by Todd McNeill
Many of you may be reading about development deals getting financed with EB-5 loan products. What is EB-5 financing, who provides it, and what does the process look like?
First, the U.S. Citizenship and Immigration Services (“USCIS”) administers the Immigrant Investor Program, also known as “EB-5,” created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. There are two ways for a foreigner to utilize EB-5 to gain lawful permanent residence for himself and his immediate family—the Basic Program and the Regional Center Pilot Program.
The above referenced programs require that the immigrant make a capital investment of either $500,000 or $1,000,000 (depending on whether the investment is in a Targeted Employment Area [TEA] or not) in a new commercial enterprise located within the United States. TEA is defined by law as “a rural area or an area that has experienced high unemployment of at least 150 percent of the national average” and can be designated by the local mayor of any U.S. city.
In addition to the investment, the new commercial enterprise must create or preserve 10 full-time jobs within two years of the immigrant investor’s admission to the United States as a Conditional Permanent Resident. Upon the successful documentation of the job creation, the immigrant investor becomes a full EB-5 Visa resident of the U.S.
So, who provides this capital to the developers in our area? Regional Centers are set up in most every state in the U.S. to act as a “clearing house,” for lack of a better term, to promote projects that meet the requirements needed for foreign investors to secure EB-5 Visas. Regional Centers are defined as any economic unit, public or private, which is involved with the promotion of economic growth, improved regional productivity, job creation, and increased domestic capital investment.
When making an investment in a new commercial enterprise affiliated with a USCIS-designated regional center, an immigrant investor may satisfy the job creation requirements of the program through the creation of either direct or indirect jobs. An immigrant investing in a new commercial enterprise not utilizing a Regional Center may only satisfy the job creation requirements through the creation of direct jobs.
A Regional Center acts like a loan origination shop. Developers can submit their projects to the Regional Center to seek EB-5 Capital for their project. Regional Centers will review the projects and issue non-binding letters of intent that outline the terms of which a construction loan can be made utilizing the EB-5 program. If there is a “meeting of the minds” then a term sheet is executed, and the Regional Center goes to work to secure the capital on behalf of the developer by soliciting the deal to a number of EB-5 brokers that work with wealthy families from countries such as China, England, and India along with numerous South American countries, to name a few.
EB-5 Brokers work with families that are seeking EB-5 Visas to show them potential projects that are made available by the Regional Centers. As with any fair market competition, the best projects will get picked over very quickly by the EB-5 investors with the lesser quality projects taking longer to find investors or garnering no interest. It is important to understand that most of the EB-5 investors are knowledgeable about investing or they wouldn’t have the $500,000 or $1,000,000 to invest in the first place! Thus, and EB-5 deal must be structured correctly in order to get any interest. The business plan must be sound, with good sponsorship and real cash equity in front of the EB-5 investor’s first mortgage.
Generally, a sound project with the elements described previously will be fully subscribed in around 30 to 45 days from the time of submittal. As each investor commits his or her $500,000 (or $1,000,000 as the case may be) into escrow for a certain project, the investment is considered “hard,” being only subject to the immigrant investor passing a background check. The USCIS conducts a background check on each investor, which typically can take up to 6 months. Upon approval by the USCIS of each investor, the developer can then pull from the escrow account to utilize the funds for his or her project.
Typical market terms for a construction loan are up to 80% loan to cost, 4% to 6% interest, no amortization with the loan term not to exceed 7 years. There is typically a 2% origination fee paid to the Regional Center along with an ongoing nominal management fee also paid to the Regional Center. Recourse is negotiable.
If you have the time to wait for EB-5 financing, it can be the most aggressive construction financing available depending on the project. As outlined, the process can take up to 7 to 9 months depending on various factors. However, EB-5 financing does not discriminate projects like our commercial banking system does. EB-5 will make loans to projects in secondary and tertiary markets at leverage levels at which most banks won’t be able to compete. The EB-5 financing will consider out-of-the-box investments that most banks won’t even consider. Why does this inefficiency exist in the market? It is because the decision process regarding the individual EB-5 investor to make an investment can be summarized like this:
Criteria 1 – Will the project create the necessary jobs so that an EB-5 Visa can be secured?
Criteria 2 – Will I get my investment returned with no loss of principle?
Criteria 3 – Will I get a return on my investment?
In many cases, EB-5 investors only care about hitting criteria #1…securing the EB-5 visa, and if they lose $500,000 in doing so, then they simply look at it as the “cost of citizenship” in the U.S. It is when you can clearly demonstrate all 3 criteria that your project will receive the quickest execution of the EB-5 process.
MCA is currently working on several transactions that happen to have the elements that make EB-5 financing a viable solution. For more information about EB-5 and how it might work for your project, please reach out to Metropolitan Capital Advisors, and we would be happy to discuss if this is a fit for your deal.