LOS ANGELES—The EB-5 investor visa program, administered by the US Citizenship and Immigration Services has raised hundreds of millions of dollars for real estate development throughout the United States over just the past five years, according to Catherine DeBono Holmes, chair of the investment capital law group at Jeffer Mangels Butler & Mitchell LLP, who has represented more than 50 real estate developers in obtaining EB-5 financing for their projects. “Some of the largest real estate developers in the country, including Related Cos., Silverstein Properties, Forest City Ratner, and many others, have raised hundreds of millions of dollars through the EB-5 program to help finance their largest real estate developments,” she says. “Smaller real estate developers have also been successful in raising EB-5 financing to support their development projects.”
There have also been some EB-5 financed projects that have failed, and some cases of blatant fraud by a few bad actors, she notes. “The recent Fortune Magazine article about the Chicago Convention Center case that occurred in 2012 painted a dark portrait, making it appear as if this one case was representative of the entire EB-5 program. The article failed to present an accurate portrayal of the EB-5 program as a whole, failed to mention the multitude of EB-5 financed projects that have succeeded, and caused confusion among real estate developers about whether or not EB-5 financing is a viable source of capital for their projects.”
In response to the questions real estate developers are asking today about whether they should consider EB-5 financing as a potential source of capital for their projects, we talked with DeBono about some key facts about the requirements, timing, marketing, risks and recommended procedures for EB-5 financing.
GlobeSt.com: What are the most important elements of a successful EB-5 financing?
Catherine DeBono Holmes:
- Type of investment—any new business that creates at least 10 new, permanent, full-time jobs per investor can technically qualify for EB-5 financing, but the most popular projects among EB-5 investors are hotels (particularly branded hotels), large multi-family apartment and condominiums, assisted living and mixed use developments.
- Strong developer—EB-5 investors are looking to invest with developers who have a track record of successful development with the size and type of project they are offering for investment.
- Developer equity commitment—EB-5 investors prefer to invest in projects where the developer has its own equity “at risk” in the event the project fails. Developer equity can include cash equity and the appraised value of land contributed by the developer to the project.
- Financing commitments for the entire project cost—EB-5 investors will ask a developer to demonstrate committed sources of financing for the entire project. Financing does not need to be in the bank when the EB-5 financing is raised, but developers should be able to produce term sheets or indications of interest from a senior lender and any other key sources of financing.
- More than adequate job count—every EB-5 investor must provide reasonable evidence to the USCIS that at least 10 new jobs will be created for every investor visa issued. EB-5 investors and marketing agents will require a cushion of 25% or more in the job count.
GlobeSt.com: How long does it take before a developer receives the proceeds of an EB-5 financing?
Catherine DeBono Holmes:
- Marketing EB-5 investments—EB-5 investments are sold almost entirely outside the United States, and primarily in China. Marketing is conducted through an established network of licensed emigration agents and consultants in China. The time required to sell EB-5 investments will vary for each investment. Some projects may take a few weeks, while others can take more than a year to sell out.
- Release of EB-5 funds—the proceeds of most EB-5 investments are deposited into an escrow account with a U.S. bank, though this is not a legal requirement. Conditions for release of EB-5 funds vary considerably, but many EB-5 offerings provide for release of funds before all EB-5 investors receive approval of their visa petitions from USCIS, because that approval process can take from 12 to 16 months from the date each visa application is filed. It is common to provide for the developer to obtain a “bridge” financing, which can be either debt or equity, and the EB-5 proceeds are used to pay off the bridge financing.
GlobeSt.com: How much does EB-5 financing cost?
Catherine DeBono Holmes:
- Transaction costs – the developer will usually pay the costs of preparing the offering documents and some of the costs of marketing. Total transaction costs can range from $100,000 to $200,000, depending on the size and complexity of the offering.
- Cost of EB-5 funds – the developer will typically pay 5% to 7% per annum for EB-5 financing through the approximately 5 year term of the financing. This amount will be split among the various parties involved in the offering, including the regional center, marketing agents and investors.
GlobeSt.com: What are the risks of using EB-5 financing and how does a developer protect against those risks?
Catherine DeBono Holmes:
- EB-5 is a developing market with many inexperienced participants – find out as much as you can about who you are dealing with before you hire them–There are a number of people who claim to be experts in EB-5 financing, or claim to have “hundreds of investors” waiting to sign their next deal. Since there are no databases with information about prior offerings, some developers have hired consultants based on promises they cannot fulfill. A developer needs to ask for references and information about the prior EB-5 experience before hiring anyone to be part of the developer’s EB-5 team. EB-5 financing requires specialized knowledge and experience of its legal requirements and marketing realities.
- EB-5 takes more time and effort than bank financing – be prepared for a long process and have a back-up plan – EB-5 financing requires documentation of the EB-5 offering, filing of applications with USCIS, preparing economic reports and market studies, and potentially answering questions raised by USCIS. The USCIS has denied approval to some projects that cannot meet the standards of proof required by USCIS. A developer needs to be prepared to find alternative financing if the EB-5 financing process takes too long or becomes too difficult to pursue.
- If a senior loan is also part of the capital stack the senior lender will need to approve the EB-5 financing terms – coordinate the senior financing and EB-5 financing before the EB-5 offering is marketed – A senior lender will usually restrict the collateral pledged to secure an EB-5 mezzanine financing, and this in turn will impact the structure of the EB-5 financing. This needs to be planned before the EB-5 offering documents are completed.
- EB-5 offerings are securities offerings and developers could face potential claims by EB-5 investors if misrepresentations are made in the offering or securities laws are violated – hire competent legal counsel to advise on these issues and review all offering documents – The developer should take prudent measures to assure that all EB-5 documents are accurate and fairly present the material facts and risks to EB-5 investors.