Tag Archives: immigrant

Wall Street’s New Toxic Transactions

Posted on by

Toxic Real Estate

The National Consumer Law Center released a report, Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color. It describes land installment contracts as follows:

Land contracts are marketed as an alternative path to homeownership in credit-starved communities. The homebuyers entering into these transactions are disproportionately . . . people of color and living on limited income. Many are from immigrant communities.

These land contracts are built to fail, as sellers make more money by finding a way to cancel the contract so as to churn many successive would-be homeowners through the property. Since sellers have an incentive to churn the properties, their interests are exactly opposite to those of the buyers. This is a significant difference from the mainstream home purchase market, where generally the buyer and the seller both have the incentive to see the transaction succeed.

Reliable data about the prevalence of land contract sales is not readily available. According to the U.S. Census, 3.5 million people were buying a home through a land contract in 2009, the last year for which such data is available. But this number likely understates the prevalence of land contracts, as many contract buyers do not understand the nature of their transaction sufficiently to report it.

Evidence suggests that land contracts are making a resurgence in the wake of the foreclosure crisis. An investigative report by the Star Tribune found that land contract sales in the Twin Cities had increased 50% from 2007 to 2013. Recent reports from The New York Times and Bloomberg reveal growing interest from private equity-backed investors in using land contracts to turn a profit on the glut of foreclosed homes in blighted cities around the country.

Few states have laws addressing the problems with land installment contracts, and the state laws on the books are generally insufficient to protect consumers. The Consumer Financial Protection Bureau (CFPB) has the mandate to regulate and prevent unfair and deceptive practices in the consumer mortgage marketplace, but has not yet used this authority to address the problems with land installment contracts. (1-2, footnotes omitted)

This report shines light on this disturbing development in the housing market and describes the history of predatory land contracts in communities of color since the 1930s. It also shows how their use was abetted by credit discrimination: communities of color were redlined by mainstream lenders who were following policies set by the Federal Housing Administration and other government agencies.

The report describes how these contracts give the illusion of home ownership:

  • They are structured to fail so that the seller can resell the property to another unsuspecting buyer.
  • They shift the burden of major repairs to the buyer, without exposing the seller to claims that the homes breach the warranty of habitability that a landlord could face from a tenant.
  • They often have purchase prices that are far in excess of comparable properties on the regular home purchase market, a fact that is often masked by the way that land contract payments are structured.
  • The properties often have title problems, like unsatisfied mortgages, that would not have passed muster in a traditional sale of a house.
  • They often are structured to avoid consumer protection statutes that had been enacted in response to previous problems with land contracts.

The report identifies Wall Street firms, like Apollo Global Management, that are funding these businesses. It also proposes a variety of regulatory fixes, not least of which is to have the CFPB take an active role in this shadowy corner of the housing market.

This is all to the good, but I really have to wonder if we are stuck just treating the symptoms of income and wealth inequality. Just as it is hard to imagine how we could regulate ourselves out of the problems faced by tenants that were described in Matthew Desmond’s Evicted, it is hard to imagine that we can easily rid low-income communities of bottom feeders who prey on dreams of homeownership with one scheme or another. It is good, of course, that the National Consumer Law Center is working on this issue, but perhaps we all need to reach for bigger solutions at the same time that we try to stamp out this type of abusive behavior.

Reading the EB-5 TEA Leaves

Posted on by

Selena N. B. H.

Jeanne Calderon and Gary Friedland at the NYU Stern School of Business have posted What TEA Projects Might Look Like Under EB-5 2.0: Alternatives Illustrated with Maps and Data. For those of you who are unfamiliar with the EB-5 program, the authors provide some background:

Under the EB-5 Program, enacted in 1990, an immigrant who invests at least $500,000 or $1,000,000 in a specific U.S. business project is eligible for permanent residency, if the investment creates at least 10 American jobs.

These invested funds became an inexpensive source of patient, flexible capital for real estate development projects after the Great Recession in 2008. More recently, EB-5 capital has blossomed into a mainstream source of capital for real estate development projects. The immigrants’ pooled equity capital is contributed to an entity (known under the EB-5 law as a “New Commercial Enterprise” or “NCE”) typically created by an affiliated government-approved regional center. The proceeds are most commonly deployed as a mezzanine loan to a real estate project development entity (known under the EB-5 law as a “Job Creating Entity” or “JCE”). The immigrant’s motivation to make the investment is to qualify for the visa, and thus, he accepts interest rates well below market.

The original purpose of the EB-5 law was to create investments and jobs in rural areas, as well as high unemployment areas, referred to as “Targeted Employment Areas” (“TEA”). To encourage investments in these areas, the minimum investment in a project located in a TEA was set at a discounted level of $500,000, compared to $1,000,000 for a project not located in a TEA. Developers strive to have the location of their projects qualify as a TEA because immigrants seeking the EB-5 visa strongly prefer to invest in areas where the lesser minimum investment level applies, especially if they believe the investment will result in their receipt of a visa and a return of their capital investment.

Some members of Congress and other critics had become outraged by the growing trend of projects qualifying as TEAs that are located in thriving urban areas and commanding the lion’s share of EB-5 investment dollars. With the approval delegated to individual states, each of which was authorized to set its own rules and motivated to retain economic development within its own borders, projects in even the most affluent parts of the country were able to routinely qualify for the discounted investment level by combining contiguous census tracts (starting with the project site and often extending in unnatural configurations to remote sites miles away) until the weighted average met or exceeded the high unemployment threshold required by the law. This census tract aggregation is referred to pejoratively as “gerrymandering.” Thus, gerrymandering rendered the two level investment threshold meaningless and immigrants flocked to invest in luxury projects by major developers in urban areas. (4-5)

The authors conclude,

Congress should focus more attention on visa reserves and the types of projects that merit any special visa priority. As explained in the visa reserves section of this paper, immigrant investors are likely to place increasing importance on this issue in the near future as visa waiting periods rise. A project’s qualification for visa reserves might become as important a factor in the immigrant’s investment decision as the TEA status of a particular project. (48)

This type of program rubs many people the wrong way — Green Cards for Sale! — so it is important that is designed and implemented properly. As such, the authors make some valuable suggestions as to what EB-5 2.0 should look like.

Foreign Funding for Real Estate Projects

Posted on by

Jeanne Calderon and Gary Friedland have posted A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. The paper provides a great overview of a relatively new source of funding for real estate deals. The introduction opens,

From an immigrant’s perspective, the EB-5 Immigrant Investor Program (“EB-5” or the “Program”) represents merely one of several paths to obtain a visa.  The EB-5 visa is based on the immigrant’s investment of capital in a business that creates new jobs. However, from a real estate developer’s perspective, the immigrant’s investment to qualify for the visa creates an alternative capital source for the developer’s project (“EB-5 capital” or “EB-5 financing”).

Despite the Program’s enactment by Congress in 1990, for many years EB-5 was not a common path followed by immigrants to seek a visa. However, when the traditional capital markets evaporated during the Great Recession, developers’ demand for alternate capital sources rejuvenated the Program. Since 2008, the number of EB-5 visas sought, and hence the use of EB-5 capital, has skyrocketed. EB-5 capital has become a capital source providing extraordinary flexibility and attractive terms, especially to finance commercial real estate projects. Consequently, many developers routinely consider EB-5 capital as a potential source to fill a major space in the capital stack. As the financing tool becomes more widely known and understood, this source of capital should become even more popular.

The EB-5 investor’s motivation for making the investment accounts for the relative flexibility and favorable terms afforded by EB-5 capital compared to conventional capital sources. Unlike that of the conventional capital providers (such as banks, private equity funds, REITs, life insurance companies and pension funds), the EB-5 investor’s reason for making the investment is to secure a visa. Thus, his primary objective at the time of making the investment is to satisfy the EB-5 visa requirements. Consequently, so long as the investor believes that the investment will qualify for the visa and result in the safe return of his capital, he is willing to accept a below market, if not minimal, return on the investment. Furthermore, the investor might not require some of the other protections that more sophisticated, conventional real estate investors typically seek.

*     *     *

Simply stated, the Program requires that the immigrant make a capital investment of $500,000 or $1,000,000 (depending on whether the project is located in a “Targeted Employment Area”) in a business located within the United States. The business must directly create 10 new, full-time jobs per investor. Thus, the number of jobs that a project will create is a key determinant of the amount of the potential EB-5 capital raise. (3-4)

This once exotic funding technique is now becoming quite mainstream. Of interest to some readers of this blog, the paper describes at various points how EB-5 funds have been used in residential projects. The paper is a useful introduction for those who want to know more about this program.