What Real Estate Developers need to know about the EB-5 Immigrant Investor Program
By James B. Heffernan on October 14, 2013
Due to the credit crunch of the past few years and high interest rates on mezzanine financing, a new financing tool has emerged: the EB-5 Immigrant Investor Program. Enacted as part of the Immigration Act of 1990, the program is a great potential source of low interest financing for real estate developers. Of course, nothing comes easy and developers should be mindful that this source of funds does come with a few strings attached.
How it works:
Although not a new law, the EB-5 Program has recently gained in popularity since its inception in the early 1990s. Essentially, foreign investors are allowed to invest their money either directly in a business or through an investment vehicle known as a "Regional Center". In return, foreign investors eventually secure a permanent visa (commonly known as a "green card") for themselves and their family. Initially a pilot program, the Regional Center has evolved as the preferred model for real estate developers because it allows multiple investors to fund a single project while at the same time allowing developers to maintain a certain level of autonomy.
In a nutshell, the Regional Center pools together multiple foreign investors and acts as a junior lender to the developer, often lending at a rate of interest between 4-5%. A developer first presents a project to a Regional Center, which in turn either directly or indirectly, through a broker, markets the project abroad. Interested investors then each invest $500,000 (for "Targeted Employment Areas") or $1,000,000.00 (for non-TEAs). Often times the developer may already have senior debt, mezzanine debt, and other financing and should use the Regional Center to refinance the higher interest junior debt.
The EB-5 Program is administered by the U.S. Citizenship and Immigration Services of the Department of Homeland Security (USCIS), which controls everything from the approval of the projects and Regional Centers to the issuance of permanent green cards.
All of this takes time. While the foreign investors hope to receive a small percentage return on investment, their main focus is obtaining a green card. At the outset of the project, USCIS issues the foreign investor with a conditional green card. In order to remove the conditions, the project must ultimately be successful enough to generate 10 new and permanent jobs per foreign investor after two years of the investment. In total, from USCIS approval of the project to payout of investors, the Regional Center and developer must plan on a 4 to 5 year commitment with each foreign investor.
Job creation is a key focus of the foreign investor and a prudent developer will make it a priority to attract more investment from abroad. Moreover, the developer must be patient. Not only will the foreign investment trickle in with each new interested investor, the developer may not refund or refinance the invested money until USCIS removes the conditions on the foreign investor’s green card.
There is a growing market of foreign investors looking to pool their money together and lend money to real estate developers at attractive rates. Real estate developers should seriously consider this as a viable option but must be mindful that a little time and patience is required. Finally, as a growing field, expect further changes made to the EB-5 Program when Congress renews its debate over the Comprehensive Immigration Bill.
© 2013 by Rich May, P.C. and James B. Heffernan. All rights reserved.
Disclaimer: This summary is provided for educational and informational purposes only and is not legal advice. Any specific questions about these topics should be directed to an attorney in our real estate practice group.