the program also question whether it’s fair from a socio-economic perspective to make immigration opportunities available based on financial wherewithal.
Reaser, however, compared the program to other immigration programs that award visas to high-skilled individuals.
“In a visa-constrained world, one has to ration them in some fashion, and one probably wants to attract those individuals who can help our economy in the best way possible, and that is through either talent or capital,” she said.
Filner said the program wasn’t the best way to handle immigration, but said it was fine as a small piece of a comprehensive reform agenda.
“It’s not the fairest way, but it allows us to meet some needs that we have now, which is capital,” he said.