Project Finance Using EB-5 Capital

By Timothy David Knowles

What is EB-5 Capital?

The Immigration Act of 1990, as amended, permits foreign nationals to earn a green card (permanent resident visa) for themselves and their immediate family by investing a minimum of $500,000 in a qualifying business enterprise that will create 10 new U.S. jobs or save 10 existing jobs. Regulations permit the State Department to issue 10,000 EB-5 visas each year in this category.

Investors approved by USCIS (US Citizenship and Immigration Services) receive a conditional green card, that requires them to make a subsequent filing within 21 – 24 months of landing in the U.S. The filing must prove that the Investor sustained the investment, and that the investment created the 10 jobs required.

Regional Center is an investment promotion entity (public, private or non-profit) approved by USCIS to offer qualifying investment opportunities in a defined geographic area, in specific industrial/commercial categories, that comply with the EB-5 program. There are now over 125 approved regional centers in the U.S. In FY 2009-10, 1274 EB-5 petitions were approved by USCIS generating $700 million in project investment. It is projected that as much as $1 billion in investment dollars will flow into the U.S. through this program in FY 2010-11.

Jobs may be created directly (actual employees employed by the recipient of the invested capital) OR indirectly (the direct, indirect and induced employment impact as measured by an econometric study) if invested through a regional center approved by USCIS. Jobs must be full-time, permanent jobs (35 hours per week) or construction jobs that last two or more years. Since it can be quite difficult and limiting to create 10 new jobs for every $500,000 solely based upon direct employment, most successful projects utilize regional centers for investment activity.

Indirect Job Creation is the result of an economist’s report using a forecasting model, like RIMS II or IMPLAN, that measures the impact of capital investment in specific “industry clusters” in a specific geographic area on final demand or sales, using databases of economic activity for that area. The direct job impacts stem from the workers that might be expected to be hired by the industry receiving the investment; the indirect impacts stem from the suppliers and vendors of that industry; and the induced impact is the effect in the local community of this increased level of employment (houses, autos, groceries etc. purchased by these new workers). These methodologies are similar to those used by local and state economic development entities to cite the economic impact of a new business locating to a community or state.

Job Creation Leverage. EB-5 regulations permit the allocation of 100% of a project’s job creation benefits to EB-5 investors where the total project capital consists of both EB-5 and non-EB-5 capital.

For example, a $400 million wind farm project might have a total job creation impact of only 3 jobs per $500,000 invested (or 6 per $1 million) due to the capital intensive and low employment profile of such a project, resulting in a total jobs impact of 2,400. But if the EB-5 capital is only $100 million of the total investment, then the resulting 2,400 jobs credited solely to the 200 EB-5 investors will provide 12 jobs credit for each EB-5 investor, satisfying the 10 jobs requirement, notwithstanding the low 3 jobs per $500,000 econometric result.

Investment Amount: $1,000,000 or $500,000 in a targeted employment area (TEA). As a practical matter very few investors will invest in a $1,000,000 project when numerous good investment opportunities are offered at the $500,000 level. Therefore the market dictates that projects must be located in a TEA.

TEA is any geographic area for which population and unemployment data exists that qualifies either under the rural definition or unemployment definition of a TEA.

Rural TEA is located: (1) outside the limits of any MSA (metropolitan statistical area – as designated by US Department of Commerce); and (2) not within the limits of any incorporated (city, village etc.) area with a population of more than 20,000.

Unemployment TEA: located in a geographic area where the aggregate annual unemployment rate for that area is 150% of the national average unemployment rate, as designated by the Governor of each state, or an agency or individual designated by the Governor. Normally, this will be either the state agency responsible for maintaining the state’s unemployment database or the agency responsible for economic development.

Most states normally maintain employment data for MSA’s (see above), counties and large cities, as well as data at the census tract level. Some states will permit regional centers to propose designation of areas that combine qualifying census tracts with non-qualifying census tracts such that the aggregate average annual unemployment is in excess of the 150% national average. For example, affluent areas of Manhattan might be designated as TEA’s if combined with high unemployment areas of Harlem.

Project Constraints: A prospective project for EB-5 must therefore satisfy several requirements to be considered qualifying:

Located within a regional center’s approved geographic territory.
Located within an area qualifying as a TEA.
Having a project jobs impact of over 10 jobs per $500,000 of EB-5 capital invested.
The business of the job creating new commercial enterprise must lie within the scope and definition of the specific “industry clusters” (defined by NAICS codes) approved by USCIS for the regional center in its designation letter.

What is the Investment Process?

(See Attached EB-5 Process Flow Chart)

How soon is capital available?

Time to create a Regional Center

Preparation of application: 2 – 3 months
Processing by USCIS: 6 – 8 months
Regional Center Approval 8 – 11 months

Time to syndicate an offering and obtain approvals releasing funds from escrow

Start time: all project documents prepared for offering
Marketing 40 units ($20 million) - 4 months
Processing – two weeks for law firm, 2 months for audit, 2.5 months firm’s report on Investor’s source of funds (although this report may be prepared concurrently or in advance).
All I-526’s approved – 5 months after last unit submitted 5 months
All capital released to investment approximately 12 months after start date.

What Do Investors Want?

Foreign investors seeking EB-5 visas are generally not interested or motivated by the potential investment returns of a particular project. First, many come from Asia and perceive the investment opportunities available to them in their home countries to be superior to investments in the U.S. Many consider the U.S. a place to safely hold or spend money, rather than a place to make money. Investors are primarily motivated by the green card benefit; particularly the benefit to be enjoyed by their spouses and children...especially access to U.S. higher education.

Investor concerns and motivations are generally ranked as follows:

No Immigration Law risk: there is little interest in projects that push the edge of the regulatory envelope or seem at risk not to create the 10 jobs required. If the petition to remove conditions (a.k.a. “I-829”) is denied, the investor receives an immediate demand from USCIS to leave the U.S.
Limited or no risk of loss of invested capital: while the EB-5 regulations require the investor’s capital be “at risk,” EB-5 investors are no more willing than traditional investors to undertake risky projects. There is a strong preference in the market for transactions that are collateralized or where the assets of the entity receiving the investment are unleveraged real estate.
Assured Return of Capital within 5 years: investors do not want to be stuck in a long term deal. They want their funds returned within 5 years and the project’s business plan and structure of investment must provide such assurance. In the case of a real estate based investment, such exit might come from the sale or refinance of the asset – and the likelihood of such an event will be an important investment decision element. Many current projects involve two-tiered investments, where the regional center investment entity makes a secured loan to a downstream credit-worthy borrower with a 5 year term for repayment of principal. Again, the prospects of refinance or sale of the underlying assets are a material decision point. Investments in rated securities (i.e. industrial revenue bonds, collateralized mortgage bonds or the bonds issued by state agencies or municipalities to fund discrete projects) may have terms in excess of 5 years, provided that investors are fully informed that liquidation of such bond investments carry interest rate risks that may inflate or deflate the value of such bonds.
Return on Investment: This is way down the list of concerns for the investor. Investors will accept a very modest return on investment, provided that the deal as a whole is reasonably fair as between the investors and the general partner/regional center.

What is the value to recipients/consumers of EB-5 Capital?

Money not otherwise obtainable: EB-5 capital is available to industries and projects which are currently not financeable in the traditional capital markets or available from limited state and local government capital budgets. This includes both private for-profit projects and government and quasi-government borrowers whose capital budgets are sharply constrained by current economic conditions.
Money obtainable at below market rates: because EB-5 investors are looking to the green card benefits as their principal compensation for investment, they are willing to accept financial returns far below market. This would enable credit worthy government or agency borrowers (i.e. hospitals, or universities, or water and sewer districts) to borrow 100 or 50 points below the normal bond market rate, and to avoid bond underwriting costs.
Money obtainable with flexible terms and structures: EB-5 projects may be structured on an interest only basis or with deferred payments of interest or other flexible terms, not available from traditional sources.

How are investments structured?

Most investments follow one of two structures: a single investment tier or a two-tiered structure. Single tiered investments involve creation of an entity, usually a limited liability company or limited partnership, where the managing member or general partner is the regional center or an affiliate of the regional center. Since USCIS regulations permit no legal guarantees or agreements for protection of, return of, or return on capital to run directly between the investment entity and the EB-5 investors, investors look to the nature of the investment itself for protection, hence a preference in such deals for unleveraged real estate. See one-tier structure below:

Flow chart of EB-5 investment structure

Increasingly today, EB-5 investments are structured on a two-tiered basis. Whereas EB-5 regulations prohibit any guarantees or commitments running directly between investors and the entities in which they invest, there are no prohibitions against such arrangements as between the investment entity and an end-user of capital, except that the EB-5 capital must be “at risk.”

Therefore, investors seek now to obtain all of the protections and certainties in a two tiered structure which they cannot obtain in a single tier structure. Most commonly, the foreign investors invest in a new entity, “NEWCO,” which in turn, makes a secured, collateralized loan to the operating company consuming the capital, “OPCO.” The loan will have collateral (security against loss of capital) in the form of a mortgage or UCC filing on personal property (e.g. equipment), a five year repayment term (fixed term for return of the investors capital), and a specified interest rate (fixed or floating return on capital). Since these loan agreements and security run between NEWCO and OPCO, and do not run directly to the investors, EB-5 regulations are satisfied. Of course, via NEWCO, investors run the risks of market interest rate changes and repayment that attach to any creditor – placing their capital “at risk.” See typical two tiered structure below:

EB-5-chart2

Mixed Investments

IMPLAN, RIMS II and other econometric models frequently do not generate sufficient job creation per $500,000 invested to meet the 10-job requirement in more capital intensive industry classifications. Thus, it is common to employ “job creation leverage” (see Page 1) by combining EB-5 funds with monies from other sources. Additionally, EB-5 Investors perceive reduced risk when co-investing with other non-EB-5 investors. This is particularly true in a lending context, where the borrower may be an institution or government entity that is funding its capital budget through a variety of public and private sources. For loans, the EB-5 money may be invested pari-passu with another lender, or as a loan-participation with a more traditional lender. EB-5 money as debt may also be combined with grants or equity funds in a total funding package. Again, this enhances job creation which is allocated under EB-5 regulations 100% to EB-5 investors, but based upon the total of EB-5 and non-EB-5 debt and equity capital employed.

Some Successful One-Tier Investments by Regional Centers

American Life, based in Seattle, WA has raised over $400 million for multiple projects over the past 5 years including a 200-room Marriott Hotel and a $70 million office building, as well as many smaller redevelopments and adaptive reuses of industrial and warehouse properties. It is currently marketing an $80 million office building. All are unleveraged real property investments.

WORC, based in Bellingham, WA has raised over $30 million to fund development of several senior-assisted living projects, which include condominium apartments rented to seniors and provision of medical and other services to the tenants.

Jay Peak, based in Vermont, is a redevelopment and expansion of an existing ski resort to provide new condominium projects, a golf course and other amenities to transform the facility to a year-round resort. Over $50 million has been raised.

RCI/Pathway, a project of the Milwaukee Regional Center, has reportedly raised over $40 million to complete two substantial urban renovation projects in the Downtown.

CMB, based in Central California, reportedly has successfully raised over 230 million for warehouse and industrial park development projects on 7 former military bases.

Some Successful Two-Tier Investments (loan structures) by Regional Centers

Can-Am, based in Los Angeles, reportedly is completing a $100 million offering to fund an entity that will in turn finance film production projects, all secured by a guaranteed film distribution agreement with Time Warner. Can Am has previously completed numerous real estate based projects in Philadelphia (redevelopment of Navy Yard) and Pittsburgh.

The South Dakota Regional Center has raised over $150 million for the Basin Electric projects, an additional $50 million for the FPL Day County Wind Farm Project, $32.5 million for the Deadwood Mountain Grand Hotel, Casino & Event Center and $55 million for two turkey processing factory projects.

The Upstate NY Regional Center is nearing completion on a $10 million financing for a hospital’s purchase of imaging equipment for a new cardio-vascular research and clinic care facility. A related second project is a $33 million parking garage, for which EB-5 capital provides $5 million. Follow-on hospital related financing projects totaling over $90 million of EB-5 funding are in development.

The City of Dallas Regional Center is now in the market with a $15 million raise for a loan to a large hotel development and management company to fund a reservations call center and new hotel projects.