A popular senior housing finance program that was previously under fire will live another day—but lawmakers continue to discuss dismantling or reforming it.
The EB-5 financing program has been extended exactly as is until September 30, 2016, but calls to reform the program with stricter regulations have remained. The provision to extend the program without major changes was approved within the federal funding Omnibus Bill by Congress on December 15. But in early February, the program was back up for debate.
The program, which has been around for 25 years and provided billions in real estate financing, enables foreign investors to invest in real estate developments that provide at least 10 permanent jobs in targeted employment areas (TEAs), in exchange for U.S. residency visas.
The extension paused regulatory changes being considered to overhaul the program on grounds of its ability to meet its goals within targeted employment areas, and amid talk of widespread fraud stemming from the infrastructure of the program’s regional centers. The extension also undermines the efforts of advocates seeking to increase the base investment from foreign investors to $800,000—up from its current value of $500,000 in TEAs.
However, the Senate Judiciary Committee is still calling for reforms. In a hearing in early February, committee chairman Senator Chuck Grassley (R-Iowa), Sen. Patrick Leahy (D-Vt.) and Sen. Dianne Feinstein (D-Calif.) even went so far as to question if the program should be nixed entirely.
“Yet despite the need for reform, the fiscal year 2016 omnibus appropriations bill included a straight and clean extension of the program,” Sen. Grassley said during the hearing. “This was a disappointment, given the alarm bells and whistleblower allegations. It was a missed opportunity. So, we will have to make a decision—should the program be fixed or should it be nixed?”
Senators Leahy and Grassley previously introduced a bill that would have reformed the program and extended it through 2020. The bill was not acted upon.
While the extension may provide some immediate relief to investors already underway with development projects within the EB-5 program, a short-term extension still leaves a lot of uncertainty, says Tyler Dubosky, general manager of USA Continental Regional Center (USACRC) and fund manager of Continental East Development (CED), a California-based development group that recently launched into senior housing.
“We’re glad to see that there’s at least some certainty with the program’s renewal through next year, but with another short-term renewal, it does cause us and the industry a lot of uncertainty,” Dubosky told Senior Housing News. “For the long-term direction of the program going into 2016, a more comprehensive reform enacted that gives a long-term renewal or permanent extension—along with the changes to the program—will give the industry more certainty to be able to plan and prepare for projects going into the next five to 10 years, rather than not knowing what the next year holds.”
Many of the changes that were being considered late last year are likely to come up again once the extension deadline nears. That leaves developers and investors with just a limited window to file project applications under current conditions.
“The most recent proposal did include language that would have grandfathered filed investors, but now we’re back to square one in terms of having the program renewed for 2016,” says Dubosky. “A lot of the groundwork has been set for the negotiations for reform, which we certainly support, but we’re not going to know the final language.”
Those seeking major changes to the program argue that the program hinges on its utilization of regional centers that lack oversight and consistency across the country.
Senator Leahy referenced several reports during the committee hearing—from the Department of Homeland Security’s Office of Intelligence and Analysis, the Inspector General and the Government Accountability Office—that detail the vulnerabilities in the program and its overall economic impact in addition to possible abuse of the TEAs.
“I believe the Regional Center program can be fixed, but only if it is significantly reformed,” Leahy said.
Developers have noted in the past that a lack of oversight within the regional centers has led to some controversy throughout the program.
“We certainly support more oversight in the regional centers,” says Dubsoky. “That would be an important step in the reform of the program, the things that identify and help weed out the bad apples.”
The Securities and Exchange Commission (SEC) recently named the EB-5 program as one of its top priorities this year in a public letter that specified which programs and policies the agency would examine. The SEC has been the integral enforcement agency against developers and financiers allegedly misusing the EB-5 program.