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Preeti Sinha

How can I split my $1 million investment between land purchase and working costs?

I am planning to be an EB-5 investor (direct investment) and would like to invest $1 million for a residential home development. What problems, if any, will I run into if I want to use $600,000 to purchase the land and $400,000 to cover working capital (salaries for 10 workers, materials, outsourcing suppliers, etc.)? At the end of two years, what do the EB-5 requirements say I must do with any profits exceeding my initial $1 million investment?

Answers

Joe Whalen
April 21, 2015 04:53 AM  Joe Whalen

Forget it. It won't work because merely building one residence is excluded from EB-5 completely by regulation. 8 CFR 204.6(e) definitions:
Commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to, a sole proprietorship, partnership (whether limited or general), holding company, joint venture, corporation, business trust, or other entity which may be publicly or privately owned. This definition includes a commercial enterprise consisting of a holding company and its wholly-owned subsidiaries, provided that each such subsidiary is engaged in a for-profit activity formed for the ongoing conduct of a lawful business. This definition shall not include a noncommercial activity such as owning and operating a personal residence.

Fredrick  Voigtmann
May 26, 2015 11:42 AM  Fredrick Voigtmann

Assuming your project meets EB-5 requirements (and is an active business, not passively holding real estate) and your business plan complies with Matter of Ho, the EB-5 policy memorandum of May 30, 2013 allows for EB-5 capital to be used to purchase land and cover working capital and reasonable business expenses. You are entitled to keep the profits you earn in your business. You cannot withdraw (return to yourself) any of your EB-5 capital (invested principal) before your I-829 is approved and your condition removed. What you do with the rest of your income and profits is up to you.

Philip Cohen
December 06, 2015 10:16 AM  Philip Cohen

It is worth noting that the purchase of land must have a reasonable nexus (in this case need) to support the business itself, or it becomes a harder case to make.

Colin Behring
January 11, 2017 12:20 PM  Colin Behring

Yes, you may be able to accomplish your goals.

No, you can't do it the way you described in your question. See below:

The devil is in the details and Joe already gave a detailed answer on how the proposed project doesn't fit for EB-5 directly. If what you are after is investing in a safe asset that has the security of residential real estate, potential for appreciation and generating a reasonable return on real estate ownership, that can be accomplished by investing in a Regional Center program with the right project and willingness to negotiate.

My suggestion: (Be sure to read every step)
1) Find a regional center that has a for-sale residential real estate project already under construction in a TEA location ($500,000 investment) and invest in the project. This is $500,000 cheaper than a direct investment.
2) Utilizing a minor amount of additional capital above and beyond the $500,000 required for EB-5 and place a deposit to purchase a residential unit. In places like California, the deposit could be as little as 5% of purchase price and NO MORE.
3) Project investment terms can be nearly 5 years. Negotiate a side letter with the EB-5 sponsor whereas after a reasonable bench mark schedule (for example, say 3 years) your EB-5 investment generates a return on par with an inflation index (or better!).
4) When your residential unit is available to close on, you may be able to move into it with some appreciation already built in compared to your original "pre-sale" price or even trade the contract to someone else.

This way, the regional center handles all your immigration items which would save you a tremendous amount of time and headache (which is worth money to me), you are invested in a real estate asset (original goal) and you have the ability to generate a reasonable return on a real estate investment. If you were targeting major returns comparable to private equity or owning a business, you need to negotiate the side letter much harder and provide more attractive terms for the project sponsor to want to spend time with the amendment of their original program.

user
February 14, 2017 03:07 PM  

Maybe I don't quite understand the question. As I understand it, you want to use the EB5 program to build a residential property. Yes, you could buy the land and then build a property on it, but that would be completed before the 2 year Visa rule, and would not be considered a real business. You could find a regional center which has a residential home development (multiple properties in process) and invest in that....sure. That may make sense if the properties they are building including the type, location etc meets your real estate holding requirements, which by definition within the TEA, probably isn't a good fit.
If you want to control which land you buy, and want to use the EB-5 program for its benefits, why not invest in a construction company through a regional center, or find the construction company and introduce it to a regional center. This construction company will now build and manage the build out of your single home, it gets sold (to you perhaps) and continues to work as a real estate development company for the future. You now have full control of where the properties are being built, you can show you created 10+ jobs, and you have a viable business. just a thought

Marko Issever
October 04, 2017 01:54 PM  Marko Issever

Building a residential home for personal use is excluded from the EB5. If you are thinking of the direct investment route you would need to establish a true commercial enterprise that employs 10+ workers.

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