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
$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
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
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
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
Start time: all project documents prepared for offering
Marketing 40 units ($20 million) -
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
All capital released to investment approximately 12 months after
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
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
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
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
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
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
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.