Changes may be coming to the decades-old EB-5 visa program. And they could be coming just when N.J. developers need it the most

Ted Zangari vividly remembers the reaction of investors and developers when he first started explaining the EB-5 program.

“The entire development community knows about this money source by now,” he said. “But in the early days, as we would go through the litany of what dollars were available from where and we would explain the EB-5 program — essentially, foreign investment in exchange for the investor and his or her family receiving visas to come into the U.S. — the reaction of clients, without exception, was, in a word, incredulous.

“That’s still the visceral reaction of the average person outside of developers — ‘What? You mean someone can buy their way into the country, not go through the usual lawful channels, but literally write a check and come in?’ ”

Yes, they can.

In fact, investors around the world have been able to do since the program was put into place during the Bush administration.

The first Bush administration.

The EB-5 program was created in 1990, meaning developers in New Jersey and around the world have been using it for nearly three decades.

It just became an overnight sensation when Nicole Meyer, the sister of Jared Kushner, openly pitched the program at a meeting with potential investors at a Ritz-Carlton in Beijing.

Those opposed to President Donald Trump, Kushner’s father-in-law, quickly called it corruption at its core and the ultimate pay-to-play scandal.

Zangari laughed at the idea.

“Not only is the investment-for-visa feature commonly known in developer circles,” he said, “it’s the essence of the EB-5 program.”

I reached out to Zangari, the co-chair of the real estate department and member of the executive committee of Newark-based Sills Cummis & Gross, after the China event took place.

Zangari, one of the top real estate experts in the state, always gives a straightforward response. He said he isn’t concerned about the politics of the episode. Just the perception.

And, more so, how it could impact New Jersey development moving forward.

“It would be a shame if a relatively cheap source of investment were taken away from developers at a time when rates are starting to creep back up and other sources of investment beginning to tighten up,” he said. “If Congress were to eliminate the EB-5 program now, of all times in the real estate market cycle, it would be even tougher for redevelopers to make their projects pencil-out,” he said.

“As it is, the state Legislature is looking to tighten up the issuance of (payments in lieu of taxes) at the local level, the (Economic Redevelopment & Growth) incentive program at the state level is out of funds, the courts are amping up affordable housing mandates and federal tax credit programs such as low income housing tax credits will be less desirable to investors if the proposed Trump tax cuts narrow the spread between taxable and tax-exempt bonds.”

Zangari said he generally has steered his clients away from the program through the years for two reasons: first, the potential for fraud and abuse, since the people brokering these baskets of funds are unregulated; and, second, other sources of cheap money have been readily available without the fraud and abuse risk.

Those days, he fears, may be coming to an end.

“The irony if this program were to end is that, while EB-5 has been successful, its most needed days are ahead. With interest rates starting to tick up, that’s when this program will really delivered on its potential.  Already, it has become an increasingly common layer of the redevelopment capital stack as developers struggle to tackle the unique added costs of brownfield remediation, deck parking and affordable housing set asides that didn’t exist in the greenfield development of past decades.”

An elixir that’s no longer a backroom secret.

Zangari suspects many members of Congress, like the general public, were surprised this program exists — and has existed for decades.

Of course, Washington today is more about perception than policy. Zangari feels that could be a problem for EB-5.

Zangari thinks some changes, not elimination of the program, are coming because of the backlash that followed the Kushner presentation, the overall anti-immigration fervor brewing around Congress and the fact that the program has been the subject of some instances of fraud and abuse.

“You’re likely to see changes to EB-5. And change for this program would be a good thing,” he said.

“My hope is that Congress doesn’t eliminate the program, but, instead, puts more institutional controls on it that, candidly, will not only save EB-5, but make the program useable for more conservative developers who were leery about ever wading into an unregulated loan pool of individual investors speaking a different language  and residing halfway around the globe.”

Of course, doing so would be looking past the obvious pay-to-play perception. It’s a hurdle many will have to overcome — just as they did in the early days of the program.

“That was the typical reaction of investors and developers back then,” Zangari said. “Now, it’s the typical reaction of ordinary Americans who are suddenly learning about this program. And the mood between now and then has changed vastly due to the overheated topic of immigration.”