EB-5. Love It or Hate It?
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[Editor's note: Feinberg is a GlobeSt.com Thought Leader and director at Ackman-Ziff, one of GlobeSt.com's thought leaders.]
With growing frequency, we hear more clients ask about EB-5, an innovative financing alternative that can benefit developers, communities and those seeking permanent residency in the US. “EB-5” is an abbreviation that stands for the fifth preference employment-based immigrant visa program administered by the United States Citizenship and Immigration Services (USCIS). The program has been utilized in projects like the Atlantic Yards in Brooklyn; the Jay Peak ski resort, in Vermont; and dozens of hotels developed by Marriott, Hilton and Starwood.
With the EB-5 program, foreign nationals have the opportunity to invest $500,000 to $1 million toward a new commercial enterprise. The regional center, a legal entity as designated by the USCIS, aggregates a pool of capital and deploys it in an enterprise that can create at least 10 permanent jobs per each foreign investor. If job creation is proven successful, investors will each receive a permanent green card. Currently over 90% of the foreign investors come from China.
When compared to conventional construction financing, EB-5 has several notable advantages.
Rate: The foreign investors generally have three objectives, in this order: (1) obtaining a green card; (2) getting their money back at the end of the term; and (3) a return on their investment. Since the return is less of a priority than for typical lenders, the EB-5 entity can often justify charging a lower interest rate.
Scale: With EB-5, a developer can secure hundreds of millions of dollars from a single source, whereas a conventional construction loan of the same size would require a syndicate of multiple banks.
Pre-leasing: One major advantage, especially for retail and office properties, is the ability to secure a loan with relaxed pre-leasing requirements, in some cases none at all. That can be a tremendous attraction when more conventional lenders demand 50-75% pre-leasing before considering a new construction loan.
Recourse: Another huge edge is the absence of a repayment guaranty, the kind of recourse that can keep a developer up at night. EB-5 loans only require a completion guaranty.
That is not to say that EB-5 isn’t without its disadvantages.
Long process: The most frustrating aspect of EB-5 is the time between a loan request and the funding of full proceeds. The entire process can take one to two years…or longer. Not all developers have the patience for this, as most are looking to complete their project quickly before the market turns.
Legislative risk: Currently, the EB-5 program has been extended until September 30, 2015, but extending the program beyond that will require the cooperation of congress.
Ongoing obligations: Finally, there are the ongoing USCIS reporting requirements.
Bottom Line – Be Smart: There are now over a hundred approved regional centers in the US, plus enough applications to more than double the total number. As the competition heats up, it becomes vital that borrowers choose a regional center wisely. One bad deal can jeopardize a regional center’s reputation and ability to attract capital. And the stakes are high for foreign nationals, who can potentially be deported and lose their initial investment. A few recent horror stories illustrate this point.
In Chicago, the SEC sued a businessman for making false representations to foreign investors that he had acquired all necessary building permits and had signed up several major hotel chains for a conference center. In Vermont, a regional center rescinded its approval for a project when it discovered several material misrepresentations in the application. In Virginia, an electric car enterprise has been accused of being a visa-for-sale program without the ability to create the required jobs.
No two regional centers are alike and there is no reason to believe that the loan terms you receive from one will be similar to the terms received from another. I encourage all developers to consult with a knowledgeable advisor to help you navigate through the EB-5 process and explore all financing avenues – including more traditional bank lenders. Considering the time between first applying for EB-5 and full funding, it is crucial to start exploring your options as early as possible.
For MORE insights on finance trends, check out Ackman Ziff's "Capital, Fueled by Innovation" home page, which provides Thought Leadership positions on a variety of commercial real estate trends, transactions and movement.
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