Since the financial crisis of 2008, traditional lenders have significantly tightened their purse straps, and many developers have subsequently resorted to seeking alternative funding sources. One alternative financing source that is gaining popularity stems from the EB-5 visa program, where foreign investors invest capital into the United States in exchange for green cards.
What Exactly Is EB-5?
The EB-5 program provides foreign investors with the opportunity to obtain a green card in exchange for investing $500,000 to $1 million in a U.S. business venture. However, there are conditions attached to the investment capital: each investor’s capital must create at least 10 full-time jobs for U.S. workers.
In 2007, prior to the financial crisis, United States Citizenship and Immigration Services (USCIS) received a mere 776 I-526 petitions from foreign investors (the I-526 is the initial application that an investor files with USCIS to participate in the EB-5 program). But later in 2012, after developers looking for alternative sources of financing began revitalizing the two-decade old program, USCIS received 6,041 such petitions. By September 2013, USCIS had 7,131 pending applications. The growing numbers speak for themselves.
Roughly speaking, 3,000 EB-5 applicants translate into a minimum of $1.5 billion in foreign capital investments into U.S. job-creating entities. And the economic impact does not end there. A recent article by Dr. Scott Barnhart of Barnhart Economic Services, LLC, projected that the issuance of 8,000 EB-5 visas, which includes investors and their qualifying family members, could contribute an estimated $3.8 billion to GDP, create more than 46,000 jobs, raise $532 million in federal taxes, and raise $371 million in state and local taxes.
Why Do Real Estate Developers Like EB-5?
Real estate developers seek EB-5 funding because of the relatively low interest rates and no personal guarantees. Interest rates on EB-5 projects can be as low as 2 percent and rarely exceed 6 percent. The market standard term for an EB-5 investment is typically around 5 years, with two one-year options to extend.
Jeffrey Campion, founder of The Law Office of Jeffrey E. Campion, P.A., has worked closely with developers who utilize EB-5 investment capital for their projects. He is an advocate of using EB-5 capital. “EB-5 capital is powerful in the mezzanine tranche,” says Campion, “but developers need to be patient or have a project that will not need the capital for at least 12 months because of timing issues regarding the release of capital. However, suffice it to say, mezzanine money at five points below market on $10 million makes the wait worth it.”
Despite the favorable interest rate and lack of personal guarantees, EB-5 capital is unpredictable. Henry Liebman, founder and CEO of American Life, Inc., has attracted more than 1,300 EB-5 investors to his development projects. He understands that the timing of using EB-5 funding is much different from those of other funding sources. “Developers need to know when the money will be available to meet commitments for soft costs, construction, and land purchase,” Liebman said. “If EB-5 is subject to escrow, and it oftentimes is, you don’t know when the money will be available. Even without escrow, one cannot predict how fast capital can be raised.”
Why Do EB-5 Investors Like Real Estate Projects?
Historically, EB-5 investors have shown a significant preference for real estate projects because real estate is tangible in nature. Investors from China, who now account for more than 80 percent of all EB-5 investors, according to CNNMoney.com, can easily fly to the United States to inspect a project site for themselves. They can get an appraisal of the project’s value upon completion and can typically conduct a due diligence review of the developers and their EB-5 project without significant hassle.
EB-5 investors also prefer real estate projects because these projects are thought to offer a clearer and safer path to having their investment returned. Unlike manufacturing or restaurant projects, real estate projects are less reliant on income or cash flow to repay investors. Instead, an exit strategy for investors may come in the form of a property sale or refinance.
How to Get Involved in EB-5
In order to successfully raise and use EB-5 funds for a real estate project, developers will need to establish connections that will enable them to market their project in front of potential EB-5 investors. Taking adequate time to learn the ins and outs of this alternative source of funding and networking with experienced professionals in the EB-5 industry will be key for developers looking to possibly incorporate EB-5 investment in their projects.
For those who are looking for such opportunities, there are several reputable resources available to you. EB5 Investors Magazine, Association to Invest in USA (IIUSA), and American Immigration Investors Association (AILA) all provide educational content and information about upcoming EB-5 conferences that individuals can attend to learn more about getting EB-5 investors involved in their businesses.