No one was more surprised than Hiroki Shuto to hear that his new Sky Men’s Grooming Salon — where the barber chairs are plush, the stylists wear crisp shirts and vests, and a basic cut runs $45 — was located in an area that state and federal officials have tagged as distressed.

The burgeoning hipster hotspot of Kakaako, with 1,625 new condo units finished in 2016 and 1,840 more on the way, offered a prime location for the high-end barber shop. Shuto said he had a “golden opportunity” to lease ground floor space in the Halekauwila Place development, which is half a block from a planned Honolulu rail stop and across from another retail and condo project underway.

It might seem like the last place to need incentives to attract investment.

But that’s not the case, according to some state and federal officials. The area around Shuto’s business is designated so economically distressed that it qualifies as a “targeted investment area” under the federal government’s EB-5 Immigrant Investor Program, which is designed to spur foreign investment to create jobs in the U.S.

Stewart Yerton/Civil Beat

A parcel across Halekauwila Street from Shuto’s shop has been certified as an EB-5 targeted employment area, and so has Stanford Carr’s Keauhou Place across Keawe Street.

Carr said he has not used EB-5 financing for the $170 million project, which he said was financed by a consortium of local banks including Finance Factors, First Hawaiian Bank, Bank of Hawaii, American Savings Bank, Central Pacific Bank, and Hawaiian National Bank. In fact, Carr said he had not even sought certification to designate his development as a targeted investment area.

But a letter obtained from the Hawaii Department of Business, Economic Development and Tourism shows that the state certified the site of the development, 500 Keawe Street, as a targeted employment area under the EB-5 program. The letter, signed by Mary Alice Evans for DBEDT Director Luis Salaveria and dated May 8, 2015, was addressed to Richard Marquard of the New York-based LCP Group, which runs a Hawaii EB-5 center.

Kakaako being distressed was news to Shuto, who is also president of the Waikiki Sand Villa Hotel. He said he knew about the EB-5 program but thought it was designed to bring investment to areas that “are not doing well.”

“I don’t think this is a place that’s not doing well,” he said.

Kakaako isn’t the only thriving hotspot tapped as a distressed targeted employment area. A project in bustling Ala Moana, where the unemployment rate is less than 1 percent, also has been targeted for a jobs boost from foreign investors. So has the Ko Olina resort, where the Four Seasons recently opened its first property on Oahu. Recent census data pegged Ko Olina’s unemployment rate at 2.5 percent.

Federal regulators seem to have had enough.

Stewart Yerton/Civil Beat

The Department of Homeland Security, which administers the EB-5 program, has proposed regulations to close the loophole that lets developers and state governments define vibrant places as distressed.

Business interests like the U.S. Chamber of Commerce are pushing back. Meanwhile, places like Kakaako, Ala Moana and Ko Olina remain targeted for investment.

The EB-5 program encourages foreign investment by providing a permanent resident document known as a green card to foreign nationals who invest in qualifying businesses. To get a green card, investors generally must put $1 million in a jobs-creating U.S. business. But the amount is lowered to $500,000 for investments in businesses in targeted employment areas, where the unemployment rate is at least 150 percent of the national rate.

The loophole involves how the program designates target employment areas. Developers can create oddly shaped, gerrymandered districts that link their project’s immediate, thriving vicinity to faraway distressed places with high unemployment.

Hawaii Department of Business, Economic Development & Tourism

As long as the gerrymandered area’s census tracts are contiguous and the combined area’s unemployment rate averages out to 150 percent of the national rate, the state government can certify the district as a targeted employment area. Some of the state-certified districts on Oahu stretch more than 30 miles from the edge of Waikiki to places that are genuinely distressed.

That’s why a project like the proposed Hawaii City Plaza qualifies. In the proposed luxury condo tower’s neighborhood, you can find everything from discount Hawaiian souvenirs at Wal-Mart, to shabu shabu and fancy pastries at the new 808 Center on Rycroft Street, to luxury electric cars from the Tesla showroom in Ala Moana Center.

You can also find a job. Wal-Mart is hiring. So is Domino’s Pizza on Keeaumoku Street. Fancy retailers also need help – and say it’s hard to find.

Cory Lum/Civil Beat

“The unemployment rate is really low in this area,” said Yayoi Akana, marketing and business development manager at Ala Moana Center’s Minamoto Kichoan, which sells gourmet Japanese treats like maccha tea mochi and jellied mango, delicately wrapped and boxed. “It’s hard to find people for us as a retail store.”

The shop has a “we are hiring” sign in the window and has been looking for one or two part-time workers for a month, she said. But competition for labor is stiff.

“You can see a lot of places around here are hiring,” she said.

Stewart Yerton/Civil Beat

The unemployment rate in Hawaii City Plaza’s census tract was 0.8 percent in 2015. But the site qualified as a targeted employment area because it is part of a larger area that stretches to the high unemployment areas of Oahu’s west side.

Hawaii City Plaza has come under fire from Honolulu City Council members who say the developer has revealed he has sold 60 of his 163 residential units to buyers from China — a move council critics say runs counter to development policy in a city suffering a housing shortage.

Jay Fang, the developer, has said the 60 Chinese investors are EB-5 investors who have ponied up $30 million to build the project and are not necessarily condo unit buyers.

But the council critics have not questioned the bustling neighborhood’s designation as a distressed target area.

Eugene Tian, the Hawaii state economist, said his office approves sites as target areas if they meet the federal criteria: the census tracts have to be contiguous, and the area’s unemployment rate has to be 150 percent of the national average.

Tian said it’s common for target areas to stretch westward to Waianae and beyond because those places typically have the highest unemployment rate. “Without linking to Waianae, it is difficult to form a (targeted employment area),” he said. He once turned down a site in Manoa because it could not meet the criteria, Tian said.

The targeted employment area designation is “a pure statistical function,” Tian said. “It has nothing to do with economic development.”

Documents obtained from Tian’s office through a public records request show numerous sites the state has certified as targeted employment areas. The letters do not show whether foreign investors have invested in the projects.

Carr questioned why the state had certified his project as a targeted employment area when he did not request the designation; Marquard, an executive with New York-based LCP Group, an EB-5 investment firm which obtained the certification for 500 Keawe Street, did not return calls.

Calls placed to the number listed for Kenneth Kai Chang, developer of a proposed condo project at 615 Keawe and 690 Halekauwila streets, across from Sky barber shop, were not answered. Calls to Jianjie Ji and 900 Investments, which obtained a targeted employment area certification for a single-family housing development in Mililani, were not returned.

Sweetie Nelson, a spokeswoman for Ko Olina’s development and management company, The Resort Group, said Ko Olina has no plans to enroll in the program. Nelson said she did not know why The Resort Group’s chief executive, Jeffrey Stone, had asked the State of Hawaii in August 2016 to confirm that Ko Olina was certified as an EB-5 targeted employment area. She said Stone’s letter was “a general program inquiry.”

Cathelijne Sieber, the agent listed for Paradise Retirement Hawaii and PRW Hawaii, a Kalakaua home health care and retirement home company that has received EB-5 targeted employment area certification for sites on Kalakaua Avenue near the Hawaii Convention Center, was not available for comment and did not return emails.

The EB-5 program came under scrutiny nationally in April after revelations that the family of Jared Kushner, President Donald Trump’s son-in-law and policy adviser, had used the program for a luxury development in New Jersey. Kushner’s sister, Nicole Meyer, was criticized for mentioning her brother’s ties to the White House while trying to attract $150 million from Chinese investors.

Targeted employment areas are supposed to provide an exception to the general provision that requires investors to invest at least $1 million. But in practice, almost no one actually invests $1 million. The Department of Homeland Security, which administers the program, says 97 percent of all EB-5 petitions filed in 2015 involved investments at the lower level for target areas.

Proposed Regulations Would Prevent Gerrymandering

The department is trying to change that. In proposed regulations published in January, the Obama Administration was pointed in its criticism of the current system of creating targeted employment areas.

“The deference to state determinations provided by current regulations has resulted in the acceptance of some (targeted employment areas) that consist of areas of relative economic prosperity linked to areas with lower employment, and some (targeted employment areas) that have been criticized as ‘gerrymandered,’” the Department of Homeland Security wrote. The department added the result was target areas “resembling a chain-shape or other contorted shape.”

The proposed rules would let developers propose target areas including a project’s census tract and adjacent tracts surrounding it. Homeland Security, not state governments, would certify the areas. The standard investment would increase to $1.8 million, while the amount for target areas would be $1.35 million.

The U.S. Chamber of Commerce has submitted public comments opposed to changing the investment amounts and the method for defining target areas. The National Association of Home Builders also has opposed the changes.

U.S. Sen. Brian Schatz told Civil Beat he doesn’t think the program in general has met the spirit of the law. “It is not what the authors of the EB-5 (law) envisioned,” Schatz said.

At the same time, Schatz said, when it comes to targeted employment areas it might make sense to look at where workers are coming from.

Despite the family connection to the infamous EB-5 deal in New Jersey, the Trump administration has acknowledged the program is flawed.

“There are serious concerns held by the administration regarding the EB-5 visa program, in part because it is not being used as it was primarily intended,” Michael Short, a White House spokesman, told The Washington Post. “The administration is continuing to evaluate reforms to the program, which we believe is in need of substantial repair.”