Institutional Investors See Value In EB-5 Program

Feb 17 2015 | 9:59am ET

Program designed to help well-heeled immigrants obtain U.S. green cards is proving a boon to hedge funds and private equity firms

By Adam Salis
Counsel, Manatt, Phelps & Phillips 

The U.S. Immigrant Investor Program, also known as EB-5, was created by Congress in 1990 to “stimulate the U.S. economy through job creation and capital investment by foreign investors.” Run by U.S. Citizenship and Immigration Services (USCIS), the EB-5 program allows immigrants who invest at least $1 million into a project that generates at least 10 full-time jobs to obtain their green cards, which legally gives them the right to reside in the U.S.

What’s interesting is the $1 million investment threshold can be reduced to $500,000 per investor where the projects that create the jobs are located in what are called “targeted employment areas” or TEAs. These are a geographical area in which the median unemployment rate is at least 150 percent of the national average annual unemployment rate.

I estimate that about 95 percent of all current EB-5 projects are in TEAs, since investors want to invest in projects with the smallest minimum investment possible because their only goals are to get their money back and obtain a green card.

Project sponsors can raise EB-5 capital either by creating projects that generate a sufficient number of full-time employees or investing through “regional centers.”  A regional center is a company formed for the purpose of promoting job growth and economic growth in a certain geographical area. When a project sponsor works together with a regional center, it allows that sponsor to gross up its overall job count by including not only direct W-2 jobs but also indirect jobs that are created within the community as a result of the existence of that new project.

As one example, say a hotel is a regional center-sponsored project, not only do you get to count the W-2 jobs of the people that work at the hotel but you count all kinds of indirect jobs, like the jobs at the company that provides the food for the hotel. Those jobs count too. There is an indirect multiplier effect that allows for a much larger quantity of EB-5 money to be raised.

I am seeing a tremendous influx of EB-5 projects being marketed all over the world but primarily in China because China historically has represented 85 to 90 percent of the worldwide EB-5 investor pool. That is a pretty amazing situation, particularly because the Chinese are subject to currency controls. It's not easy to get $500,000 out of that country.

The EB-5 program has historically been utilized by developers looking for equity to finance projects that may not have otherwise attracted conventional debt and equity in the capital markets. But, in recent years institutional investors have seized on the program to juice their overall returns. 

The cost of capital is typically well below 5 percent per year for a five- to seven-year term, and even that is mostly compensation paid to intermediaries.  The actual investors may receive only 1 percent a year on their money, which is fine by them given that return on equity is not a focus for them. Since EB-5 money can come into a project as debt or equity and can be subordinate to conventional bank financing, hedge funds and private equity investors see EB-5 money as a way to reduce their overall cost of capital and leverage their own equity slice in the deal.

Private equity and hedge funds are taking a very hard look at the EB-5 space and many of them are actively marketing in China right now so they can raise money for their own projects.  Those funds that can establish a direct marketing relationship with the investors can walk away with five- to seven-year financing at a rate of 1 to 2 percent per annum.  Where are you going to beat that? 

If you turn a 30 percent equity position into a 10 percent equity position in a deal because you can backfill two-thirds of your equity requirement with affordable EB-5 money, you’ve effectively increased your overall internal rate of return on that equity substantially.

We are seeing many institutional players out there actively raising money.  Some of them now have entire divisions dedicated just to raising EB-5 money.  They've gotten very sophisticated about their outreach efforts and, as a result, the overall quality of the project pool and level of sponsor sophistication has increased dramatically in the last few years.  The indirect effect of institutional involvement in the space is that the EB-5 investors and their agents have also become more discerning about the projects they will support, which is a good thing for the future health of the industry as a whole.

Some of the larger institutional developers have also formed their own regional centers to keep their transactional costs down and boost their job numbers.  Many of them also have boots on the ground in China to raise money. It's become, over the last several years, a much more sophisticated industry than it was five years ago as a result of institutional players getting involved.

The process of obtaining a green card begins with the filing of an I-526 petition, during which time USCIS examines the project for compliance with the EB-5 program and conducts background checks on the immigrant investor..

After several years, the investor files an I-829 petition which must include evidence that the immigrant investor successfully met all requirements of the EB-5 Visa. Once the I-829 is approved, the investor's conditional residency restriction is removed so that the investor, their spouse and their unmarried children under the age of 21 can live in the United States permanently..

I estimate that there has been at least $1 billion a year in EB-5 funds raised in the last several years, as the program has virtually exploded in popularity.

While most states have at least one EB-5 regional center, L.A. and New York are hotbeds of EB-5 activity, as is Florida where even the city of Miami established its own regional center.

The key to this program is you have to invest in something that's going to create new jobs.  You can't just buy an existing business that has employees using EB-5 money because those are not new jobs. And similarly, you can't really invest in projects that don't create all that many jobs since the transaction costs are high and level of proceeds low.

For example, you're not seeing multi-family projects being developed with EB-5 money because there are not very many employees in those projects and therefore you can't raise the money. The two sectors that currently attract the most EB-5 capital are operating real estate businesses such as hotels and assisted living facilities, which tend to have a significant number of full-time employees. 

Keep in mind that the program is not perfect. Sometimes you get bad apples, but that’s like in any industry. But in general, the projects that qualify tend to do well. The key concept to keep in mind is that this is not a fast process.  From start to finish, you should assume 18 months.  Sponsors that thrive in this space realize that you have to create short term financing to bridge the time period to actual receipt of EB-5 funds.  As a result, an entire cottage industry has arisen to provide developers and other project sponsors with EB-5 bridge financing, which is another area where private equity has played in order to get enhanced yields.

This is a transformative program in terms of getting new projects off the ground, in terms of creating job growth, and in terms of bringing new immigrants into our country that contribute to our economy. It's kind of a win-win for everybody.

Adam Salis is Counsel at Manatt, Phelps & Phillips.  Salis brings over 20 years of experience to his practice as a transactional real estate attorney, combining his skills as a legal practitioner with practical experience in the real estate industry obtained from his years outside of the practice of law. His work experience runs the gamut of the real estate life cycle, having served as an acquisitions manager, special assets loan officer, REO portfolio manager and managing partner of a syndicate that owned and managed a portfolio of shopping centers.

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