In light of the financial industry’s diminished appetite for risk and more stringent lending regulations, real estate developers in Florida are facing significant obstacles in obtaining affordable capital. Even though lenders are requiring more collateral, they still may not be willing to lend. And, even if a loan is available, the interest rates can be so high that the project may not be financially practical.
Because of all of the obstacles with traditional project financing, developers are looking for lower interest rate alternatives that can turn a marginally profitable development into one that increases profitability. There are two Federal programs that provide the opportunity for low interest financing. They are the EB–5 funding program and the New Markets Tax Credit program.
The EB–5 program is designed to attract foreign individuals seeking permanent visas to lend money to a U.S. business that will create 10 new full-time jobs. The minimum amount a foreign person is required to lend is $1,000,000. This minimum is reduced to $500,000 if the business is located in a rural or high unemployment area (a “Targeted Employment Area”). The foreign individual can loan the funds directly to a US business, or use a Regional Center, which is a private enterprise eligible to accept EB–5 capital for economic development. The Regional Center assists the US business in qualifying for the EB-5 program and finds the foreign investors.
The EB-5 Regional Centers raise the capital and then arrange to loan the funds to developers (and other businesses) with below market borrowing costs and interest rates (ranging from 1% to 3%). Developers are under no pressure to produce high rates of return as the EB-5 investors are primarily concerned with obtaining green cards through the program than the returns on their investments. Loan terms are typically 4 to 5 years, the length of time it takes the immigrant investor to receive permanent residency, and are often payable interest only with all principal due at the end of the loan term.
The Federal New Markets Tax Credit (“NMTC”) program is also designed to provide a real estate developer with low interest financing, but uses income tax credits to attract capital instead of green cards for foreign individuals. In return for an investment in a business that creates jobs in low-income communities (“LIC”), the investor receives a tax credit equal to 39% of the investment, spread over seven years. A “Community Development Center” (“CDE”) raises capital from investors and then lends to developers of qualified real estate projects located in a LIC, such as retail developments, office buildings, and mixed use projects.
Since the 39% tax credit increases the rate of return for the investor, the tax credit enables a CDE to make below–market interest loans to developers for qualified projects. The low–interest loans cannot be paid for seven years, and are typically payable interest only with a balloon after seven years.
The EB–5 and New Markets Tax Credit programs are valuable funding tools for Florida developers, but you should seek professional assistance in meeting all of the technical requirements for qualification in either of these Federal programs.