Seyfarth has organized a multi-departmental practice group to assist our clients to tap foreign sources of capital available to certain U.S. businesses under the federal government’s EB-5 immigrant investor visa program. The EB-5 program permits foreign citizens who invest $500,000-$1 million in a new, job- creating business to receive conditional permanent resident status (Green Cards) for themselves and their immediate family members. Each investor’s investment must create ten jobs. The amount to be invested is $500,000 per investor in Targeted Employment Areas (TEA), defined as either a rural area or an area of high unemployment; for all other investment locations, $1 million per investor is required.
If the investing foreign citizens meet the conditions of the EB-5 program and other criteria, they receive unconditional Green Cards and become lawful permanent residents of the US.
These EB-5 investors are particularly appealing to developers seeking lower-cost capital, for several reasons:
- The investors’ main focus is to receive their Green Cards and to bring themselves and their spouses and children to the United States. Thus, they are often less concerned with the rate of return of their investment than other investors.
- They are also concerned with preservation of their principal, which makes real estate-based investments, where much of the investment will be used to acquire hard assets in the form of real property, particularly attractive.
- Under the regulations of U.S. Citizenship and Immigration Services (USCIS), the agency administering the program, the investors cannot be guaranteed a return of principal and the issuer/developer cannot return the capital to the investors until after approval of their petition to remove conditions on their residence status -- typically three to five years from initial investment
Additional standards, requirements and features of financings under the EB-5 program include:
- Almost all investments are at the $500,000 level as the larger investment size is unattractive. Investments can be made in cash or property or by the issuance of promissory notes secured by assets other than the EB-5 investment itself.
- The funds are usually held in escrow by a bank escrow agent until the investor has received approval of his or her petition requesting classification as a conditional permanent resident.
- Each investment must create or preserve at least 10 fulltime jobs in the U.S. within 2-1/2 years. Investments made through a government-approved regional center can count indirectly created jobs (based on projections contained in an economist’s report) toward the 10-job total. All jobs created by the project can be counted toward the employment goals, not just the jobs created with the EB-5 capital.
- Because the investment must remain “at risk,” there can be no guaranteed return of principal to the investors.
The investments are generally structured with the foreign investors investing in a pass-through vehicle which in turn loans money to the real estate project at a relatively low rate of interest. The loan is usually secured by a second (or third) lien on the real estate and other assets of the project in an attempt to limit the risk that the loan will not be repaid. The term of the loan is generally around five to seven years with no principal amortization. Interest rates paid by the project tend to be in the 4-5% range. In deals originated by a regional center (which in turn seeks investors for the deals it approves), the regional center may form an intermediate lending entity which receives a portion of the interest paid by the project and/or it may charge origination fees, ongoing management fees or other fees. The cost of capital to the developer is still considerably lower than the cost of capital in non-EB-5 financing alternatives.
Upfront costs for first-time EB-5 financings by a developer include the usual costs of preparing a business plan and offering documents for the project, along with structuring of the transaction, preparation of economic reports and costs of immigration compliance. (Regional centers which complete multiple transactions can achieve economies of scale with respect to certain of these costs because the documentation and the business and structural issues tend to be similar in many deals.) Some of these costs can be borne by the regional center where one is involved in consideration of the fees paid by the developer to the regional center. (Developers can also form their own regional centers.) For substantial developments, these up- front costs do not alter the fact that EB-5 capital is low-cost by comparison to more traditional forms of capital.
The typical EB-5 financing takes about three months to market to investors and an additional six to nine months to clear the USCIS approval process. It is possible to bridge an EB-5 financing and certain institutional lenders have begun to make bridge loans available based on an advance rate which is a percentage of the EB-5 subscription funds placed in escrow. EB-5 financing amounts vary greatly in size and as a percentage of the issuer’s overall capital structure. The typical EB-5 financing size is about $30 million and constitutes only one tranche of junior capital in the deal. EB-5 investors investing through a regional center (the most common vehicle for EB-5 Green Cards) typically take a passive position in the project, usually as a limited partner.
EB-5 investments cut across a number of different disciplines and require experienced professionals in each, including:
- Immigration attorneys to assist in qualifying the investment for the EB-5 program and, when required, creating approved regional centers. In order to avoid conflicts of interest, the project developer will retain its own immigration attorney, and investors should engage separate immigration counsel to file their Green Card applications.
- Corporate and securities attorneys to assist in structuring the terms of the investment and conducting the securities offering to ensure compliance with applicable securities laws.
- Real estate attorneys to assist in the acquisition and management of the real estate assets.
- Finance attorneys to deal with the various levels of project debt and inter-creditor arrangements.
- Tax attorneys to help with the structure of the investment vehicles and terms.
Seyfarth Shaw maintains an EB-5 practice team comprised of attorneys in all of these areas to work with (depending on the client’s role in a given transaction) developers, regional centers, lenders or other parties involved in the EB-5 financing.
In addition, in order to complete the EB-5 regional-center designation request, developers will need non-legal professionals to assist in the writing of the business plan, economists to assess the job-creation aspects of the project, accountants to review financial projections and individuals to facilitate access to foreign investors. Seyfarth’s EB-5 practice group can also assist clients to coordinate the efforts of many of these third-party service providers.
A limited number of EB-5 financings have attracted scrutiny from the SEC and other regulatory agencies in the past year and this scrutiny is expected to continue. Still, properly structured EB-5 financings will continue to be a meaningful path to capital for developers with meritorious projects. (The maximum size of the opportunity is $5 billion per year under the visa quota set aside under the program.) We anticipate a consolidation of the
EB-5 program among the more experienced regional centers and developers. Seyfarth is poised to play a significant role in this re-shaped EB-5 market through its broad experience in all of the practices areas relevant to EB-5 financings.