A common challenge across American cities is insufficient capital, especially to support economic development in inner cities, those distressed urban areas with high poverty and unemployment rates. The EB-5 program is one tool city leaders could leverage to increase investment in those areas. The program was created by the U.S. government in 1990 to improve economic conditions, especially in high unemployment areas and rural areas, by attracting foreign capital to support investments that create local jobs. Yet, interest by city leaders and developers in EB-5 as an investment tool was relatively limited until the recent recession and subsequent contraction of more traditional sources of capital. The EB-5 program has the potential to channel up to $5 billion – $10 billion annually to community and economic development projects in underserved neighborhoods. Because of this tremendous potential, using the EB-5 program to increase economic opportunity in distressed urban communities has become a hot topic. In addition to receiving their green card, investors who come to the United States through the EB-5 program can play a key role in revitalizing American cities and bettering the lives of others.
In American cities with over 75,000 people, there are 328 inner cities. Fifty-eight percent of inner cities have unemployment rates of at least 150 percent of the national average, which qualifies them as targeted employment areas (TEAs) and makes them competitive locations for EB-5 investment. Leaders from these cities are increasingly interested in using the EB-5 program to make their urban areas more competitive, meaning more opportunities for EB-5 investors. This interest is tied to a new awareness in some cities that immigrants can drive economic growth, especially in distressed urban areas. A recent influx of immigrants is helping to stabilize declining older industrial cities such as Cleveland, Toledo, Detroit and Syracuse that have been losing residents for decades. New York, San Francisco and other traditional immigrant destination cities have long understood that while immigrants seek out American cities as proverbial lands of opportunity, they can also play a significant role in urban economies by creating new jobs and investing in development. As smaller cities across the United States are realizing this potential economic impact, many are enacting local initiatives to help draw more immigrants and investment to their communities.
The Regional Center Landscape
Since the vast majority of EB-5 projects flow through regional centers, this is an important channel for inner city investment. As of June 2014, there were 579 EB-5 regional centers operating across the United States and new regional centers keep opening every month. Regional centers can be publicly or privately operated or represent a public-private partnership. The majority of regional centers are privately held, although a few states and cities operate their own regional centers. However, city and state governments more frequently enter into partnerships with private capital firms to manage EB-5 regional centers.
Every regional center is required to define the geography that it plans to serve and the regions vary widely across centers. A regional center’s approved area of operation can span across state borders. Our analysis of regional centers in February found that 60 of the regional centers operate in more than one state and the states with the most regional centers operating within their boundaries are California, Florida, Texas, Washington, and New York. Every state has at least one regional center with the authority to operate there.
The Opportunity of Inner City Investment
Regional centers that have strong partnerships with local government officials, economic development organizations and community organizations should provide the best opportunities for investing in projects that create the greatest impact on the local economy. Aligning EB-5 regional center priorities with economic and community development priorities will help ensure that EB-5 capital is being used as originally intended, which is to support projects that would not have been funded otherwise. It will also help channel resources to transformative projects that create high-quality jobs in the areas that need it most. In turn, the impact of EB-5 projects will be maximized if they are part of a larger economic development plan since they can catalyze additional development, leverage resources of multiple public and private partners and benefit from a growing local economy. As a result, EB-5 investors may feel more confident making their investment.
For example, EB-5 funding was used to support the development of the NYLO Dallas South Side hotel in South Dallas. It is the first full-service hotel built in this part of Dallas since 1946. The inner city neighborhood has a poverty rate of over 40 percent and high unemployment. The hotel is part of the city’s larger redevelopment plan for South Dallas, which includes transforming the neighborhood into a vibrant mixed-use entertainment, business, and residential center. The City of Dallas Regional Center (CDRC) structured the financing for the hotel. CDRC is a public-private partnership between the City of Dallas and Civitas Capital Management, LLC, an asset management firm that manages the regional center. The close partnership between the City of Dallas, its Department of Economic Development, and Civitas Capital ensured alignment with the City’s economic development priorities for South Dallas and the goals of EB-5 program. The public support helped the private developer leverage public financing as well as EB-5 investment to complete the project and the additional development will support the growth of the hotel.
The University of Miami Life Science and Technology Park (UMLSTP), which was financed in part with EB-5 funds, is another example of the positive benefits created when EB-5 projects are integrated into broader economic development plans. UMLSTP is located in the heart of Miami’s Health District, which is located in the inner city of Miami. UMLSTP is being developed as part of the University’s master plan. It will eventually generate up to two million square feet of new space that will support the growth of healthcare and biotech clusters in the area. The University and the City of Miami have worked together to improve education, housing, public safety and retail in the Health District. This public-private partnership will help UMLSTP prosper, which will in turn help transform inner city Miami.
In our research on economic opportunity in distressed urban communities with EB-5[1], we identified over 175 EB-5 projects in large and small cities across the United States. The projects identified represent a sample of the diverse opportunities available to EB-5 investors. Many, but not all, are large real estate development deals. The growth in regional centers and increased interest in the EB-5 program has led to new types of projects. Although less common, entrepreneurs can also bypass regional centers and use EB-5 direct investments to grow new businesses. In Indianapolis, a trucking company is structured with each investor making a $500,000 investment into the partnership, which finances the purchase and operation of trucks. Direct EB-5 investments are also being utilized to fund charter schools, which are used to solve some of the educational challenges in inner cities. Students and parents in many cities seek non-traditional educational options.
In many inner cities, especially in smaller cities, EB-5 investment is the type of capital that is essential for smaller projects that cannot attract sufficient funding to support important community and economic development. When the EB-5 program was first started, the capital was often used for smaller projects such as restaurants and retail businesses. However, in the current EB-5 market, smaller projects, especially when they are in smaller cities, are finding it difficult to attract EB-5 investors. Foreign investors are not as familiar with Toledo, Ohio as they are with New York and Los Angeles. The smaller markets may not have the resources to develop a regional center or market their city and potential projects directly to foreign investors but that does not mean they cannot develop successful EB-5 projects. While large deals with internationally-recognized corporations (e.g.,Marriott) that involve significant pools of funding may be considered “safer” by investors and therefore more attractive, investment in smaller and inner cities provides its own unique advantages.
Addressing these barriers will enable the EB-5 program to achieve its full potential and direct billions of dollars each year to support economic development in the urban areas that need it most. Part of the solution is to help investors understand the benefits of investing in inner cities. Inner cities can be advantageous places for businesses: they typically have lower rents, significant local demand, strategic location and an underutilized workforce. As the examples highlighted above show, the location also often means developers can access more public resources and gain more public support than in other parts of a city. Inner city projects also provide an additional type of return: investors will be supporting essential projects that might not otherwise have been developed. However, developers and EB-5 agents seem to be overlooking great investment opportunities in inner cities.
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[1] http://www.icic.org/ee_uploads/publications/ICIC_EB5Impact_Report.pdf
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