EB-5 Program Can Provide Alternative Source of Funding for Brownfield Projects

In a prior post, we discussed how the EB-5 visa immigrant investor program was becoming an important source of construction funding. Since then, the EB-5 immigrant investor program has continued to undergo explosive growth. The popularity of EB-5 is partially because traditional forms of project financing remains difficult to obtain. However, the EB-5 program is also attractive to developers because it can serve as an alternative source of relatively inexpensive capital or lending with typical interest rates for EB-5 financing is in the low single digits with some projects offering only 1%. Developers are able to offer such low rates of return because the EB-5 investors are primarily more concerned with obtaining green cards. The cheaper equity also allows developers to pursue more projects.

EB-5 capital has been used to fund a wide variety of projects including hotels, mixed use real estate development, nursing and assisted living facilities, hospitals, medical research facilities, manufacturing facilities, large infrastructure and construction projects and even solar energy projects. Some developers use EB-5 funding to acquire development sites those the purchase price cannot be used towards the job creation count. As a result, some developers have entered into purchase agreements with an EB-5 contingency.

Savvy developers are using EB 5 funding in combination with other sources of non-traditional or public-private financing, such as historical tax credits, New Markets Tax Credits (NMTC), and Tax Increment Financing. A number of our clients have used EB-5 funding on complex brownfield projects.

Following is a brief description of the EB-5 program. We then suggest how environmental professionals may play a role in this expanding and important program. Readers interested in learning more detailed information about EB-5 can visit the U.S. Citizenship and Immigration Services (“USCIS”)  website or review the websites of an EB-5 regional center in your geographic areas.  

What is the EB-5 Program?

EB-5 is an employment-based visa program designed to attract foreign capital investments. Foreign nationals that invest in an approved EB-5 qualified project will receive a conditional two-year visa from the USCIS.   If the investment project fulfills the job creation criteria after two years, the investor can apply for permanent resident status, and then seek U.S. citizenship in five years. Thus, the EB-5 program a very attractive means for obtaining green cards.

To qualify for an EB-5 Visa, an investor must invest at least $1MM (or $500K for a project in a “targeted employment area”) in an enterprise that will create at least 10 new full-time jobs for U.S. citizens and legal residents. If the project is an existing business, the 10 new jobs have to be in addition to the existing jobs in the business.

How Does EB-5 Program Work?

EB-5 is usually structured using limited partnerships or limited liability corporation that either extend loans or purchase equity stake in a special purpose entity established for the qualifying real estate or other capital development (i.e., job creating) project that is controlled by the developer. Limited liability partnerships (LLPs) are the preferred investment vehicle because EB-5 regulations require the EB-5 investor to control the business, unless the investor is a limited partner in the business. Each limited partnership generally invests in a single project. Foreign nationals qualify for the conditional visa by purchasing limited partnership interests of the LLP that invests in the qualified project either as a lender or equity participant.

When used as debt, EB-5 funding can be secured by a first lien, second lien, mezzanine pledge, or other collateral, and it may be in the form of recourse or non-recourse debt. The typical term of an EB-5 loan to a developer is five years. After the EB-5 investors obtain their green cards, project sponsors will typical “take out” the EB-5 investors by refinancing or selling the project.  

EB-5 investments may be pooled to raise the funds necessary to finance a project with the total financing dependent on the number of new jobs that are created. Because new jobs have to be created, EB-5 financing is generally used for construction projects such as building new hotels, medical facilities or multi-family projects but have also been used to fund major renovations of old buildings.

EB-5 investments can be made directly to a business or project, or through an approved regional center. In the direct EB-5 investment approach, a business owner raises capital for its business project directly from foreign nationals who will take an equity position directly in a business. Only full-time jobs (i.e., W-2- employees) directly generated by the business or project may be counted for EB-5 funding eligibility. The direct EB-5 model is usually more appropriate for foreign nationals who are interested in buying or starting a business, or want to control their investment and maximize their profits.

In contrast, projects that are sponsored by an approved regional center can include both direct and indirect jobs created within the designated geographic area of the project.  For example, if a shopping center is built with a direct investment of EB-5 financing, only the direct employees of the entity constructing the center may be counted towards calculating the amount of eligible EB-5 funding. However, if the same project received EB-5 financing through a regional center, all of the employees of the tenants in the shopping center could be counted, along with any other employees who provide goods and services to the shopping center. Regional centers usually use economic models to predict the total number of direct and indirect full-time jobs.

Since most EB-5 financings are done through limited partnerships or limited liability companies, EB-5 financings involve the sale of securities that will be subject to Securities and Exchange Commission. The offerings may be exempt from registration under Regulation D (for private offerings of securities) and Regulation S (for offshore offerings of securities outside the U.S.). Counsel for the business owner/developer will prepare the private placement memorandum, limited partnership or limited liability agreement, and subscription agreement for the EB-5 offering. Each EB-5 investor will generally sign a subscription agreement, place the full amount of their investment in escrow, and commence the immigration process by filing an I-526 visa application through a U.S. immigration attorney. Although not required, it is typical that the investor funds will remain in escrow until the investor obtains approval for the I-526 visa application.

For projects with $500K investors, a developer seeking to construct a $20MM hotel would have to generate 400 full-time employees. However, for projects sponsored by an approved regional center, the new jobs count can include direct jobs (hotel employees), indirect jobs (such as jobs at suppliers of goods and services to the hotel) and induced jobs (such as jobs created by other new businesses surrounding the hotel). For every 10 more jobs that can be counted, the developer can raise an additional $500,000 more in EB-5 financing. So, for example, a hotel that will create at least 300 new direct, indirect and induced jobs, could raise $15 million in EB-5 financing.

Not surprisingly, approximately 90% to 95% of all EB-5 visa investments are made through regional centers.  As of June 2014, there were 532 approved regional centers around the country although, many of these regional centers have not yet closed on any EB-5 financings. A number of large developers have established their own regional centers to take advantage of the demand from both investors looking for certified EB-5 projects. Business owners or developers may establish its own regional centers.

With the popularity of the EB5 program, the USCIS processing time for approving visas and regional centers has increase. While the foreign national I-526 petition is pending, the investor’s money is usually held in escrow is approved. Moreover, EB-5 funds cannot be used solely to pay down debt or redeem equity. However, the USCIS allows developers to use bridge financing or interim funding to maintain project feasibility and momentum prior to receipt of EB-5 capital. The bridge loan may be used to fund project costs or early-stage construction costs including demolition, renovation, remodeling can be used. If the project commences based on the bridge financing prior to the receipt of the EB-5 funding and then subsequently takes out the interim facility with EB-5 capital, the project may be able to count the jobs created during the interim financing period towards the required EB-5 job creation. When the EB-5 funding is approved, the EB-5 funds can be used to replace or “take out” the bridge financing. Terms vary widely with interest rates usually ranging from 10% to 14%. EB-5 bridge lenders tend to prefer hotel and senior facility projects in primary markets.  EB-5 funding can also be used for mezzanine financing to bridge the gap between developer equity and the loan-to-cost requirements of many commercial lenders.

Every EB-5 investor will be required to file an I-829 visa application for removal of the conditions within two years of the date that the investor obtained its conditional visa. At that time, the investor will be required to prove that the conditions under which the project was approved as an EB-5 investment have been met. If the business plan was not materially completed for any reason, the investors will lose their conditional visa.

Since obtaining US permanent resident status is generally the principal motivation behind an EB-5 investor, project success (i.e., project completion so permanent jobs are created) is critical to obtaining a permanent resident visa, due diligence has become critical for EB-5 projects. Obvious risks to investors include that the project may not qualify, there be insufficient investors in the project, the investment entity goes bankrupt, and the investor may lose its principal or suffer a delay in return of investment. The developer’s risk can include that investor’s source of funds is not lawful or the investor cannot document the source or path of its funds.

Use for Brownfields and Contaminated Sites

Regional centers and private developers begun turning to the EB-5 program for financing brownfield redevelopment in many US cities. For example, the Empire State EB-5 Regional Center recently closed and funded the first phase of a $220MM multi-use project on a brownfield site in upstate New York.  The America Now–Philadelphia Metro Regional Center, LLC is focused on redeveloping former industrial and brownfield sites. In Pittsburg, the state Department of Community and Economic Development (DCED) helped facilitate EB-5 funding for the Bakery Square project that transformed the former Nabisco property in Pittsburgh’s East Side into a mixed-use complex encompassing retail, office, hotel, dining and entertainment spaces. The Cleveland International Fund has also help fund construction projects on brownfield sites in Cuyahoga and Summit counties. In California, the American Development Center, LLC has provided early stage EB-5 financing for redeveloping former military bases and industrial properties. 

Projects with environmental issues can be a concern to EB-5 investors since the foreign nationals have to make “at-risk” investments. In other words, if the project does not produce the required number of jobs within the two year period, the foreign national’s path to path to permanent residency could be derailed. EB5 investors will need to understand the risks that environmental investigation/remediation process may impact project viability. Environmental issues can increase costs that could make a project infeasible or delay project completion so that the requisite jobs may not be created or may be delayed. Thus, developers seeking EB-5 financing for contaminated property should discuss complications posed by environmental issues in the offering memorandum if the environmental conditions could pose material risks to timely project completion. Foreign nationals will want to retain advisors to help understand the environmental issues as part of their overall project and financial due diligence. Likewise, regional centers promoting redevelopment projects on contaminated sites will need to understand the environmental risks to these projects.