What’s in the latest Newark development project’s capital stack?
If you are not a developer, real estate broker, economic development officer or politician, this question may seem foreign to you, but it affects the developments rising up right at our doorsteps.
A “capital stack” refers to the layers of financing used to acquire property and develop a real estate project. At Newark Community Economic Development Corporation’s (Newark CEDC’s) second annual Developer’s Finance Forum at The Newark Club earlier this month, panelists explained to a room full of commercial and residential developers, investors, and portfolio managers why some are taking advantage of EB-5 financing in order to complete their projects in Newark.
Investing as a pathway to permanent U.S. residence
A controversial financing tool, EB-5 is distinct from other forms of financing in the real estate development toolkit: investing in a project through the program offers foreign investors a pathway to a United States visa.
In 1990, the U.S. Congress approved a new provision of the Immigration and Nationality Act authorizing allocation of 10,000 conditional immigrant visas per year to individuals seeking lawful, permanent residence in the United States.
Billed as an economic development engine, the program requires foreign investors to help finance projects that create at least ten jobs at prevailing wage for U.S. citizens, other legal private residents outside of the investor’s own family, asylees, or refugees for a minimum of two years. The standard minimum investment for EB-5 is $1 million, except for projects within targeted employment areas, like Newark, where the minimum drops to $500,000.
According to the New York Times, 80 percent of EB-5 investors are Chinese citizens.
Ron Beit, CEO of Newark-based real estate developer RBH group, utilized EB-5 financing for Teacher’s Village, a project in downtown Newark that houses a charter school, retail space, and housing units. It wasn’t without its challenges.
“It’s a process,” shared Beit, “Timing is everything. Expect the funds to be tied up for 14 to 16 months,” he advised the forum’s attendees.
Panelists discuss creative financing options, including EB-5, at The Newark Club.
While this may seem like a major holdup to some developers, EB-5 may be underwritten as part of a capital stack’s mezzanine level, which refers to project financing that kicks in after the initial rounds of funding needed to launch the project and see it through its early stages have already been secured. Beit also advised the Newark CEDC audience to onboard a reliable consultant to ensure they follow all laws to the letter.
Developers are allowed to independently source capital for their projects from foreign investors and file the necessary applications with the United States Citizen and Immigration Service (USCIS), but they can also get help with the process.
The Regional Center program can help developers identify foreign investors and manage regulatory and statutory compliance. They also allow capital to be pooled together to access a wider range of project opportunities within a specific geographic region, such as hotels and resorts, convention centers, and mixed-use developments.
Regional Center regulations also expanded the definition of “job creation” to include so-called “indirect jobs”–those created “collaterally or as a result of capital invested in a commercial enterprise affiliated with” a foreign investor through the EB-5 program.
Cities say EB-5 is vital for redevelopment. Lawmakers say it needs reform.
When the funds are finally released, said Beit, “EB-5 is great for emerging markets like Newark.” Some wholeheartedly agree. The United States Conference of Mayors, of which Newark Mayor Ras Baraka is a member, this year called the program “ a vital source of urban redevelopment funds” that “finance job creating projects in urban areas that could not otherwise be funded.” According to forum panelist Min Chan of Skyview Property Advisors & EB-5 Regional Center, EB-5 funding has contributed $1.9 billion to the New Jersey economy.
But EB-5 has not been without controversy. The program has had to fight the perception of being a “$500,000 visa” and government-backed foreign money-laundering scheme, with scrutiny of EB-5 rising recently in light of its reauthorization coming due. An article in The Atlantic last year wondered whether the program is worth its weight in job creation. The New York Times recently discussed the fact that foreign fraudsters and other bad actors have attempted to infiltrate the program, sometimes successfully.
The future of EB-5 funding is uncertain and dependent upon congressional authorization and extensions. The latest extension is set to expire December 9th of this year, except by a move of seven congressmen on the Judiciary Committee and the Department of Homeland Security. With the recent election of Donald Trump as the country’s 45th president, EB-5 will soon have an ardent fan in the White House. Trump used the law to attract Chinese investors to help fund the development of Trump Bay Street, his new luxury 50-story residential high rise in Manhattan, according to Bloomberg.
A bipartisan group of congressional lawmakers is seeking reforms with the reauthorization, including one House bill that would institute for more stringent requirements for proving invested funds were legally obtained; raise the minimum investment from $500,000 to $800,000; and include fixed allotments of 2,000 visas apiece for urban and rural projects out of the 10,000 total visas available annually under the program.
EB-5 was an important tool for positioning both the Teacher’s Village development and Newark itself as a “brand ambassador” for “America’s new urbanization wave,” according to a three-year-old report by Hopkins, Sampson & Brown Real Estate Advisory Services. The report also said the program was being used, at the time, to attract Chinese investors, and was looking to expand to potential investors in Latin America and other Asian countries. NJ Digs reported last month that Teacher’s Village is expected to be complete by the end of this year.
Other creative financing tools discussed at the developer’s forum included Israeli bonds, crowdfunding, and New Market Tax Credits.