Get the Inside Scoop on the EB-5 Visa Program and How NYC Real Estate Developers are Leveraging it to Raise Capital

by Vlad Sapozhnikov21. November 2013 15:10

 

Recently, more New York City real estate developers and entrepreneurs are leveraging the sometimes controversial Federal Immigrant Investor Program, aka the EB-5 Visa Program, to secure capital from foreign investors in countries such as India, China, England, Mexico, Venezuela, South Korea, Taiwan, Venezuela, among others. And Chinese investors accounted for approximately 70% of the total EB-5 foreign investors in 2012. Furthermore, the visa program doesn't have any restrictions on country of origin for the foreign investor, but the U.S. Federal Government does limit the number of EB-5 visas (10,000) available each year and approves each and every one of them.

Why else is the EB-5 Visa Program so popular with NYC real estate developers?

Because of the more stringent lending guidelines from the Dodd-Frank Act 2010 and the banking industries continued distaste for risk and traditional financing, NYC real estate developers are looking for other avenues for financing and raising capital for NYC real estate projects. In short, the EB-5 Federal program is a low-cost financing vehicle for New York City real estate developers and a road to permanent residency for foreign nationals; they receive two years of conditional residency while the investment is put to work – a match made in heaven. Or is it?

In the beginning of the 1990’s, wealthy foreign investors were more concerned with acquiring their green card rather than the return on investment (“ROI”). But now, with more competition, more EB-5 applications, and regional centers (more on this later) popping up across the nation, foreign investors are starting to care more about their ROI. However, as per the Federal EB-5 Visa Program guidelines, guaranteeing a return is not allowed. Furthermore, the United States Citizenship and Immigration Services does have to approve each and every EB-5 program. But an approval is not an endorsement.

Additionally, EB-5 financing has less legal hoops to jump through than most traditional financing options. For NYC real estate developers with constant capital needs, paying out the start-up costs is a smart decision because once the regional center is in place; they can use it the EB-5 capital to raise funds for other projects.

Let’s take a quick look at the EB-5 Visa Program’s historical significance and requirements for context.

Brief Overview of Immigrant Investor Program (aka EB-5 Visa Program):

U.S. Citizenship and Immigration Services (“USCIS”) administers the Immigrant Investor Program, aka the EB-5 Visa Program, and is governed by federal laws and regulations – not by any state agency; therefore, not governed by New York State law. Back in 1990, Congress created this Federal Program by passing the Immigration Act (IMMACT90) to stimulate the U.S. economy through capital investment and job creation with the help of overseas capital. These foreign investors are eligible for an EB-5 Visa if they invest or are in the process of investing the required amount of capital into one of the following for-profit business models:

·      Must create a new commercial enterprise after 11/29/1990.

·      Meet capital investment thresholds by creation of an enterprise that will expand to 140% of pre-investment net worth or number of employees (note: investment capital can’t be borrowed).

·      Invest in a troubled business in which full time jobs will be created and preserved.

New Commercial Enterprise. Let’s begin with the first requirement where the foreign EB-5 investor must create a new commercial enterprise. As per the USCIS, a “commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to: a sole proprietorship, partnership, holding company, joint venture, corporation or business trust or other entity, which may be publicly or privately owned.”

Capital Investment Thresholds. The USCIS has two options for capital investment requirements for the EB-5 foreign investor. The standard capital investment, or minimum qualifying investment in the U.S, is $1 million. Capital equates to cash, inventory, property, equipment, stocks, and indebtedness secured by assets owned by the foreign investor. All capital is valued at the fair-market value of the U.S. dollar at the time of the investment. The alternative capital investment requirement for an EB-5 foreign investor in a high unemployment area, (calculated as an area with an unemployment rate that is at least 150% of the national average), or a rural area is $500,000.

Job Creation. As per the USCIS, the overseas investor must create and preserve a certain number of jobs for U.S. workers within the United States for a troubled business. The capital can go to a new commercial enterprise, a troubled business or in pooled loans through a regional center across the country. More specifically, EB-5 foreign investors must demonstrate that their capital investment will directly or indirectly create or preserve at least 10 full time (35-hours/week) jobs for qualified employees (i.e. U.S. citizen, permanent resident, asylee or refugee). Bottom line: the employee must be authorized to work in the U.S. and is not a family member of the immigrant investor. (Note: go here for further explanation on job creation and details on what constitutes a direct or indirect job).

EB-5 Visa Program Not Without Issues

No surprise that a Federal program that involves both foreign monies and immigration has created some controversy – especially in the current political and economic climate. As with many government programs, there’s the usual bureaucratic runaround, trivial paperwork and legalese that can drive a NYC real estate developer mad. Recently, the U.S. Securities and Exchange Commission (“SEC”) has been turning the heat on unlicensed “finders” who charge a fee to help NYC real estate developers locate and secure foreign capital. As we all know, only licensed brokers can solicit investors and bring parties together for a transaction. If an unlicensed finder matches a foreign investor with a NYC real estate developer and is compensated, he/she is subject to SEC and New York State fines; and could face the possibility of being banned from trading securities all together. For example, The SEC in February 2013 charged a Chicago hotel developer (ACCC) who had raised $145 million in EB-5 capital by misleading 250 investors, mainly from China, into believing they would make a substantial return on investment. But instead, he collected over $11 Million in fees and defrauded investors that believed “they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport.” Sadly, it was all a dupe. We also spoke with a high level official in the United States Department of Homeland Security and our source revealed, “There has been a lot of fraud involved in the program.”

As of October 1, 2013, USCIS had approved nearly 325 out of 439 regional centers and many of them are used for non-real estate-specific investments; approximately 27 are approved for New York as per the USCIS website list (which again approval does not signify endorsement). The site also states that, “Because regional centers can operate in multiple states, those entries DO NOT represent distinct regional centers.”

More Options: Make Your Own or Join Up

EB-5 visa applicants have two main investment roads at their disposal:

Business Formation. The foreign investors can invest in their own commercial enterprise that is more labor intensive and requires a direct managerial role (managing day-to-day operations) in the project. Direct investment (aka setting up your own regional center) is the best option for those who want more hands-on control of their investment and the New York City real estate development or project that received their investment. In addition, this choice is much more time-consuming and can cause quite a few headaches. Take a look at the timeline below:

Business Investment. The second option is for EB-5 applicants to invest in a regional center owned by others. This appears to be the best choice for those who are more interested in the immigration goals (getting that green card!) rather than obtaining maximum ROI. Regional centers are responsible for adhering to EB-5 Federal Program rules and guidelines so this takes the burden off of the EB-5 foreign investor so that he/she is not solely responsible for meeting program requirements. This option best serves foreign investors who want a more hands-off approach, where they are not responsible for the day-to-day management of their investment into the NYC real estate development or project.

All and all, the EB-5 Visa Program is a great resource for NYC real estate developers to raise capital for projects as long as federal guidelines and rules are followed both by the foreign investor seeking his/her green card and by the New York City real estate developer seeking the capital.