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Since the renewal of the EB-5 program this year, there has been a lot of talk about what this means for developers interested in taking on new projects. Our recent article in Westlaw Today sums up the latest information about the program. Part one is below; part two will be published next week.
This article was originally published on Westlaw Today on April 14, 2022.
After being sidelined for the last few years by circumstances culminating with the pandemic and the lapse of the Regional Center Program in June of 2021, the EB-5 foreign investment program looks like it has returned as a viable option for developers seeking low-cost funding for new construction projects.
On March 15, President Biden signed the Omnibus Spending Bill, which included the “EB-5 Reform and Integrity Act of 2022,” sponsored by Senators Pat Leahy (D-VT) and Chuck Grassley (R-IA). This bipartisan bill restores viability to EB-5 by reauthorizing the lapsed Regional Center Program, a component essential to the success of EB-5.
What is EB-5?
EB-5 refers to a program that is authorized by Section 203(b)(5) of the Immigration and Nationality Act. EB-5 is the fifth “Employment-Based” immigration program set forth in Section 203 and provides expedited visa processing for foreign investors making a minimum required investment in a project that directly creates at least 10 new jobs in the United States.
In short, it is both an immigration program for foreign investor immigrants, and a program that requires substantial capital investment in new business enterprises creating jobs in the United States.
The character of available financing and the projects most desirable for EB-5 investment are directly influenced by program requirements that must be met to qualify investors for a green card. For example, lower program investment minimums ($800,000 vs. $1,050,000) make projects more desirable in targeted areas of high unemployment and rural areas.
In addition, there is “expedited” visa processing for investments in rural areas. Immigrant investors want to invest the minimum amount of money and be approved for their visas as quickly as possible, encouraging investors to prioritize infrastructure or projects in rural areas or areas with high unemployment.
Ten thousand visas per fiscal year are set aside for applicants to the EB-5 program, and the new law sets aside or reserves 20 percent of those visas for projects in rural areas, 10 percent for targeted areas of high unemployment, and 2 percent for infrastructure projects.
Recent history of EB-5 investment
Although the EB-5 immigrant visa program has been active since 1990, the current trend of using it as a source of financing real estate development and construction started 20 years later — around 2010. The popularity of the program exceeded all expectations for several years in the 2010s, particularly with Chinese applicants, until a marked slowdown near the end of 2017.
Partisan politics during the Trump administration, strained U.S.-Chinese relationships, and the Chinese government’s strict new limits on exporting capital from China, combined with the economic panic and lockdowns of the pandemic, stopped virtually all new EB-5 investments from Chinese residents.
The Regional Center (RC) program, which allows investors to pool their money to finance new ventures, was added to the EB-5 program in 1993 and extended repeatedly until June 2021, when it was allowed to lapse. RCs are formally designated by the U.S. Immigration service and have different job creation requirements; rather than counting only the jobs directly created by a project, indirect and induced jobs tallied by approve economic methodologies also qualify.
Regional Centers offer benefits both to investors and to developers seeking funding: when more jobs qualify under immigration rules, more investors can get visas. With more available visas, more money can be raised. It is also easier to use EB-5 when there is a substantial margin of safety in the job count in case anything goes wrong. As a practical matter, regional centers have historically offered immigrant investors a buffer of 20 to 30 percent more jobs than the law requires, to protect against contingencies.
The EB-5 Reform Act reauthorizes the Regional Center program, which has proven to be essential to the viability of EB-5 overall. The demand generated by the revitalized RC program is expected to bring the EB-5 program out of its long hibernation.
What’s different about EB-5 this time around?
While the basics of the program remain the same, some aspects of the Regional Center program have changed.
The EB-5 Reform Act raises the minimum investment in qualified projects to $1,050,000 from $1 million, except in federally-designated Targeted Employment Areas (TEAs) where the investment minimum was raised to $800,000 from $500,000. The new minimum investment requirement will hold for the next five years, assuring the availability of this type of financing through September 2027.
The bill also puts a premium on investment in rural areas by expediting visa applications for investors involved in those projects; thirty percent of EB-5 visas are set aside for these investors. Infrastructure projects or those in high unemployment areas are also subject to lower minimum investment requirements, but do not qualify for expedited visa processing.
The Regional Center program offers a regulated structure industry of approved RCs, who are now subject to greatly increased regulatory scrutiny, oversight and audits as outlined in the EB-5 Reform Act. RCs are also now the only way for investors to pool their resources, and existing centers will need to refile to comply with new requirements. Experts suggest that these changes will greatly reduce the number of regional centers to those who truly intend to be active in the program.
Now that the EB-5 Reform Act has been signed, prior Regional Center law has been repealed. No new RC filings can be filed until 60 days after enactment, so applications cannot be submitted until May 14, 2022. It’s not yet clear, but it’s possible that every RC must start over with a new application, or at least an amendment to confirm the identity of all persons “involved with” the RC and to provide policies and procedures reasonably designed to ensure compliance with the new integrity rules.