The road to extending the EB-5 program has been a long and winding, not to mention occasionally rocky one, but an end is finally in sight.
The measure will either be extended under a Continuing Resolution on Friday, when spending authority expires. Or, in the unlikely event that Congress does finish its business by Dec. 11 (Speaker of the House Paul Ryan says Congress will need some more time) the EB-5 measure will be part of the Omnibus spending package.
Either way it is passing.
The first question that comes to mind, of course, 'what does it say?' The second is, 'how do you know?' Let's start with question No. 2.
Amending a Draft
Last month Congress circulated a draft document on the legislation that disappointed many in the industry and generated a number of comments to Congress, Jim Butler, partner and chairman of the Chinese Investment Group at Jeffer Mangels Butler & Mitchell LLP in Los Angeles told GlobeSt.com.
The Washington DC association formed to advocate for EB-5, IIUSA, or Invest In The USA, spearheaded the comments and presented a markup to Congress of its initial draft, Butler said.
That led to a new draft, one to which all of the relevant parties have agreed, barring a last minute crisis, he said.
Some of the highlights are:
- The program has been extended for five years.
- The number of visas allocated for the program remains 10,000 visas per fiscal year.
- The program adopted a more conservative view on how to form a TEA (Targeted Employment Area). In the first draft, sources said that the TEA language was written to preclude urban development, favoring rural areas instead. The language in that first draft was not that precise, Butler said, but the new language describing how to form a TEA is far more vague. The requirement said that up to 12 contiguous census tracts could to determine what qualifies as a TEA. But Butler argued that the definition of contiguous -- at least in context of this legislation -- is unclear. "Would a candy bar shape be allowed -- that is, end to end tracts, or does it have to be a sphere?"
- A new mandate requires that 20% of the visas allocated under the program are to go to projects in rural areas and 20% to government infrastructure projects. That totals 40%, a sizeable percentage of the visas, but Butler noted that if these visas are not used in these areas they can be redistributed for other applications. "People will be waiting in line but they will be handed out eventually."
It Might Not Matter So Much If The Project Is a TEA
- The minimum investment threshold for investors has been raised from $500,000 to $800,000 and the non-TEA investment remains at $1 million. This is a significant development, Butler said. He explored its ramifications in a blog post about the new draft. He wrote that the firm’s sources do not expect the new $800,000 minimum to affect investor interest. In fact, he wrote, the firm's sources believe that"...the reduced 'delta' between the new minimum investment of $800,000 and the continued non-TEA investment of $1 million, will reduce the importance of a project being in a TEA. In other words, they think that with this reduced spread, more investors will be willing to pay $1 million."
What is also important to note, he wrote, is that the change means that even with the minimum investment of $800,000, a developer will be able to raise 60% more money with the same number of investors. "For example, under old rules that prevailed until late 2015, 10 investors would be required to put up a minimum of $5 million assuming their project was in a TEA. Under the new rules, the minimum investment for these 10 investors would be $8 million. This is a very significant advantage."
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