On Nov 03 2010 by H. Ronald Klasko
Developers Seeking Capital Under the EB-5 Program
With traditional sources of capital unavailable, the EB-5 immigrant investor program has attracted great interest among commercial real estate developers.
Specifically, many real estate developers have chosen to form “regional centers” to attract tens of thousands of foreign investors willing to invest $500,000 for the opportunity to obtain green cards for them and their family members. In fact, the number of regional centers has expanded five-fold to more than 100 in just the last couple of years.
This article will discuss the requirements of the EB-5 program and the advantages and disadvantages to developers of forming regional centers to attract EB-5 capital. The article will also discuss other options available to developers, such as having a development project “adopted” by an existing regional center, purchasing a dormant regional center and attracting foreign capital through a pooled investment opportunity without a regional center.
Background of Regional Center EB-5 Program
The EB-5 program enables foreign nationals who invest $500,000 or $1 million (depending upon the geographical area of the investment) to get green cards for themselves and their immediate family members. In order to qualify, the investment must create ten full-time jobs for U.S. workers.
In 1994, Congress created the concept of a regional center, which enables developers to obtain certification from U.S. Citizenship and Immigration Services (USCIS) for pooled investment projects in designated industries and in designated geographical areas. The main advantage of the regional center is that the required job creation includes not only direct (W-2) employees but also indirect and induced employment resulting from the capital development project. Indirect and induced employment is proven through econometric reports based on recognized economic input/output models. Because of the difficulty of creating ten direct employees per investor, the regional center EB-5 program has become so popular that today it accounts for approximately 95 percent of all EB-5 petitions.
Here’s how it works. Let’s say a developer is looking to build one or a number of office buildings in a specific geographical area and is seeking capital for that purpose. Traditional sources of capital are unavailable or insufficient. The developer may choose to create a regional center. If the project is in a “targeted employment area”, investors in the regional center project will have to invest $500,000 each to obtain green cards. If the developer is seeking $10 million of capital, it will require 20 EB-5 investors. Although the office building may not employ 200 U.S. workers, an econometric report may be able to project that 200 jobs will be created indirectly by the building of the office building. For example tenants will purchase supplies, go to restaurants, require IT services, all of which will indirectly create jobs in the community.
Two general models of regional centers have evolved. In most cases, the investors become limited partners in a limited partnership. The limited partnership may invest in and acquire an ownership interest in the development projects. This is the equity model. In the debt model, the limited partnership provides a low interest term loan (often 5 years) to the developer.
In both models, the regional center principals file a package of documents requesting certification from USCIS. The documents usually include corporate documents, subscription agreement, marketing plan, econometric report, business plan, escrow agreement and other documents to meet USCIS’ evolving requirements. The regional center designation request may either include hypothetical projects or actual projects. A regional center may be created for one project or multiple projects over time. It is possible for each individual project to be pre-approved prior to investors investing in the project through a process called an exemplar I-526 petition.
In this author’s experience, some developers think that regional center designation is the end game and that foreign investors will materialize once the center has been designated. This could not be farther from the truth. With more than 100 regional centers competing for investors, it is critical that the regional center have a realistic plan to market to overseas investors in targeted markets.
From the investor’s point of view, in addition to the financial risk of any investment, there are also immigration risks. The green card that the investor gets is a 2-year conditional green card. At the end of the 2 years, the investor has to file a “condition removal petition” to prove that the project was actually built and the jobs — direct or indirect — were created. If that cannot be proven, the investor and his family may lose their green cards and be forced to return to their home countries.
Options for Real Estate Developers under EB-5 Program
With that as background, I have created the following bullet point outline to highlight the advantages and disadvantages to a developer of both the regional center option and the option of attracting pooled investments with individual EB-5 petitions based on ten direct employees per investor:
Creating a New Regional Center
- Developers can count indirect and induced employment opportunities, and not just direct jobs, in meeting the ten jobs per investor requirement.
- A particular project within the regional center may be pre-approved by USCIS.
- Regional center certification provides an aura of legitimacy or endorsement that may help in marketing to foreign investors.
- Regional center certification may take a lengthy period of time — 4 months to 1 year is not unusual.
- Regional center certification may entail a significant expense, including hiring an economist, hiring a business plan writer, hiring an attorney and other expenses.
- Regional center certification is not the same as approval of any particular regional center project.
- Regional center certification is no longer a small, privileged group. More than 100 regional centers have now been certified.
- Many regional centers have not been able to attract any investors. Newer regional centers find it difficult to compete in their marketing efforts with long-existing regional centers with a track record of many immigration approvals, some with both I-526 and I-829 approvals.
- Regional centers have ongoing administrative and filing requirements with USCIS in order to avoid de-certification.
Pooled Investments with Individual EB-5 Petitions
- There is none of the expense involved with obtaining regional center certification or ongoing administration.
- No delays — as soon as investors are identified, the EB-5 petitions can be filed.
- Ongoing reporting requirements to USCIS are eliminated
- This is only an option if ten direct employee positions will be created for each investor.
- The option of project pre-approval is not currently available.
- Marketing to foreign national investors may be more difficult without the aura of regional center designation.
- USCIS EB-5 adjudications are often quite restrictive if the ten full-time employees are not already employed.
- Ultimate removal of conditions for investors is dependent upon ten full-time employees being employed at time of condition removal, or within a reasonable time thereafter.
Development Project Adopted by Existing Regional Center
In addition to the options of creating a new regional center or attracting pooled investments with individual EB-5 investors, two other options exist for the developer. The developer may approach an existing regional center and negotiate to have the developer’s project “adopted” by an already-certified regional center. In some cases, this may require an amendment of the regional center’s certification. Some of the advantages and disadvantages of this option are as follows:
- All of the time and expense involved in developing a new regional center are eliminated.
- The existing regional center may have a marketing plan in place, and may even have existing investors ready to invest.
- Project pre-approval is available.
- If the regional center is a profit-making enterprise, some of the developer’s profit may be siphoned off to the regional center operators.
- The developer needs to do serious due diligence with respect to the regional center. If the regional center operators are less than scrupulous, or provide less than complete information, the developer may be affiliating with a regional center with which, in retrospect, it wishes it had not been in association.
- The developer is ceding some control of its project to the regional center operator.
- The developer assumes the risk that the regional center operator may become de-certified.
- The regional center may need to amend its certification with USCIS in order to incorporate the new project, thus entailing delay.
Purchasing Existing Regional Center
One final option has developed recently as a result of the large number of regional centers that have failed to attract investors. This option is for the developer to purchase an existing regional center. This option has all of the advantages of having a project adopted by an existing certified regional center plus the additional advantage that the developer controls the regional center and does not need to negotiate away profit or control. The developer would certainly need to conduct appropriate due diligence regarding potential liabilities that may be acquired. In addition to legal liabilities, there may be negative publicity or “negative goodwill” related to the regional center being acquired of the individuals involved in the administration of the regional center.
The EB-5 program has proven to be a popular vehicle for developers seeking capital. Creating a new regional center is one of a number of options available for the developer to raise capital from foreign nationals. An immigration attorney with experience in EB-5 regional centers should be able to counsel the developer on the best options to meet the particular needs and plans of the individual developer.