The EB-5 immigrant investors program is more popular than ever, hitting its annual cap of 10,000 visas in April. This was only the second time the program has hit its cap—the first time was August of 2014. Real estate lending, investment and advisory firm Greystone is looking to get in on the action, and it launched a full-service EB-5 regional center this June. MHN caught up with Justin Gardinier, managing director of the EB-5 group, to learn more about the program.
Why has the EB-5 program become so popular?
First and foremost, it would have to be the lack of available capital in the downturn. In 2008, construction and mezzanine financing evaporated from the capital markets. That is when EB-5 took off, and it just ‘hockey sticked’ from there.
Even in today’s liquid capital markets environment, EB-5 financing offers a less expensive form of support capital. I’d argue that it doesn’t compete with senior financing these days, just knowing how liquid the senior capital markets are. But for mezzanine financing or preferred equity, EB-5 offers a less expensive alternative, subject to the complications of actually getting it. If you have the ability to wait it out, you definitely do get a discount on the cost.
What types of deals work best for EB-5?
In the New York market, we are currently evaluating hotel projects and multifamily projects—both for sale and for rent. The EB-5 program can really work for any asset class. It is just a matter of what the construction budget is, what the operational revenue is if there is an operational component, and structuring the offering to accommodate the needs of the project and investors. The first two factors drive the job creation count, which is the limiting factor on the sizing of an EB-5 investment.
What advice would you offer a first time user?
There is a big marketing effort to a successful deal. You have to be able to entice investors who are 8,000 miles away to invest in a particular project. The easier you can get them excited for the project or location, the easier the offering process will be. A project in Midtown Manhattan is probably going to get a Chinese investor more excited than a multifamily development in Minnesota or Nebraska would. They know the major gateway markets through culture and television, and may even have relatives living there.
Other advice would be to choose the right regional center/EB-5 sponsor because it is a complicated process.
At its core, it’s a security offering. You want to make sure that your partner is going out of the way to create an offering that is fully SEC compliant. If something gets tripped up, the developer could be harmed because now they are associated with an offering the SEC is investigating. Another aspect in choosing the right partner is making sure they have the ability to sell in China. This is the part people underestimate when they get into the business. They think ‘I am going to start a regional center, fly over to China, rustle up a number of investors, and come back with money in hand.’ But it is much more complicated than that.
Can you walk us through the process?
The process takes time. First you have to prepare all the documents, which can take up to three months depending on the complexity of the deal. Then you start the marketing process of talking with investors. Again, depending on the size of the deal, that can be two months or it can be six months. Some months you find a lot of investors, the next month can be dry. It ebbs and flows.
Once the money is raised it goes into escrow. Now you have to consider what mechanism releases the money. Historically, the money remained in escrow until the deal was approved by the U.S. Citizenship and Immigration Services. The U.S. CIS approval used to take three to six months. Now it takes about 12 months, though there have been projects where it took 24 months.
Today there are several mechanisms used to release money sooner. At Greystone we’re taking a unique approach by actually putting up our balance sheet. This guarantees investors that if we take their money out of escrow before their approval—and for some reason they get denied—we will refund their money, and we will backstop it with the borrower.
China is big on EB-5, but where else are you finding investors?
So China is between 80 and 90 percent of the total capital program. The next largest country had been South Korea, but it is now Vietnam. Still, each only represents about two percent. Some South American countries are increasing their interest as well. You’re also starting to see some interest coming out of the Middle East, but that creates its own issues. Part of the application process is tracking the source of funds. There is also an extensive background check with the U.S. Department of Homeland Security. But there are groups that have successfully raised significant amounts of capital from certain Middle Eastern countries, including Iran.