(Source: National Real Estate Investor) The discussion of the EB-5 Immigrant Investor Program has
been squarely focused on gridlock on reforms that have been dragging out for
the past two years. But while Congress continues to delay any concrete
decisions on modifications to the program, it has been full steam ahead for
developers looking to access the low-cost source of capital. The cloud of
uncertainty surrounding reforms and long-term renewal of the program is acting
as a deterrent for developers who are new to the program. However, seasoned
developers who have used EB-5 previously are still very active in the market,
says Roy Carrasquillo, a member of the immigrant investor program services and
compliance practice at Cozen O’Connor in New York City.
“Despite the challenges and despite the fact that we know
this law is in a state of uncertainty, the environment for EB-5 is very healthy,”
notes Julian Montero, a partner and vice chair in the Miami office of Saul
Ewing Arnstein & Lehr LLP and a member of the firm’s corporate transactions
& counseling practice group and immigration practice group. Saul Ewing
Arnstein & Lehr currently has two developer clients that are in the process
of finalizing documents for hotel projects in Southern Florida. “So
there is still activity in EB-5 despite all of the noise,” he says. First
introduced as part of the 1990 Immigration Act, EB-5 is an incentive program
for foreign investment into the U.S. that trades green cards for capital.
Typically, EB-5 money is used to finance economic development and create jobs,
especially in urban areas with high unemployment. The most recent data
available for 2013-14 shows that more than 11,000 immigrant investors provided
$5.8 billion in capital for 562 active EB-5 projects that produced a combined
174,000 jobs, according to a January 2017 report from the U.S.
Department of Commerce.
EB-5 marketplace
continues to evolve
Although potential reforms have been dominating much of the
conversation about EB-5, the niche market has been adapting to other major
shifts in the marketplace. The big draw for developers is that EB-5 represents
a low cost source of mezzanine capital, with a cost of about 5 to 7 percent
as compared to the 10 to 12 percent that is more the norm for mezzanine
financing. Developers have been working harder to expand the EB-5 investor pool
as interest has cooled from Chinese investors. China has been a dominant
source of EB-5 capital, representing about 75 percent of the market, notes
Montero. Each country is allocated a certain number or share of EB-5 visas that
its citizens can obtain. Once that maximum amount is reached, the visas go into
a process of retrogression, effectively a logjam with people waiting longer to
obtain their visas. China hit its retrogression in 2014. “This factor is
certainly causing a chilling effect for the Chinese investor who would have to
make their investment today and potentially wait seven to 10 years or more before
they would get the benefit of their resident status,” says Montero. The typical
wait time for investors from other countries is five to seven years.
That pullback from Chinese investors is forcing developers
to expand the scope of EB-5 fundraising efforts to other countries, and it is
also reducing the size of fundraising amounts. In the past, developers would
market very large deals in China of $50 million to $100 million. It is taking
longer to raise those larger dollar amounts. So the deal size is shrinking to
$5 million to $25 million, and developers are more actively marketing deals in
other countries. Regions that have become increasingly active include Latin
America, such as Venezuela, Columbia and Brazil, as well as India and some
countries in the Middle East. On a positive note, one sign that the EB-5 market
is maturing is that more alternative lenders are comfortable stepping into the
gap to provide bridge financing for EB-money, notes Carrasquillo. EB-5 money
can take more time to assemble and the bridge lenders allow a project to
commence while that EB-5 money is falling into place. Raising EB-5 capital
requires compliance with U.S. securities laws and it typically takes about nine
to 12 months to assemble.
Another looming
deadline
Since the EB-5 program officially expired in September 2015,
it has received a series of short-term extensions as Congress has worked to
come to terms on proposed reforms. The latest extension is set to expire
on Dec. 8. It would be surprising if the program didn’t receive another
short-term extension sometime in the next few weeks. Part of the delay on
reforms and a long-term renewal is simply due to the fact that Congress has had
a lot on its plate with healthcare reform, the broader issue of immigration
reform and now tax reform. “We all know that there are a lot of bigger
issues that Congress and politicians in general are dealing with right now,”
says Montero. Most legislators agree that modifications are needed, but they
have yet to come to terms on specific details of those changes.
Reforms are expected to include an increase to the current
investment amounts. Foreign nationals can qualify for a visa by investing a
minimum of $1 million in a development, or $500,000 if it is invested in a
qualifying Targeted Employment Areas (TEAs). Those minimum amounts have not
changed since the program was first introduced in 1990. It is widely expected
that those levels will increase, though it’s not yet clear by how much. Another
sticking point is the definition of qualifying TEAs. The whole premise behind
EB-5 investment is to spur economic development and job growth in blighted or
needy areas. Ninety-nine percent of EB-5 projects are located within bigger
states and cities such as California and New York. “I think that EB-5 is here
to stay. The benefit that brings for job creation and economic development, at
no cost to taxpayers, is something that is really valuable,” says Carrasquillo.
“But at the same time there is tension where different states have different
interests.”
A third important piece to the reform will be more
compliance and oversight. Those reforms will help a more mature EB-5 program
resemble more traditional financing, which will be good for the program, adds
Carrasquillo. “Particularly on that point, a lot of developers and people using
EB-5 capital within their projects are already implementing those best
practices and those financially sound compliance and oversight measures,” he
adds.