Long known as one of the poorest areas in the United States, Hidalgo County in south Texas is being transformed by the steady influx of cash from wealthy Mexicans fleeing drug-related violence south of the border. Unlike the vast majority of the Mexican-Americans who comprise about 92% of the county’s population, many of these Mexican nationals are flush with cash.
For example, in McAllen, the largest city in the region, about one-third of all retail business is done by Mexicans. Retail sales figures per square foot at an outlet mall in Mercedes, Tex. — where typically half the cars in the parking lot sport Mexican license plates — are among the highest in the United States. Indeed, a recent survey found that the average Mexican spends about $1,500 a day when visiting that mall on the Texas side of the border. In addition, some of the wealthiest Mexicans own luxurious homes on South Padre Island, a Texas resort town.
Alarmed by a wave of shootings and kidnappings in the northern states, a growing number of these wealthy Mexicans are taking advantage of the once-dormant EB-5 entrepreneurial visa program to gain permanent residency status in the U.S. Their peace of mind comes at a considerable financial cost — and with the possibility that they will lose their investment in what critics call a “pay-for-visa” program. Established in 1990, the EB-5 visa program enables foreigners of any nationality to secure permanent residence (or “green card” status) by investing $500,000 in an enterprise in the U.S., if that enterprise creates at least 10 jobs, directly or indirectly, in a community with a high unemployment rate or in a rural area. Alternatively, an applicant may also invest $1,000,000 in an enterprise that creates at least 10 jobs, but which is not located in a rural area or a location that does not have a high rate of unemployment.
What are the risks involved in the EB-5 program for immigrant entrepreneurs? And, as in the case of the U.S.-Mexico border, can the capital raised in the program help fuel an economic overhaul of a region long dependent on a low-wage work force?
A Rising Tide
Applicants for EB-5 visas must invest in projects that are operated either by public entities, private businesses or by private/public endeavors that are known as “regional centers.” Both the regional centers and the projects for which they are seeking foreign investment are vetted by U.S. Citizenship and Immigration Services (USCIS). After the USCIS approves the regional center's project, the applicant invests the $500,000 or $1,000,000, and applies for a conditional visa that is good for two years.
Over the past half-decade, the popularity of the EB-5 visa program has grown steadily. In 2012, 80 Mexicans wealthy enough to consider an EB-5 visa applied for the initial permits required, compared with only 14 such applicants in 2009. The USCIS provides no figures about the total dollar value of such investments. However, assuming that each of the 56 approved applicants from last year invested at least $500,000 in the U.S., a minimum total of $28,000,000 in capital will leave Mexico to be invested in the U.S. as a result of the program in the last year alone.
Mostafa Malki, assistant professor at the University of Texas at Brownsville School of Business, says that “EB-5 has become one of the best sources of funding” for the long-impoverished economy of southern Texas. “With the violence in Mexico, a lot of successful Mexicans have started moving to the United States.”
The EB-5 program “is probably the best, but least understood, way to get a permanent residency status in the United States,” according to Michael Wiglesworth, marketing director of The Star of Texas Regional Center in Houston, Texas, which works with EB-5 applicants to find investment opportunities. Many of the applicants’ “immediate families are kidnapped, or those of their friends,” notes Mark Kroll, dean of the University of Texas at Brownsville School of Business. “Most of the Mexicans [applying for the program] are just people who want to lay their heads down and not worry about kidnappings.”
Risky Investment
How do Mexican and other foreign entrepreneurs find the most promising opportunities that meet the requirements of the EB-5 program? The process is facilitated by well-entrenched networks of personal ties across the border. Malki notes that many of the Mexicans who participate in the program already have business relationships in southern Texas, whom they tap into to find job-creating opportunities in such areas as real estate and restaurants. A lot of these applicants already own personal properties in McAllen or on South Padre Island. To allay suspicions that some of that incoming capital is the product of criminal activity, the USCIS conducts extensive background checks, refusing approval to any applicant with a criminal background. The agency also investigates the financial capabilities of each applicant, and decides whether his or her U.S.-bound investment will indeed be directed into a project that will create at least ten legitimate, full-time jobs.
Nevertheless, as USCIS spokesman Chris Bentley points out, EB-5 applicants of all nationalities should be aware that their investment will be placed at risk, even if it winds up creating the required number of jobs to qualify for a conditional green card. “It is the responsibility of the immigrant to do due diligence,” says Bentley. In a worst-case scenario, EB-5 applicants could wind up without either his money or his visa, if his funds are invested in a project that winds up doing poorly. On the other hand, Bentley notes, it’s possible to qualify for an EB-5 visa by investing in a project that is well-intended and shows a “good faith effort,” but ultimately winds up not creating a sufficient number of jobs because the investment ultimately collapses through no fault of the passive investor who applies for the visa.
There are more than 250 regional centers around the United States, and about 75% of their applicants were Chinese last year, Wiglesworth notes. About 90% of the regional centers “won’t make it,” or will go out of business, says Wiglesworth, because the business of running an EB-5 regional center “requires a lot of marketing, lots of management expertise and geographical positioning.” In the case of his Houston center, The Star of Texas, geographical positioning means “selling the State of Texas, not the regional center itself” – in particular, selling the city of Houston as a multicultural, business-friendly town that’s ideal for entrepreneurs. He adds, “EB-5 candidates are highly educated; we see this area as underpenetrated, with huge potential. We have a marketing plan to generate awareness in Mexico.”
Unlike Chinese applicants for the program, who “want to take their money out of China, the Mexicans are being forced to do so” by concerns for their safety and that of their family members. For wealthy Mexicans, the EB-5 program is especially ideal, he says, because “they want to keep one foot in Mexico and one foot in the United States.” Permanent residency status in the U.S. gives them that option, because even Houston is only about 90 minutes from Monterrey by non-stop flight.
Nevertheless, some critics of the EB-5 program argue that the USCIS approves many of the business proposals submitted by regional centers in order to inflate U.S. employment figures. They say that numerous proposals that have dubious chances of success are vetted by the agency, and their EB-5 immigrant investors wind up losing their sizable investments, and/or wind up being denied the permanent residency status they are seeking. In response to charges that some EB-5 investors have been directed by unscrupulous advisors into making overly risky investments, Alejandro Mayorkas, director of the USCIS, has said that his agency is working to "enhance the integrity of the program.”
Enhancing Regional Development
Rather than invest incoming EB-5 capital almost exclusively on Texas real estate, restaurants and other conventional businesses, Malki would like to see a significant amount of capital invested in enhancing the competitiveness of the south Texas-northern Mexico region. Carlos Marin, president of Brownsville-based Ambiotec Engineering Group, points to what he sees as a major opportunity: An increasing number of global firms have been relocating their plants to Mexico from China — a phenomenon known as ‘near-sourcing’ — because Chinese wage rates are soaring, and transportation costs from China are high. However, most of those firms are relocating in the highland cities of central Mexico, such as Queretaro, not in Brownsville or elsewhere across the Rio Grande Valley. Marin says, “We’d like to take advantage of that ‘near-sourcing’ trend, instead of seeing all of the near-sourcing going to central Mexico.” According to Malki, “The EB-5 program can be a tool to try to get more money to go [to both southern Texas and northern Mexico], rather than to central Mexico.”
Malki and Marin both hope that EB-5 capital can play a significant role in transforming the Rio Grande Valley into a high-value manufacturing center, on both sides of the river. In an upcoming U.S.-Mexico economic development initiative, they note, they will bring together business and government leaders from both sides of the border “to grow the [Rio Grande Valley] region together,” says Malki.
To attract outside investors, leaders in the region will soon be “developing a case to show [to investors] that the violence in northern Mexico is not a military problem, but is an economic development problem,” Malki adds. The solution is not more “boots on the ground,” notes Marin, but a coherent strategy for improving the region’s economic foundations.
Marin points out that while “there is a lot of advanced manufacturing already being done on the Mexican side of the border, the engineering, research and development for those plants is not being done” nearby in Mexico but faraway in the U.S., Europe, Asia and elsewhere — too distant from those plants to boost demand for a highly skilled workforce adjacent to the plants themselves. Malki agrees, noting that the cluster of automotive companies along the Mexican side of the Rio Grande generates US$8 billion of revenue a year, but only US$100 million of that revenue remains in the Rio Grande Valley.
The challenge for the Rio Grande Valley region, says Malki, is “how we can capture a larger percentage of that value-added with engineering? We have to think as a single region; in the past, everyone has been thinking in a silo. But we are not competing [against other locations in] the United States. We [both Mexicans and Americans in the Rio Grande Valley region] are competing against central Mexico. The maquiladoras must be a place of value-added engineering, not just a place where we assemble…. EB-5 will be just one of the options we use for finding the capital needed” for such a transformation.
