Several local real estate projects are securing gap financing by luring foreign investors to create American jobs in exchange for U.S. visas. Most of this money is coming from China under a U.S. Customs and Immigration Service (USCIS) program known as EB-5. As this is a financing tool relatively new to North Texas, I have laid out the basics of EB-5 below.
Q. What is an EB-5 Visa?
A. EB-5 is an immigrant investor visa category created for foreign nationals who invest in a U.S. business that creates at least 10 full-time jobs. An EB-5 applicant will receive a visa for himself or herself, his or her spouse, and all of their children under the age of 21. The USCIS will issue a conditional visa within five-eight months of application by an EB-5 investor, as long as the investor and the project are qualified. If the investment project fulfills the job creation criteria after two years, the investor can obtain permanent resident status, and can apply for U.S. citizenship in five years.
Q. What is the criteria for an EB-5 Visa?
A. In order to qualify for an EB-5 Visa, an investor must invest at least $500,000 in a “targeted employment area” (as discussed below) in an enterprise that will create at least 10 new full-time jobs for U.S. citizens and legal residents per $500,000 investment. Foreign investors usually purchase limited partnership interests in a limited partnership made up of multiple investors seeking EB-5 visas, with the partnership being controlled by the EB-5 Regional Center (which in essence acts as the “syndicator”). This limited partnership then invests in the entity that controls the project.
Q. What is a Regional Center?
A. A Regional Center is an entity created to sponsor projects for EB-5 investors and approved by the USCIS. There are currently more than 175 Regional Centers.
Q. How are EB-5 investors secured?
A. The EB-5 Regional Centers have well developed networks of foreign brokers and licensed emigration agents who raise financing for EB-5 projects, usually through seminars attended by foreign investors.
Q. What are EB-5 investors looking for in an EB-5 investment?
A. EB-5 investors are looking to obtain two primary objectives: 1) their visas, which are obtained through the project creating the number of jobs promised in the business plan, and 2) a reasonable likelihood of the return of their investment in five or six years. Secondarily, EB-5 investors and the Regional Centers are looking for a small rate of return on their investment—frequently from 1-5 percent plus, depending on the structure, a small back-end interest in the project (which can be subordinated to debt repayment and returns to other equity partners).
Q. What is a Targeted Employment Area?
A. A targeted employment area is any city, county, census tract or other geographical area or political subdivision accepted by the USCIS that has an unemployment rate that’s more than 150 percent of the national average rate, or a “rural area.” A rural area is an area outside a metropolitan statistical area or outer boundary of any city or town having a population of 20,000 or more. Although at first blush this would seem to allow the use of EB-5 financing only for rural projects and urban projects in impoverished areas, we have found after evaluating a large number of proposed project sites that a large percent of urban areas qualify.
Q. What is the process?
A. The process of qualifying a project for EB-5 investment is as follows. It typically takes about nine to 12 months to complete:
• Determine if the site qualifies as a targeted employment area.
• Provide project information including description and proformas to the Regional Center.
• Negotiate a term sheet with the Regional Center outlining the amount and terms of the investment. The Regional Center hires an economist who determines the number of jobs that will be directly or indirectly created by the project (and thus sizing the total EB-5 capital limit).
• Work with other debt and equity financing sources to make certain the EB-5 terms and conditions coordinate with other financing terms.
• The project sponsor and the Regional Center negotiate the investment documents.
• The Regional Center (working together with the project sponsor) prepares the investment partnership documentation and an offering memorandum and business plan outlining the investment and submits same to the USCIS for approval.
• The documents are translated into the foreign language and the Regional Center markets the investment overseas through foreign brokers.
• The foreign investors make application to the USCIS for their visas and place deposits in escrow with the Regional Center.
• The USCIS processes the visa applications.
• The USCIS approves the visa applications.
• The approved foreign investors close their investment in the investment partnership, which in turn invests in the project partnership. These investments are sometimes made while the visa applications are being processed, but are returnable if visa approval is denied by the USCIS.
Securing these funds overseas is a complex and time-consuming process, but for real estate projects that will be in development for a lengthy period, and where the EB-5 raise will be in excess of $5 million, the process may be worthwhile given EB-5’s low cost of capital (versus traditional real estate mezzanine debt/equity).
Bob Voelker, a shareholder at Munsch Hardt Kopf & Harr PC, is the business development coordinator of the firm’s real estate group.
