The Immigrant Investor Program, also known as “EB-5” and administered by the U.S. Citizenship and Immigration Service (USCIS), may be a viable option for some builders and developers to raise capital, and HBAs can play a significant role by acting as approved Regional Centers for job creation.
Congress created the EB-5 program in 1990 to stimulate the economy through job creation and capital investment by foreign investors.
When thinking about EB-5, builders and developers need to examine several factors: The time, effort and upfront expense required to pursue funding through the EB-5 program makes it most applicable to projects that require at least $8 million of EB-5 capital. EB-5 investments are typically just one piece of a capital stack, and it is typically not possible to finance 100% of a project’s costs with EB-5 funds. Some developer equity and/or conventional financing is usually required by investors or in order to meet the program’s job creation requirements, which require the creation of at least 10 jobs per EB-5 investor.
The EB-5 program has been used more often for non-residential developments. However, there are opportunities for financing residential projects if the builder or developer can meet the program criteria, and residential projects funded with EB-5 money are becoming more common.
Advantages and Challenges for Investors, Builders
The incentive for foreign investors is issuance of a green card for themselves and their immediate families (spouse and children). If the project is successful, the investors have the opportunity to recover the investment (although no guarantees can be provided), earn a return on their capital, and achieve permanent residency status for themselves and their families.
In exchange, the EB-5 program may offer builders/developers a significant amount of capital at a lower cost. An EB-5 investor typically expects a return of between 0.5% and 3% on the capital for a term of five years, although each investment agreement will have its own individual terms, including interest rate and length of time. Investments are required to be "at risk" and investors cannot require or be given a guarantee that they will receive a return on, or a return of, their capital.
The EB-5 approval process may take up to a year or longer and it may cost a developer more than $100,000 in attorney and program fees to create an EB-5 compliant investment offering. In addition to the upfront expenses, fees for marketing, immigration brokers and regional centers can be added to the interest rate raising the cost of capital over and above the investors’ expected return.
It's All About the Jobs
Because EB-5 is intended to stimulate employment, the program has specific, mandatory job creation targets. Each EB-5 investment must create at least10 full-time jobs, or 35 hours per week, that last a minimum of two years, and meeting this requirement can be a hurdle. These jobs may include indirect jobs (i.e. those not created directly at the entity into which the investor is investing) if the EB-5 is sponsored through an approved Regional Center. The number of indirect jobs that will be created by a project can be predicted using a specialized economic model, which is typically based on construction expenditures or other inputs.
Builders should focus on whether they could realistically achieve the job creation requirements when considering whether to utilize funding from EB-5 investments. The number of jobs that will be created by a project determines the amount of EB-5 capital that can be raised for that project. Also, job creation is essential to the investors obtaining their green cards, so whether the project is likely to meet its job creation targets is a factor that will be looked at carefully by potential investors, and will affect the marketability of the project as an EB-5 investment.
Investment Requirements and Options
The program generally requires an investment of $1 million per foreign investor. But, the required investment is $500,000 for projects in rural areas or areas of high unemployment – called TEAs or Targeted Employment Areas. These are rural areas outside a designated Metropolitan Statistical Area or the boundary of any city or town having a population of 20,000 or more according to the U.S. Census, or an area that is experiencing an unemployment rate of at least 150% of the national average. The authority to designate a specified geographic territory as a high unemployment TEA has been delegated to the States. A state may designate a district comprised of one or more census tracts, or other political or geographic subdivisions that meets or exceeds 150% of the national unemployment rate.
There are two investment options: the direct investment or investment in Regional Center.
For the direct investment, the investor must serve in a management capacity of the company or project. This direct investment option requires direct job creation, which is a more stringent calculation.
When working through a Regional Center, the investor typically has no operational control over the project, and can benefit from indirect job creation, including employees added by subcontractors, making the 10-job minimum easier to meet. It is important to note that proving indirect job creation is highly scrutinized by USCIS and requires a specialized economic analysis that meets specific criteria. That said, the Regional Center program is the most favorable program for home builders because of the ability to count indirect jobs — and because a home builder, developer or HBA can apply to be a Regional Center for the purposes of hosting its own projects (or the projects of others for a fee), or can have an individual project sponsored by an existing Regional Center.
Applicants must submit a wide range of documents in their filings. For instance, an economic analysis is needed to provide job creation estimates and, if applicable, to support the TEA designation request. Among other requirements: a private placement memorandum, feasibility study, business plan, marketing plan and an immigration filing (I-526 application).
Foreign investors must also use this detailed information to support their visa application, and the approval process can take up to a year.
Investments are not guaranteed. USCIS makes it clear in their communication to investors that EB-5 is an “at-risk” program and it is illegal for an investor to require any sort of corporate or personal guarantee in return for financing.
Connecting with Foreign Investors
Builders and developers find foreign investors through personal contacts, immigration brokers, existing regional centers or other experts.
Investors will likely expect the builder/developer to have some of their own equity in the projects.
Step by Step
The first step is to determine if the project will reasonably meet the job creation requirements. In most cases, this analysis would be done in consultation with someone experienced with EB-5. Also, the amount of money needed, the construction schedule and cost of the application process are important factors to consider.
Determine if the project could be eligible for a TEA designation, which allows for the lower investment amount of $500,000 and may open the door to a larger pool of investors. This application for TEA designation is one of the first steps because it will set the level of investment.
The economic analysis demonstrating the job creation is another critical early step in the process, particularly since the investor’s visa(s) are tied to the job creation requirement. Again, this analysis must meet specific USCIS criteria.
Create a private placement memorandum (PPM).
Determine if either a direct investment or Regional Center path is optimal for the individual circumstances.
Contact foreign investors. Typically, this is handled through brokers with existing contacts. (Please note there are many regulations governing this process, including SEC requirements.)
Contact an existing Regional Centerto see if the project/company meets the specific industry, location and other requirements. Because regional centers are private entities, it is important to do appropriate due diligence: Speak to others who have used that Regional Center, speak to the Regional Center’s counsel, etc.
Apply to become a Regional Center – either for the individual project or the company. This requires ongoing administrative processes and staff to monitor the investments and file the paperwork. The application process may take up to nine months.
The investor must submit an immigration application. The PPM, economic analysis, business plans, and other documentation must be included.
Because of the complexity of the program which includes financial agreements, immigration filings, foreign investors and securities laws, builders/developers should consider engaging expert advice on navigating through the process.
The EB-5 Resource Center, LLC
Laura Foote Reiff
Greenberg Traurig, LLP, Business Immigration & Compliance Group
Daniel B. Lundy, Esq. (N.Y. Bar only)
Klasko Rulon Stock & Seltzer, LLP
1800 John F. Kennedy Blvd., Suite 1700
Philadelphia, PA 19103
*NAHB has not researched, verified or vetted the financial health, stability or professional abilities of any of the firms or individuals listed. NAHB makes no representations, guarantees or warranties as to, and assumes no responsibility for, the use of any of the listed firms or individuals or any services they may provide. NAHB expressly disclaims any and all liability for damages of any kind arising out of the use or performance of the services provided by the listed firms or individuals. Similarly, NAHB does not offer any representations regarding compliance with the laws or regulations applicable to these firms or individuals, or to the services they may provide.
Please note: This page is intended to familiarize NAHB members with the EB-5 Immigrant Investor Program. It is not a comprehensive treatment on the subject matter, and should not be regarded as such. This article in no way constitutes an opinion of law, financial or tax advice. For those interested in pursuing EB-5 investment funding, a qualified attorney or experienced financial planner should be consulted to determine matters of feasibility and application to your particular business needs and circumstances.