Los Angeles Business Journal

Developer Money Crosses the Lines?

Real Estate: Projects draw ‘low-income’ maps to tap EB-5. By Alfred Lee Monday, November 4, 2013

Rep. Lucille Roybal-Allard, D-Commerce, whose district includes some of the job-poor areas cited, said in an email, “We need to take a hard look at the process for evaluating EB-5 applications to ensure that the program is working as intended and guaranteeing job creation and investment in low-income communities.”

Defining unemployment

Use of the EB-5 program has surged since the recession, when pressure on developers to find alternative ways to fund their projects coincided with a boom in wealth in China. Last year, foreign investors were approved to invest at least $3.7 billion through the program – nearly 10 times as much as in 2007.

To receive a green card, those investors must place at least $1 million into job-creating projects in the United States. However, the threshold is lowered to $500,000 if the project is in a high-unemployment area – defined as 50 percent higher than the national unemployment rate. The federal government leaves it to individual states to decide which areas qualify.

EB-5 funding can be preferable to construction loans because it’s cheaper. Developers often agree to pay interest to EB-5 investors, but at rates as low as 2.5 percent, several points lower than a typical construction loan, according to Scott Kalt, an attorney at Elkins Kalt in Century City who has worked on EB-5 projects.

Investors, on the other hand, benefit because it fast-tracks them to a green card, which can otherwise be difficult to obtain. Usually hailing from China and South Korea, many have young children they want to send to school in the United States.

At Via Marina and Tahiti Way in Marina del Rey, San Diego’s Hardage is planning a $70 million, 288-room Marriott Courtyard hotel. The developer hopes to raise half that amount through EB-5 investments. It expects to begin construction late next year, according to the project website.

But Marina del Rey has an unemployment rate of less than 6 percent, almost half the county average and ranks in the top 10 in per-capita income in the county, according to Census Bureau data. Though the project is not in a city, county or census tract defined by the state as a high-unemployment area, it still qualified after a Hardage subsidiary drew a map annexing faraway communities.

The map heads northeast from the marina, avoiding the commercially successful areas of Santa Monica, Culver City and Playa del Rey, then expands broadly to the southeast, encompassing poorer communities such as Crenshaw, Baldwin Hills, Leimert Park, Hyde Park and a wide swath of South Los Angeles. It ends at 120th and Figueroa streets, some 80 blocks south of USC. A laborer who lived in that neighborhood would face an hour-and-a-half bus ride to the hotel site.

Page 2 of 4