In the past, when China exceeded its 7% allocation of US Immigrant Investor Visas (EB-5 visas), Chinese applicants were permitted to take advantage of unused EB-5 visas allotted to other countries. But as of the last week of August 2014, the US State Department decided that the issuance of new EB-5 visas to Chinese applicants will be frozen or “retrogress” (move backward) until October 1, 2014, when the new fiscal year starts.
At that time, a new visa quota of 10,000 EB-5 visas (for all countries) will become available for the next fiscal year through September 30, 2015. China will again be allotted only 7% of these visas but most experts expect that Chinese investors will be permitted to access visas unused by other countries in accordance with practice over the past 3 years. This means that the 10,000 visa cut-off date likely will be reached much earlier in the fiscal year ending September 30, 2015, and this may significantly affect fundraising in 2014 and 2015.
EB-5 Visas and China “Retrogression” – What it means to you
Why should this latest development in EB-5 financing concern you — a mere 5 week “freeze” on the issuance of EB-5 investment visas for China? If you want to use EB-5 financing as part of your capital stack for a project in 2015, it should concern you plenty for the following reasons:
- China has been the dominant source of EB-5 capital for the last 3 years — more than a staggering 70% of EB-5 visa applications.
- The freeze will only affect immigrants filing I-526 applications who are born in Mainland China. Of course, over time, other countries may fill any shortfall of investors from Mainland China but that may take 2-3 years or longer to develop the EB-5 infrastructure that makes foreigners aware of the program, motivates them to immigrate to the US and provides EB-5 “capital delivery” system (marketing agents, immigration attorneys and the like) that can match China.
- Anything that delays, retrogresses, or threatens the certainty of EB-5 financing from China creates uncertainty that is bad for all participants in the EB-5 financing world — the Chinese investors, US developers, and the communities that benefit from the realization of new projects, new jobs for US citizens, and economic stimulus.
- If the EB-5 issues are not fixed quickly, an irreplaceable source of financing could be lost for US developers, communities may lose the benefit of major new projects (from hotels to conference centers and port facilities), Americans will forfeit hundreds of thousands of new jobs each year, and we will lose a critical source of highly-educated, wealthy immigrant talent as America faces a critical labor shortage of skilled workers in the near future.
Based on our experience of assisting developers with EB-5 financing for more than 60 projects, we are confident that there are both short term and longer term solutions to these problems which are discussed at the end of this article. But first, we need to recap the background and setting for the EB-5 program.
Why is EB-5 financing important to the hospitality industry?
In an era where construction loans — particularly low-cost mezzanine loans to increase leverage to 80-85% — are difficult to obtain, significant investment dollars provided by EB-5 immigrant investors have been an important addition to hotel developers looking for capital. 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. EB-5 capital is widely used by major hotel brands and some of the largest owners of hotels and restaurants:
- Marriott International has raised $500 million in EB-5 capital
- Hilton Worldwide has raised $100 million
- 4 projects in Washington DC were built with more than $150 million of EB-5 money (including City Market at O, the Marriott Marquis, a Hilton hotel development on New York Avenue and a hotel on E Street that will include a fire station)
“I understand why the government has really pushed this,” says William B. Fortier, Hilton’s senior vice president for development in the Americas. “It’s comes out of nowhere in the past couple of years as a real help to get things going in this industry.” (Washington Post Digital, March 22, 2013)
What is EB-5 and EB-5 Financing?
A provision in the United States immigration laws, EB-5 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 a minimum investment of $500,000, and create a minimum of 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.
More than 75 percent of all capital invested since the EB-5 program began 24 years ago has been raised in the last 5 years. EB-5 visa applications have increased from less than 4,000 in 2012 to an expected 10,000 in 2014:
- 2012 – 3,706 visa applications
- 2013 – 6,106 visa applications
- 2014 – 10,000 visa applications expected
At this rate of surge, approximately $5 billion of low cost EB-5 financing per year is now being created under the program on an annualized basis. Analysts estimate that 80-90% 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 manufacturing, entertainment, and projects in other industries. EB-5 financing is also used by institutional and government players such as port authorities.
Why is the EB-5 program important to the US economy?
The EB-5 program creates jobs by investing fresh capital in US projects – and it doesn’t cost US taxpayers one dollar!
It is estimated that the EB-5 program has raised more than $6.7 billion in capital for needed projects and created more than 95,000 direct jobs, and hundreds of thousands of indirect and induced jobs.
At the 2014 pace of 10,000 visas per year, the program will create about another $5 billion per year of new investment and as many as 100,000 direct jobs. More than 3/4 of the visas, investment and jobs have been created since 2008, more than half in the last 3 years (since 2011).
EB-5 financing can be used for a variety of job-creating projects, and has proven to be a reliable source of gap financing for developers in a variety of industries. Barclay Center — the home of the NBA’s Brooklyn Nets — was funded through EB-5 investment. Sony and Warner Brothers have raised funds for film projects through the EB-5 program. The list goes on.
“In the wake of the financial crisis, it was very difficult to find funding for new commercial real estate projects. Working with Cleveland International Fund to include EB-5 as a critical part of our capital stack allowed us to bring our vision of The Flats East Bank Project to fruition.” — Scott Wolstein, Chairman & CEO of Starwood Retail Partners (Source: Association to Invest in USA)
Why is China special?
The increasing wave of Chinese investment in the U.S. is being fueled by the Chinese government (generally acting through construction companies, banks and other intermediary companies) and an exploding class of wealthy Chinese. The top .05% wealthiest Chinese have investible funds of more than $2.7 trillion, and there is a rapidly growing class of billionaires and more than 800,000 millionaires. Plus there is a huge rising middle class looking to travel and enjoy life.
China has created a growing number of wealthy citizens in the last decade, and many of them are keenly interested in immigration. They are not motivated so much by investment opportunities as by securing education for their children, medical care for family members, and a pollution-free lifestyle. They are willing to make significant investment in exchange for a safe haven in the US and elsewhere.With strong Chinese communities in US cities, and abundant investment opportunities presented to them, many are attracted to the EB-5 visa program. See “Asians want to live, buy homes and invest in Orange County” and “Growing Together — China and Los Angeles County.”
Raising EB-5 financing in China is very attractive to US developers. More than most groups of foreign investors, the Chinese understand the requirements and risks associated with acquiring an EB-5 visa. Importantly, China provides a very sophisticated and reliable infrastructure for raising EB-5 investment – no other country can even begin to compare. A highly developed system of marketing agents, who market US projects to prospective Chinese investors, is available to US developers seeking capital.
So, what’s the problem?
EB-5 visa demand from China has exploded — from 16 in 2004 to 6,900 in 2013! And now, there is a backlog of EB-5 applications (from all countries) of more than 10,000 at the United States Citizen and Immigration Services (USCIS). This backlog is a bad thing. In the short term, it is likely to create a panic to get through the “window” of opportunity before it closes. But it in the longer term, the delay and uncertainty discourages future investors. It also discourages developers who need the capital now for their projects. It creates uncertainty all around, and business hates uncertainty.
The impact in 2014 is relatively minor – a 5-week disruption – but it signals increasing problems in 2015 and thereafter. Many US business and developers are just learning about the value of EB-5 financing; others have experienced its benefits and are now looking to raise ever larger amounts of capital. There are now several developers seeking a minimum of $1 billion in EB-5 financing. And top tier developers are increasingly recognizing the opportunity to raise cheap mezzanine financing, but may miss out on the opportunity.
Chinese investors cannot file EB-5 visa applications until they have selected their specific investment. Consequently, those projects that are being actively marketed in China in the early part of the cycle stand a better chance of successful funding.The current freeze in Chinese EB-5 visa applications serves as an early warning for US developers to launch their EB-5 financing plans as soon as possible.
Is there a longer-term solution?
It would help if Americans embraced the EB-5 program. And they should, as it is a thing of beauty: a government program that creates jobs and provides investment capital without costing the taxpayer a cent.
But many criticize it as “green cards for cash.” They don’t seem to realize that EB-5 immigrants are less than 1% of all immigrants and are typically well-educated, wealthy and self-supporting. They provide capital to build projects that America needs, and they create new jobs for Americans.
An easy solution to the current EB-5 crush is to raise the cap on EB-5 visas and Chinese immigrants. Alternatively, the Administration (including the US Department of State and/or the USCIS) could “interpret” the law so that the 10,000 visa limit only applies to the number of EB-5 investors and does not count family members. Currently, an EB-5 investor is entitled to immigrate with a spouse and children –- but each family member counts for one visa. On average, each EB-5 investor brings two family members, so if we counted EB-5investors only in the cap, that would permit about 30,000 EB-5 visas: 10,000 investors plus their family members.
It has taken 24 years for the EB-5 program to really catch on with foreign investors and US developers. As it reaches the cap for the first time, we could be at the point where the program is either given the expansion and encouragement it needs to thrive, or is permitted to flounder on in obscurity. To thrive, the program must eliminate the backlog of more than 10,000 visa applications, and the USCIS application processing time of 12-24 months must be significantly reduced – say, to 30 days or less. The program will not be viable unless practical accommodations are made.
What should hotel developers do?
If you have a new hotel development in the pipeline and you are on the fence about EB-5 financing, now is the time to act!