Euros, Yuans and You: The EB-5 Investor Visa Program as a Capital Source for Commercial Developers

CRE Finance World, Summer 2013

Euros, Yuans and You: The EB-5 Investor Visa Program as a Capital Source for Commercial Developers long overlooked federal program is revolutionizing the funding of real estate development across the country, and may help your project see not just green, but red, white and blue as well. Atlantic Yards in Downtown Brooklyn.1 Jay Peak Resort in Jay, Vermont.2 The Aloft Hotel in Milwaukee.3 Extell Development Company’s $750 million International Gem Tower in Manhattan’s Diamond District.4 The 400-room Marriot near L.A. Live in Downtown Los Angeles.5 The renovation of the historic Knickerbocker Hotel in Times Square, New York.6 What do these major development projects have in common? They all raised a substantial portion of their capital through the EB-5 immigrant visa program, a longstanding, but historically underutilized, federal program offering U.S. visas to foreign investors. In exchange for a qualifying investment in a U.S. business that creates at least 10 jobs, foreign nationals investing through the EB-5 program can obtain lawful residence in the United States, thereby providing (i) a relatively inexpensive source of capital to U.S. businesses, (ii) support for domestic job creation, and (iii) an efficient route for well-heeled foreign nationals to obtain U.S. residency. Although the EB-5 program is available to all businesses, since the onset of the credit crisis, commercial real estate developers in general, and hotel developers in particular, have made the EB-5 program an increasingly popular source of financing. Under the EB-5 program, developers can attract foreign capital to invest in domestic projects at significantly lower cost than traditional sources of capital. While investors generally seek returns of 10% or higher on subordinate debt or preferred equity and 20% or higher for equity, EB-5 investors have generally been willing to forego higher returns and tolerate greater risk in return for their ultimate goal of U.S. residency.7 Moreover, the hospitality industry, with the hundreds of staff required to manage and run hotel properties, is a prime source for satisfying the job creation requirements of the program. Background on EB-5 Program The EB-5 program was enacted in 1990 in an effort to induce wealthy foreign nationals to relocate to the United States, by specifically allocating up to 10,000 immigrant visas each year to foreign investors. Initially, the EB-5 program generated little interest from investors, and was even suspended from 1998-2003 due to widespread fraud and corruption.8 However, the number of EB-5 visas issued has grown exponentially over the last several years, with applications nearly quadrupling over a two-year period to 3,800 in 2011, and applications are on pace to well surpass that for the year 2012.9 CRE Finance World Summer 2013 28 This increase has coincided with shifts in the conventional credit markets, which has forced developers to look to foreign investors as an alternative and available source of capital. Today, EB-5 visa investors hail from around the globe, with most of them living in Asia. Chinese nationals alone received over 50% of all EB-5 visas from 2006-2012, with other top Asian countries being South Korea, with over 20%, and Taiwan, with over 4%. Other visa recipients include citizens of Great Britain, Iran, South Africa, Russia, Venezuela, India and Mexico.10 Overview of EB-5 Program The EB-5 program actually consists of two separate sub-programs: the Immigrant Investor Program (a.k.a. the “regular” EB-5 program), and the Immigrant Investor Pilot Program (a.k.a. the “Pilot Program”). To qualify under the regular EB-5 program, (i) a foreign national must invest at least $1,000,000 in a domestic commercial enterprise, (ii) the investment must be “at risk” equity capital and not guaranteed or in the form of a loan, (iii) the investor must be actively involved in the day-to-day management or policy decisions of the enterprise and (iv) such enterprise must directly create or preserve at least 10 full-time jobs within two years. Under the Pilot Program, the requirements described above have been relaxed. In contrast to the regular program, under the Pilot Program, investors can (i) invest through “regional centers” (investment vehicles that pool foreign investment in a particular geographic region) rather than directly in a U.S. business, (ii) be a member or limited partner of an indirect owner of the business rather than be actively involved in its day to day management, and (iii) include “indirect” jobs11 in the calculation of jobs created, rather than only “direct” jobs.12 In addition, if an investment is made in a “Targeted Employment Area” — an area that either (a) has an unemployment rate that is at least 150% of the national average or (b) is a rural area designated as a Targeted Employment Area by the U.S. Office of Management and Budget — the minimum investment required is reduced from $1,000,000 to $500,000.13 “Targeted Employment Areas” include portions of many major metropolitan areas, including New York, Los Angeles, Washington D.C., Seattle and Miami. The Pilot Program’s greater flexibility and relaxed requirements have contributed to its widespread success, with over 90% of EB-5 investments made through regional centers, and more than 240 regional centers currently operating nationwide,14 with more pending “regional center” designation.15 A Geoffrey Butler Associate Schulte, Roth and Zabel Joshua Cohen Associate Schulte, Roth and Zabel Marshall Brozost Partner Schulte, Roth and Zabel


CRE Finance World, Summer 2013
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