EB-5 is also known as the Immigration Investor Visa Program. It allows American real estate developers to raise capital for projects from foreign investors who are seeking to come to the United States and relocate here permanently.
In the past few years, however, there’s been a lot of changes. There’s been a lack of clear regulations and a shortage of visas have made the EB-5 landscape really difficult to navigate, especially for Chinese investors. Because of that, it sent the EB-5 industry to alternative markets around the globe. That’s why Kevin Wright and Michael Fitzpatrick wrote their book, EB5 2.0, to guide stakeholders through the changes in the EB-5 process.
A bit of background on the coauthors; Kevin Wright is an economist and a consultant with the Finra Broker dealer, Baker Tilly Capital, and he previously founded Wright Johnson, which is one of the world’s largest EB-5 consulting companies. Michael Fitzpatrick is a partner and board member with Baker Tilly Virchou Crouse, which is the 13th largest CPA in consulting firm in the United states. In 2001, he co-led the formation of Baker Tilly Capital where he leads its EB-5 practice and has closed more than a billion dollars of specialized financing. If you hope to benefit from the EB-5 program, this is the episode for you.
Kevin Wright: Before working in the industry, I had never left the United States once in my life. I traveled around throughout the United States and thought I really understood diversity and how different people thought—until I started traveling for EB-5 and really seeing the world and working in 15-plus countries.
Really realizing that people in different places have different experiences, and they come up with radically different ideas and have different ways of doing things. Trying to figure all that out 15 different times, that was a huge challenge for me and an eye opening experience to understand that I don’t always do things the right way.
There are other ways to do things, and some of the times, I’m surprised that they’re vastly better than everything I’ve ever been taught or known. Just having your eyes open to different cultures in the whole world.
Charlie Hoehn: Do you remember a particular moment standing out as surprising you in that way?
Kevin Wright: I can remember landing in China for the first time and spending a couple of weeks there, thinking to myself that coming from where I started from in the first 25 years in my life in Michigan, things moved at a certain speed. Then moving to South Florida and spending a lot of time in California, I thought, “Okay, now I’m really exposed to a lot of different things and things are moving really quickly.”
Things change quick, and I’m in that kind of an environment.
After two weeks in China, realizing the entire world changes in that country and literally a month, almost every single month. Just understanding how fast the rest of the world is developing compared to our own.
We’re a developed place and things are kind of stable here. Never really understanding just how stable it is in the United States until that first trip to China and seeing how just the speed of everything.
When I was there one time, they built a 57 story building in 18 days.
That just seems absurd to me but that’s things that happen on a daily or monthly basis there. Or the idea of when I first got to China, communication was difficult, you had to get a local sim chip, you had to put it in your phone, you had to get a second phone. It was difficult because the rules and how you got that phone and whether you had a local ID and communication were so difficult.
Within three years, they had built what they call super apps. With We Chat and other things. Now when I go back there, they are so far advanced from anything else you see in the rest of the world. On one app on my phone, I communicate with people, I send them files, I pay for my food, I order a taxi, I do literally almost every single thing I need in life in a single app.
“That’s something that doesn’t even exist here.”
Charlie Hoehn: I want to transition a bit into the book itself, EB5 2.0. Michael, who would you say this book is really perfect for and who is it not for?
Michael Fitzpatrick: I would say that the book is ideal for a variety of spectrum of persons looking to raise capital in the EB-5 market. I think it’s a great primer for someone coming in to the industry and looking to either raise capital or for their own project or for others so that they can get the lay of the land as it currently is. Because things did change really on a dime when a US CIS released data announcing that the retrogression wait line for china was around 15 years long, which all but shut down capital raising, especially capital raising of any scale in China.
But I also think that the book is appropriate for veterans of the EB-5 industry as well. I think it’s a great coalition of where things have come from and where they’re going.
I think there’s also an underlying message of unity within the industry that doesn’t exist today. There is some differing factions about where the industry should go forward, and I think the book also offers some thoughts about how to bring things together within the industry itself.
What Is EB-5?
Charlie Hoehn: For listeners at home who might be wondering, hey, what is this EB-5 thing? What’s the simple definition of it?
Michael Fitzpatrick: Yeah, the simple definition of EB-5 is, it’s an opportunity for foreign persons to make an investment in the United States. One of the main benefits of making that investment is permanent US residency for themselves, their spouse, and their minor aged children. It’s really a program that is similar to that offered in other countries, so it’s not unique to the United States to offer residency rights for making a qualified investment.
“It’s what I call the triple win.”
It brings capital into the United States at a low cost, which enables funding development in areas that are targeted by the government as in need of job creation. It creates jobs for US persons. Brings in foreign capital at affordable rates, and then it brings people to the United States on a faster track who come here with some wealth, knowledge, likely entrepreneurship that becomes tax paying persons.
It’s all done without costing tax payers any dollars. It’s really, I think a very beneficial program when properly implemented.
Charlie Hoehn: Just to be totally sure I’m understanding. I have a friend who is from Canada. He moved to the United States and created a company that now employs over 40 full time people. Would he fall into the EB-5 investor program?
Kevin Wright: He would, in general, your friend would have thought of this before he moved to America and set it all up in a way to make it work. So would be figuring it out retroactively, but yes, absolutely. That’s the way to do EB-5 for sure.
Charlie Hoehn: What is the state of the market today? What’s the state of China today?
Kevin Wright: Really in early 2017 it became apparent that the demand for the EB-5 program in China had been going so greatly for so long that the country began to retrogress, meaning that there was only a certain amount of visas available for people in China and that they had used up 15 years’ worth of them.
That really slowed demand dramatically by about 90%, almost overnight.
The industry then from that standpoint, moving forward over the last couple of years, has really moved to all new market places, opening up markets all over the globe—whereas in the past, people only focused on China.
Michael Fitzpatrick: That really led to the next section in part one, talking about the new world where the market is going to right now. The most notable countries being India, Vietnam, Brazil, and the dynamics within those markets, because they’re not the same as China.
The cultural differences really matter in terms of the type of investment and the structure of the investment that’s offered, and also the lack of infrastructure to market the investments.
In China, there was such a robust industry for marketing student visas in H1B visas that infrastructure took hold of the EB-5 opportunity as essentially another product line that they could add to their distribution channel of existing immigration type consulting services and that’s one of the reasons why that, combined with really the significant rise of wealth in the middle class in China, they all coincided at a time when the US economy went into the great recession in 2008, which sent developers looking for alternative capital overseas.
This sort of perfect storm came together that put China right to the forefront of the program, and it was so successful as Kevin noted that it sort of out kicked its coverage and is in a long retrogression waiting line which has now essentially shut down that market.
Opportunity for All
Charlie Hoehn: What would you say to people who are trying to figure these stuff out on their own and track it? Are they going to be able to do that easily or not?
Michael Fitzpatrick: Well, to me, there are two sides of the coin. One is that as Michael was talking about, it used to be a very easy track to follow. You went to China, you worked with certain licensed agencies in China, and there was a very clear path to success.
Because of that, several groups became very large and very dominant in the industry. Now that China has fallen, and really, the other countries from a variety of places around the planet had picked up, the downside to it is, you really have to be very nimble and very quick to show up in a new culture, understand it quickly, develop relationships there, and really build from scratch an entire system that used to be readily accessible when you just landed in China.
“The positive side to the coin is that has eliminated the advantages of large players.”
So nowadays, almost anyone with proper resources and drive can show up in a new marketplace and really be a dominant player or make a niche for themselves in a variety of places.
We see people in certain regional centers or certain industry participants who are doing really well in South Africa, whereas they have no presence at all in Brazil or in Mexico, and the same thing for people in Mexico. They may have their niche there and they are doing really well. Whereas someone else who has a focus on India doesn’t even go to Mexico.
That’s really allowed some of the smaller players to rise up and has made the market a much more even playing field today.
Kevin Wright: I would agree, and what it also done is it’s enabled those groups, those upstart groups to focus more regionally and then therefore tailor the investment structures to the preferences of those regions where they can get a little bit more traction by offering the market what they are looking for.
Charlie Hoehn: Let’s talk a bit about part two, attempts at long term renewal. What are some of the things that readers are going to get from this section of the book?
Michael Fitzpatrick: There’s two parts to the EB-5 law. There is a part of the law that’s permanent and then there’s a part of the law that is temporary subject to legislative renewal and the permanent part of the law allows an EB-5 investment to happen for $500,000 in a targeted area for creating 10 direct jobs. So these are jobs that you can actually count the people on the payroll. The temporary part of the law, which is what comes in and what we call a regional center is investments made through a certified regional center.
Similarly, it is a $500,000 investment in a targeted area but the regional center adds the capability of counting not only the direct jobs but what we call indirect and induced jobs and those are jobs that are calculated by an economist based on either the construction cost of the project or the projective revenue that it would generate after construction and the benefit of that is those jobs are deemed to have occurred if the project is build or if the project is generating projectile levels of revenue.
And you don’t have to count those people directly, and that actually adds some safety and security to how the jobs are measured by USAS.
There is more certainty, and that part of the law currently has expired and so the attempts of long term renewal are all about trying to, and by the way, 95% or more of the EB-5 capital raises are through this regional center concept. So that’s really at this point in time with the government shutdown has slowed the industry down to a near halt.
“So these attempts at long term renewal are to actually make the regional center part of the law permanent.”
There is a lot of debate internally within the industry and within congress on what’s the right way to do that and what is ultimately the legislative intent. The original legislative intent of the program.
Kevin Wright: The industry has been in somewhat of a short term renewal cycle whether it would be for one year or a few months at a time for several years now since about 2015, and our Congress and legislation has been slow to catch up and to update the program and make it permanent. A lot of that has been focused around how do we add more security to the program, more regulation? How do we take all of the things that were positives and some of the ones that are negatives and craft a permanent solution to the program?
I think the second section in the book does a good job of basically describing all of the different components that go into the thoughts of what will be in a permanent program and what types of regulations will be coming in the future that don’t exist today and why they’re there.
More About EB-5
Charlie Hoehn: For people who know EB-5 well, they’re in that world what’s going to surprise them about this book, what would you say?
Kevin Wright: I think that since people have left China and are now exploring different parts of the world then maybe some insights into the individual countries and what you’re going to find when you get there. It’s like I say, some people may be focusing on working in Vietnam and they have been focused there, there is a network of agents that help you to recruit investors there, whereas they may not have ventured into Brazil yet where that infrastructure doesn’t exists.
Really, what is the mindset of people in places like China or Asia? The main driver behind people investing through the EB-5 program is to help their children get a better education, whereas you enter Brazil and while that is still a significant driver, there is also a very strong driver of security and safety as that’s a very unsafe country. A lot of people choose the EB-5 path for the safety of it.
So every country has its own little niches and reasons why people go from one place to another. There is a good opportunity to get a basic understanding of what the underlining drivers are for many different countries across the globe.
Michael Fitzpatrick: I think one thing that I will also be a little refreshing, maybe a little surprising, in part two would be the candor with which we discuss the internal struggle within the industry constituents and trying to offer suggestions that will hopefully bring some alignment to the industry, which is still struggling with today.
Charlie Hoehn: Has there been anybody that comes to mind that’s been really positively impacted in some way by what they learned from you guys?
Kevin Wright: Well without naming anyone in particular, there are a couple of groups that come to mind that we worked with over time that, back when the Asian model was the definitive way to go, they were a little late to the game. Due to that they were already large players that were entrenched and it was very difficult to unseat them and to get a seat at the table, whereas today, you fast forward two years later and they completely switched focus.
Working in different countries and found their niche and they’re doing really, really well by understanding their niche market and focusing very much on those places. It’s at both directions—while we both discovered them together, their experience drives a lot of what is written in the book.
Connect with Michael and Kevin
Charlie Hoehn: What is the best way for somebody listening to this episode to potentially connect with you or follow what you are doing?
Kevin Wright: Certainly our website, bakertillyeb5.com, lists all of our contact information and how to get a hold of us. I think we are all also available on various social media platforms from around the world now today, such as Whatsapp and We Chat and Instagram and all the rest of the social platforms. So there are a variety of ways to find us.
Michael Fitzpatrick: Yeah and we’re fairly prolific in terms of being on EB-5 panels and events. We’re fairly active in offering new articles and hosting our own investor seminars when we’re travelling abroad, marketing investment stories capital.
Charlie Hoehn: What is your vision for this book? Let’s say five years from now, what is the impact you’ll hope it will make?
Kevin Wright: I hope it helps some of the new entrance to the industry or people that haven’t really gotten out or really understood how to go into other marketplaces and how to seek investment. It gives them a place to start from and gets them into the market places in a variety of countries than in the end helps to create potentially thousands of jobs for Americans right here in America as well as helping the economy.
Michael Fitzpatrick: I think maybe a more aspirational hope on my end would be that we do get not only long term renewal of the program but also some restructuring on how the program is administered that would eradicate the problems it’s currently facing simply through administrative protocols that really have reduced a number of EB-5 visas that are allocated annually.
So for example, under the EB-5 program, there are 10,000 visas per year.
And there is a visa consumed for each investor, their spouse and their children. So say a family of four would consume four of those 10,000 visas whereas under other immigration programs administered through the USCIS like the H-1B visa program for foreign persons working in the United States under that program, which also has a cap, an annual cap on the number of visas, they only count the employee visa even though they grant spouse and children visas with that employee.
“They don’t count those visas towards the cap.”
So there is sort of an arbitrary difference in the way to similar programs are managed, and that arbitrary difference is incredibly material to the EB-5 space. That’s really what had triggered the long term waiting lines in China, so it’s a part of long term renewal and potentially some legislative overhaul that the program needs cleaning up that kind of a problem would free up the EB-5 space immediately.
And it would be a great inflow of capital to the United States to create jobs where they are needed the most.
A Challenge for Listeners
Charlie Hoehn: What is one thing listeners can take away or implement from EB5 2.0 that will have a positive impact on their life?
Michael Fitzpatrick: Well I think for industry veterans who have a stake in this for the long term, I mean the challenge I would pose would be, if you can’t take a full step backward from looking at your own window, to at least take a step back and try and look through a broader window of the industry and in perpetuating it for the long term. Part of the problem that the industry is going through right now is that the stakeholders tend to look through a very myopic point of view.
The forest gets lost in the trees and we can’t get any headway on compromise that would be a long term solution, really for the benefit of everyone in the program.