Although the EB-5 program was created 25 years ago, the processes involved are still not well understood within the commercial real estate community. Demystifying the program and how it works will be the focus of a concurrent session slated at the upcoming 2015 CREW Network Convention & Marketplace, Sept. 29 - Oct. 3, in Seattle. Merri Cross talks with two of the three panelists, Jessic Yu, an associate at Stokes Lawrence, and session moderator; and Loren Cohen, an attorney and manager of legal affairs for MC Construction Consultants Inc., to get a preview of the discussion. (Kevin Stamper,executive director of the Seattle Regional Center, will also serve on the panel.)
Jessica Yu: The EB-5 program was relatively unknown until 2008 or so. Its popularity, or the popularity of the regional centers, surged in the last several years when the economic downturn adversely affected lending practices. Developers were not able to get a loan from anywhere, and they turned to EB-5 as an alternate lending source. Then developers realized EB-5 provides abundant foreign capital at a really low rate, and they don’t have to give up control. That is why the EB-5 program will continue to grow.
Loren Cohen: I believe there’s a twofold reason for the surge in the popularity of the EB-5 program. The first is the correlation of the increased interest in the program with the Great Recession. With the closure of typical sources of debt financing, people who needed capital (including builders/developers) looked for alternative sources, and EB-5 was one of these sources that was actually a viable strategy to the banks. The corollary reason was the rise in the strength of China’s economy – mixed with all of the other drivers of the capital exodus out of China. So together these two events led to the surge in popularity. I do not think it’s necessarily on a sustainable growth track. There’s likely a lot more growth that could come, but probably not at the rate EB-5 has grown over the last five years. It will be interesting to see what transpires in the statute as part of Congress’s immigration overhaul, but with the arbitrary cap on number of EB-5 visas keeping this program very limited in size, if this cap is opened up there’s likely an opportunity to find a sustainable model for EB-5 funding that could continue in perpetuity so long as America remains a place where foreigners continue to want to invest and live and so long as we continue to have worthy projects for these investors to seek out.
Yu: The role of the Regional Center is multifaceted. In a few words, a regional center is the business creator, project manager, and investor coordinator.
"Other business types, say a startup company with a great idea, can turn to an angel investor for funding. It’d be hard to find an angel investor or a group of angel investors to fund mega projects that need hundreds of millions of dollars."
- Jessica Yu
Yu: I believe developers as a group were the most severely affected during the economic downturn because all lending sources dried up. Real estate projects tend to be bigger in size and require bigger loans compared to other types of businesses, and with traditional sources of capital unavailable, developers had to find an alternate source of capital to fund their big projects. Other business types, say a startup company with a great idea, can turn to an angel investor for funding. It’d be hard to find an angel investor or a group of angel investors to fund mega projects that need hundreds of millions of dollars.
Cohen: First, the requirement for an EB-5 investment to be "at risk" takes ordinary securities off the table. But when looking for an at-risk investment, investors look for security, and EB-5 investors have been no different. Real estate is one of the easiest types of investment securities to explain and is the type of security any investor - whether foreign or not – can easily understand. Stocks, government bonds, Internet sites and media business opportunities and the like are all very interesting investments, but when you get to the nuts and bolts of how an investor’s money is secured, it’s not as clean as a real estate deal – and that’s why a bulk of EB-5 has found its way to the real estate market.
Yu: For a regional center EB-5, source of fund for the investor, employment creation and a good exit strategy for the regional center.
Yu: I believe Chinese investors will continue to dominate for a while, but I see an increase in inquiries from Russia and South America as well. I think India is another country to consider, but the wealthy Indian citizens have less of an incentive to move out of the country.
Cohen: China will continue to be strong so long as investors are able to move their money into the world market. There’s always going to be growth from the emerging markets. They tend to be a little less stable in governance, which means less stable for investment opportunities. This makes an EB-5 type of program very enticing, so I look for emerging markets to be the growth leader. Recent developments in the Chinese market are of obvious concern, but I think there’s a chance this could lead to even more capital flight, as Chinese investors seek safe havens for their money.
Yu: Any type of commercial entity can be a candidate for EB-5 investment. Whether it’s a regional center or direct EB-5, I would think the ideal project is one that can create at least 10 jobs. A resort that creates jobs in hospitality, local vendors, and suppliers, etc., will be better than a manufacturing plant that is fully automated.
Cohen: The cleanest EB-5 investment to sell is one that is highly secured and directly collateralized to a land-based security.
Yu: Developers, regional center owner, equity investors, and investors and their immigration attorneys. It’s definitely a team effort. Failure at any point of the process by any key person is a genuine risk.
"Find the right partner, find the right project, find the right boots on the ground team, and EB-5 is a fantastic way to finance real estate development."
- Loren Cohen
Cohen: The brokers on the ground who are finding the investors are the most important; everything else can be handled very easily stateside. The on-the-ground broker is the one role that cannot be easily managed by a foreigner. This role is followed closely to the U.S. immigration attorney who initially packaged the deal for USCIS.
Yu: With any investment, there is a risk. In fact, EB-5 investment has to be at risk. The same risks that exist for any business exist for EB-5 projects, but there is additional risk for EB-5 projects. If a business fails, investors lose money. If an EB-5 business fails, investors lose not only the money, but they can also lose their green cards (assuming the failure of the business happened during the conditional green card stage).
Cohen: Marketing to foreign investors for any investment creates different issues, from culture competency concerns to just simple language barriers. EB-5 is also mired in bureaucracy, and compared with the hoops of a typical senior debt financing underwriting process, is far more intensive.
Yu: I would suggest that developers work with a reputable broker and participate in the marketing act.
Yu: First, the EB-5 process is complicated. It’s more than just setting up a business, taking foreign investors’ money and applying for their green cards. Second, it takes time. In addition to all the players who are normally involved in starting and running a new business, the federal government and state government are involved. The I-526 is taking about 13.4 months now. You will have to be patient. Third, EB-5 is an at-risk investment. An investor is not guaranteed a green card. An investor is not guaranteed the return of the investment. The regional center is not guaranteed the number of investors it needs to complete the project. There are so many contingencies that affect the fate of the regional center.
Cohen:
1. They need to know that it’s going to take a longer time than normal.
2. They need to know that most participants in the EB-5 world are blindly feeling their way forward. Competing ideas are rampant, and no one is an expert, yet everyone is an expert. It’s simply a program with limited history and lifespan, and developers must understand what that means to a project.
3. They need to know that it’s the real deal, and it really does work to actually create financing. Find the right partner, find the right project, find the right boots on the ground team, and EB-5 is a fantastic way to finance real estate development.