4 August 2014
Frequently Asked Questions about EB-5 project financing
for new hotel development
Jim Butler and Jonathan Bloch
Partners, Jeffer Mangels Butler & Mitchell LLP
Why is there so much buzz about EB-5 financing?
In the last five years, EB-5 financing has become extremely popular in development circles and is being widely used by mainstream, institutional players including government entities such as port authorities, major hotel brands like Marriott and Hilton, and some of the largest owners of hotels and restaurants. EB-5 financing has provided low-cost, non-recourse, five to six year term financing for construction and development of new projects and offers a number of advantages to developers.
What is EB-5?
EB-5 is a provision in the United States immigration laws. It is the fifth “Employment Based” immigration provision providing expedited visa processing (hence “EB-5″). The program is a win-win-win arrangement giving wealthy immigrants the opportunity to earn a “fast-track” for a US green card if they make an investment of $500,000 or $1 million, and create a minimum of at least 10 permanent US jobs. In return, communities get the benefit of economic stimulation created by this investment and the new jobs. And developers get a valuable source of financing for new projects that is otherwise more difficult to obtain.
Is EB-5 funding available for new development and new construction?
Because foreign investor money must create NEW US jobs, construction and development projects are the normal target of EB-5 financing investment. Although the law does not restrict the nature of the investment to real estate, foreign investors have demonstrated a clear preference for real estate-related projects, particularly hotels, restaurants and resorts. EB-5 financing can also be used to add new facilities to existing ones, such as a new tower of hotel rooms, a spa, a restaurant or nightclub. And, in limited circumstances, EB-5 financing can be used to rescue a bankrupt or failing business, but this exception is difficult to use.
Can I use EB-5 funding to buy an existing project?
Unless a project is in bankruptcy or is failing, EB-5 financing cannot be used for acquisition, because the money will not create 10 new US jobs per EB-5 investor. As noted above, EB-5 financing might be used to add new facilities to an existing project which will meet the new jobs creation requirement.
Is there any limitation on the kind of project funded with EB-5?
There is no limitation in the law as to the type of project that can be funded with EB-5 financing. The critical requirement is that the minimum number of 10 new US jobs for each investor will be created within a specified period of time. However, in order to raise money from foreign investors, the project must satisfy the investors’ critical need for certainty that the project will be completed on time and create the necessary jobs in satisfying the EB-5 requirements so that the EB-5 investors will obtain their green cards. Secondarily, the project must also be attractive from an investment standpoint in providing a high degree of comfort that the project will be able to repay the investment in five or six years (whether the EB-5 financing is structured as debt or preferred equity).
Analysts estimate that 80 to 90% of all EB-5 investors select real estate-related investments, particularly those that create a large number of new US jobs such as hotels, restaurants, night clubs, resorts and senior living. However, we have assisted clients in successfully closing EB-5 financing on solar projects, high tech, entertainment, and projects in other industries.
Certain classes of real estate are problematic for EB-5 investment because of the “tenant occupancy” issue. The USCIS currently takes the position that a project cannot count the jobs created by tenants leasing space in a property. Thus the USCIS generally says that a developer cannot count any of the jobs that are created by its tenants, such as retailers leasing space in a shopping center, or by the businesses that lease office space in an office building. And unfortunately for the EB-5 job count, the developer/owner is likely to have few employees of its own at a shopping center, office or multi-family project.
How much does EB-5 money cost?
As of this writing in 2014, EB-5 financing for “preferred” developers typically costs 5 to 7% per annum to the developer on an all-in basis. The foreign investor usually receives 1% or less on his investment, and the rest of the per annum cost goes to pay for all the infrastructure and personnel involved in selling the project, raising the money and EB-5 compliance, securities compliance and administration.
How do I know if EB-5 will work for me and my project?
Generally speaking, however, it will be essential that your project is in a TEA (or Targeted Employment Area, described below) because more than 90% of all EB-5 investors over the past 3 years chose projects where they could make the minimum $500,000 investment. This minimum investment is only possible when the project being financed project is located in a TEA.
After establishing that the project is located in a TEA, EB-5 feasibility will be determined by all the relevant factors. These include the developer’s track record of success with similar prior projects, the developer’s financial stability and reputation, and the project’s financial viability. Another series of factors relate to the comfort level that the project will meet all of the EB-5 requirements for investors to get their permanent visas. For example, what assurance is there that the minimum number of jobs will be created, the project will be completed and opened on time, and the project will be able to repay the investors’ money at the end of 5 or 6 years?
Of course, in addition to a high quality developer, project, and deal structure, the EB-5 team should be “best of breed” in order to succeed in this competitive environment as ever-more developers seek EB-5 capital. If the due diligence, deal structure, marketing, escrow releases and other elements cannot be properly executed, even strong offerings will fail to attract sufficient EB-5 investor interest.
What is a regional center?
A regional center is an entity that has received formal approval by the US immigration service (the USCIS) of an application to be designated as such. As of July 2014, approximately 532 regional centers have been approved by the USCIS, but less than 10% of those have ever raised significant EB-5 financing, much less gotten their immigrant investors’ permanent visa approvals through the I-829 process. Virtually all of the successful EB-5 financings to date have been handled by the top 10% of the regional centers. They have been established for some time, have a strong infrastructure in both the United States and China, have built reliable marketing organizations, and have worked out procedures, documentation, and logistics to evaluate new EB-5 projects.
A substantial amount of work is required to underwrite a deal, consummate arrangements with the developer, prepare the project marketing program and materials, sell projects overseas, and get the funds released for deployment by the project. In addition to the transaction work of making deals and raising capital, the regional center must also insure compliance with securities and immigration laws. And above all, the regional center must establish a track record of success in obtaining permanent visas for its EB-5 investors, because the regional center’s ability to raise capital in the future will depend upon being able to establish a high probability of success in getting green cards for its projects based on its prior performance.
Do I need a regional center?
A regional center is NOT REQUIRED to be used for EB-5 financing. However using a regional center increases the critical job count (the requirement of 10 jobs per investor) by counting direct jobs, indirect jobs, and induced jobs for a project in accordance with one of four pre-approved economic formulas. This usually results in a calculation of jobs created that are a significant multiple of those that result without a regional center. A multiple job count for EB-5 calculations means a multiple of EB-5 capital that can be raised.
Should I form my own regional center?
Rarely should a “preferred” developer form its own regional center. See discussion below for what this means. See Hotel development & EB-5 financing: Why you don’t want to form your own regional center.
Here are some of the relevant considerations for and against forming your own regional center.
The “advantages” of forming your own regional center are touted by certain immigration lawyers and advisors who stand to earn $100,000-$200,000 in fees for helping you form the regional center. Why should you pay someone else to serve as a regional center for your deal when you can have your own? Maybe you could shave 1% or 2% off the cost of your EB-5 financing. Perhaps you could have greater control over the fund raising process. You could hand-select the marketing agents who will sell your offering. You can use the regional center for future deals and turn it into a profit center for handling other developer’s projects.
If the developer cannot qualify for “preferred” status, to a greater or lesser extent the developer may find itself forced into the “immigration business” if it wants to use EB-5 financing. The developer may form a regional center, seek to identify regional centers to “rent,” or otherwise cobble together marketing agents and other components of the EB-5 capital raising chain. This is a difficult, time-consuming and somewhat risky course to set unless the developer fully understands the nature of the commitment, effort and capital likely to be required. Operating a regional center means running a complicated business that requires financial skills, a deep, working understanding of the immigration business, and most importantly, establishing and maintaining a great network of contacts overseas in order to raise capital.
The developer forming its own regional center will be competing with a handful of dominant players who have been established for many years. They have spent a vast amount of time and money to build their presence in China, along with their marketing organization, infrastructure, systems, forms and reputation amongst the EB-5 investor community.
An extraordinarily high percentage of developers who initially believe they want to form their own regional center and build their own EB-5 infrastructure will ultimately abandon their path. Although we can help clients establish a regional center and related infrastructure, developers need to understand this alternative involves setting up and operating an entirely new business – the immigration business. It takes a long time to get regional center and project approvals, and even longer to push projects all the way through the EB-5 pipeline so that you can show new investors that all your prior investors got their green cards.
Most of our clients find that it is far better to connect with and rely upon well-established major players in the EB-5 financing chain. We serve as Counselors to assist them through this process.
What is a TEA?
In the EB-5 world, TEA is not pronounced like the hot drink. It is pronounced by naming each of the capital letters in its name, e.g. “T”… “E”… “A” and those letters stand for “Targeted Employment Area.” TEAs are either certain narrowly defined rural areas, or other specifically defined geographic territories where the unemployment rate is 150% of the national unemployment rate. Determination of whether a project is in a TEA is critical, because 90% of all the EB-5 investors for the past three years invested in projects in TEAs. This is the only way the EB-5 investors can make the minimum $500,000 investment for the expedited process to get a green card under EB-5. If the project is not in a TEA, then the immigrant must invest a minimum of $1 million, and only 10% of the foreign investors have done that over the past three years.
Every jurisdiction has its own rules for determining TEAs. Some, such as the state of New York, are extremely liberal. Other states, including California, are much harder to work with, but there are a variety of ways to configure a census map to qualify as a TEA. Once you know why it is important to have your project in a TEA, don’t waste any further time on this yourself. Call an expert and see if we can get you a TEA letter for your project.
How much money can I raise?
There is nothing in the EB-5 regulation scheme that sets a limit on the amount of money that can be raised for a project under the EB-5 program, except the requirement that at least 10 new US jobs must be created for each EB-5 investor within the specified time period. So the calculation of new US jobs is one of the most critical factors in determining the maximum amount of EB-5 financing. As noted elsewhere, regional centers are often employed because where they are used, the new job calculation for EB-5 purposes is not limited to the direct, full-time employees with W-2s, as it would be otherwise. With a regional center, new jobs include those direct jobs as well as indirect jobs and induced jobs.
After the crucial jobs creation requirement, the other major factor affecting how much EB-5 capital can be raised is the attractiveness of the deal to your marketing organization and the EB-5 investors. These players tend to prefer that the EB-5 investment be limited to 30 or 40% of the total project cost. They want to see substantial equity and they want to see that all other parts of the capital stack are in place to help ensure that the project will be completed on a timely basis, and that at least the minimum number of EB-5 jobs will be created for all investors to qualify for their permanent visas.
With good advice, the amount of money raised by EB-5 can be optimized with proper sizing and positioning of the capital stack and structure of the overall deal.
Other articles on EB-5 Financing
Other articles on EB-5 Financing
To access other articles on EB-5 financing, go to www.HotelLawyer.com, scroll down the right-hand side under LEARN MORE ABOUT and click on “EB-5 Financing.” For your convenience, here are a few popular EB-5 articles that may be of interest:
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $68 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
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