Guest Column: Adding EB-5 Immigrant Investor Funds to Your Capital Stack
By Kate Kalmykov
Since 2008, a little-known government program, the EB-5, has grown exponentially in popularity. The EB-5 program has become particularly popular with those in the commercial real estate industry as an alternative, low-interest source of capital.
The Immigration Act of 1990 for the first time permitted a foreign national to qualify for permanent residency (green card status) in the United States, based upon investment under the employment-centered fifth preference category (EB-5). The foreign national who wishes to use the EB-5 category has two basic choices: Find an existing EB-5 investment company or invest directly in his or her own new enterprise.
With the “individual EB-5” option, the investor will not only be required to commit the EB-5 investment funds to the enterprise but also be expected to be actively involved in the day-to-day management of the business. Individual EB-5s are not limited to one investor; multiple investors can pool funds together to infuse into businesses that they know will create the requisite amount of direct employee positions for each investor (the individual EB-5 requires that the investor demonstrate, after a two-year period, that their investment has resulted in the company creating 10 full-time and permanent positions filled by U.S. workers, whether citizens or permanent residents). The investor must demonstrate that the job creation requirement has been met by submitting evidence that includes W-2s, Form I-9 employment eligibility verification forms and payroll records.
The second and more popular option is to invest in a United States Citizenship and Immigration Services (USCIS) designated “regional center.” A regional center is an entity, organization or agency that has been approved as such by the USCIS. The regional center focuses on a specific geographic area within the United States and seeks to promote economic growth through increased export sales, improved regional productivity, creation of new jobs and increased domestic capital investment.
A regional center designation is desirable because the job creation requirement can be met not only by demonstrating the creation of direct employment but also through indirect and induced employment. Indirect and induced employment is demonstrated through econometric reports based on recognized economic input/output models. From the investor’s perspective, because of the difficulty of creating 10 direct employees per investor in a relatively short period of time, the regional center EB-5 program has become so popular that today it accounts for approximately 95 percent of all EB-5 petitions.
With either of these options, the investment amount per person is $1 million unless the investor can show that the investment is located in a “targeted employment area” (TEA), which is defined as either a rural area or an area that has experienced unemployment of at least 150 percent of the national average rate. If the area qualifies as a TEA, the required investment amount is reduced to $500,000.
So how does this apply in the commercial real estate context? EB-5 money can be used for almost any commercial real estate project, be it an office building, industrial property, medical center, hotel, mall, retail store, shopping center, multi-family housing or warehouse. Often, a real estate development company that has had trouble securing financing through traditional lending sources or is simply looking for lower-interest financing to include in their capital stack applies for regional center designation. As part of that initial designation application, they often submit an application for pre-approval of their first “shovel ready” project. The initial application will also include corporate and SEC offering documents such as a private placement memorandum, subscription agreement, limited partnership or LLC agreement, as well as a business plan, econometric report, marketing plan, operational plan or other documentation establishing that the project is shovel ready.
Once approved by the USCIS, the regional center will take the project to market to attract foreign investors. This often involves working with international consultants and brokers to source investors. Those interested in the regional center will subscribe to an EB-5 investment vehicle structured as either a limited partnership or a limited liability company, specifically created for the purpose of financing the development project.
This company may then either obtain an equity stake in the development project or, alternatively, use the EB-5 funds to provide a low-interest loan to the developer. If the project is in a TEA—and most projects administered by regional centers are—investors will contribute $500,000 each to the regional center project and obtain their conditional two-year green card.
At the end of the two-year period, the investor must file a petition to remove conditions of residency with the USCIS. As part of that application, the regional center must provide documentation to the investor verifying that developer completed the project as described in their business plan—i.e., it was built and the funds were expended. By doing so, the USCIS can determine that the jobs both direct and indirect have been created pursuant to the econometric report the investor submitted with their original petition to obtain the conditional green card.
Regional center designation is not a one-time thing. Once obtained, the designation may be used for other projects. If a project is outside the scope of the initial designation, either by industry or by geographic area, the developer may apply for an amendment of their designation. Developers may also adopt other projects under the auspices of their regional center for a fee. Likewise, those developers that are not interested in seeking regional center designation for themselves because of the expense or time involved may choose to have their project adopted by an existing regional center. A final option may be to purchase an existing regional center that is approved by the USCIS but is not in operation.
USCIS policies with respect to the EB-5 program are extremely fluid. Retaining experienced EB-5 counsel to ensure ongoing immigration, securities and tax compliance is the key to creating and maintaining a thriving and successful center or project.
Kate Kalmykov is of counsel at Greenberg Traurig L.L.P. She works regularly with developers, private equity funds and organizations on developing projects that qualify for EB-5 investments, including creation of regional centers, having projects adopted by existing centers and individual EB-5s. She regularly helps to prepare I-924 amendments and exemplar petitions and develops compliance programs. She also counsels foreign nationals on individual or regional center EB-5s, as well as issues related to I-829 removal of conditions.