EB-5 Financing as an Alternative Source of Capital for Housing U.S. Department of Housing and Urban Development Presentation Debbie A. Klis, Esq. klisd@ballardspahr.com February 1, 2017
The EB-5 Investment Visa The EB-5 Visa for Immigrant Investors is a U.S. employment-based (EB) visa created by the Immigration Act of 1990 to stimulate economic activity and job growth, while allowing eligible aliens to become permanent residents. The EB-5 Program provides a method of obtaining a Green Card for foreign nationals who invest money in the United States. This Program enables a foreign national to obtain permanent residence status more expeditiously than would most other options. The EB-5 Program has evolved into a low-cost source of alternative financing for U.S.-based projects. - To obtain the visa, individuals must invest at least $1,000,000 creating at least 10 jobs full-time (35 hours) for qualified employees. - By investing in certain qualified investments or regional centers with high unemployment rates (i.e., "Targeted Employment Areas ), the required investment amount is $500,000. 2
EB-5 Investment Requirements Investment Amount - The investor is required to invest $1,000,000 (or a reduced amount of $500,000, if the investment is within a Targeted Employment Area (TEA), i.e., 150% of the national average unemployment statistic). Job Creation Requirements - Each investor must create 10 full-time U.S.-based jobs from their investment. - Job creation can be through both direct and indirect jobs. Source of Investment Funds - Investor must demonstrate the EB-5 Visa investment capital is from a legal source, acquired, directly or indirectly, by lawful means (e.g., no criminal acts). - Investor must document the path of the funds with bank statements plus supporting documents to establish the source. - Investor can demonstrate a valid "pattern of income" such as through income tax records and savings records to prove funds were accumulated over time. 3
Types of U.S. Projects Using EB-5 Funds Real Estate Investments Real estate projects using EB-5 include: - office and retail buildings - shopping centers & strip malls - hotels, conference centers, dorms, ski villages and ski resorts - casinos, shipyards, senior living/care - big box stores and sports stadiums - apartments, condos and single-family home developments - solar-plants and wind farms - mixed-used residential developments Private Equity Investments Non-real estate projects that create direct jobs in a new enterprise: - manufacturing plants, fishing businesses, dairy farms - in-home care for seniors, - medical device companies, hospitals, universities, service centers - research facilities and grocery stores - restaurants, charter schools, - other business seeking capital with job creation to support investment 4
Residential EB-5 Projects Residential EB-5 projects are growing in popularity for both residential only and mixed-use projects including affordable housing projects Assuming no or very few direct jobs on the premises of the apartments, condos or housing development, job creation numbers for residential projects rely on: - Two-year construction period to make use of the construction jobs in the job count If one project s construction period is <2 years, consider bundling one or more projects as one project (must have the same contractor) Still doable even with less than a 2-year construction period - Approved hard and soft costs to benefit from the indirect and induced jobs created in the regional center 5
Key Ways to Use the EB-5 Program Form your own Regional Center - Loan to your own project(s) - Loan to third-party projects Procure a loan from an USCIS-approved Regional Center - Confirm the RC s approval in the project s geographical area - As of 2013 Policy Memo, pre-approved labor codes not required Rent a USCIS-approved Regional Center - Per a rental agreement for a fee or a % of a project s revenues - Actual partner in a joint venture proposed by an outside party Direct Investment by an EB-5 investor directly in a project 6
The Regional Center Most EB-5 investments occur through a Regional Center An entity involved with the promotion of economic growth, productivity, job creation, and increased capital investment. An entity that has received Regional Center designation from the USCIS following the submission of documents supported by an economic report, showing: How the regional center will promote economic growth, How, in verifiable detail, it will create jobs directly and indirectly through capital investments, and The amount and source of capital committed to the regional center. Regional Centers match foreign capital with developers/entrepreneurs who need funds. More and more, developers/entrepreneurs launch their own Regional Center to cut out the middleman. 7
Job Creation is a Key Factor Direct Jobs - Identifiable jobs within a new commercial enterprise - Permanent full-time jobs defined as a minimum of 35 hours per week over the course of that project - Construction jobs exceeding 24 months Indirect/Induced Jobs - Jobs shown to be created collaterally, or - Jobs shown to have resulted from the investment in the new commercial enterprise - To include the indirect/induced jobs, the project must be funded through a regional center 8
Regional Center Basics Investor must invest 100% of the $1,000,000 ($500,000 in a TEA plus an admin fee currently approx. $53,000). Money can go: To the project immediately To escrow and release subject to a holdback To escrow and release upon a benchmark Regional Center administers the EB-5 projects New Commercial Enterprise investors subscribe to this entity Job Creating Entity recipient of the EB-5 funds that creates the actual jobs 9
Pros & Cons of Using an Existing Regional Center The benefits to the developer of using an existing Regional Center: - Avoidance of the time and expense associated with setting up a Regional Center (approval time right now is approximately 9 months) - Developer s only responsibility is to negotiate the investment for the project from the Regional Center - The Regional Center is responsible for locating foreign investors The downsides to the developer of using an existing Regional Center: - Regional Center might reject the project or might require unfavorable terms and high fees & interest rate, and/or proceed at a slow pace - Regional Center would receive the profit spread between the 0.5-1% pref to the EB-5 investors + marketing fees (1.0-3.00%) and the 4.0-7.0% (or more) interest charged to developer - Developer is missing the opportunity to have a Regional Center in place to fund a pipeline of future real estate projects 10
Advantages of Creating a Regional Center Regional Center designation by the USCIS provides legitimacy for the project, which may help in marketing to foreign investors. Regional Center designation is a one-time designation allowing future projects to be marketed without incurring delays. A project may be pre-approved by USCIS which facilitates fundraising. In addition to funding their own projects, Regional Centers can profit by funding projects developed by developers/entrepreneurs. Regional Centers are permitted to count indirect and induced jobs plus direct jobs, in meeting the 10-jobs-per-investor requirement. The Regional Center is an asset that can grow geographically. 11
Disadvantages of Creating a Regional Center Regional Center certification takes between 9 and 12 months. - Regional Center certification is not the same as approval of any particular Regional Center project unless the application included an actual project vs. an exemplar project. Newer Regional Centers find it a bit more difficult to compete in their marketing efforts with long-existing regional centers with a track record of many immigration approvals The costs of locating investors have increased in recent years - Annual marketing fees of 2-4% of funds raised Regional Centers have ongoing filing requirements with the USCIS to avoid de-certification 12
Summary of EB-5 Program Successes Since 2008, more than $12 billion in foreign investment in U.S. EB-5 Program contributed $9.62 billion to GDP from 2010-2013 creating an average of 29,300 jobs per year EB-5 spending contributed $3.58 billion to GDP, created 41,000 jobs, generated $805 mill in tax revenue in 2013 In 2014, the Brookings Institution estimated that the EB-5 visa created 85,500 full-time jobs Brookings found that in 2013, EB-5 brought in $1.6 billion and created 31,000 jobs 13
EB-5 Program Benefits to the Project The EB-5 Program can be used as an alternative funding source When traditional forms of capital come up short or are too costly and would affect the ROI, developers seek low-cost funds. Investors receive a de minimis pref (0.5% to 1.0% lately), which makes this investment a low-cost source of funding. Investors pay an upfront administrative fee ranging between $50,000 and $60,000 each to cover the program promoter's broker costs. Marketing agents in the foreign countries market the project and locate eligible investors for a portion of the administrative fee and an annual percentage (1.0% to 4.0% lately). EB-5 funding works well along side Historic Tax Credits, New Markets Tax Credits, Revenue Bonds, TIFs, Low Income Housing Tax Credits, Housing and Urban Development ( HUD ) financing, etc. 14
A Residential EB-5 & LIHTC Case Study 15
An EB-5/LIHTC Case Study The project contains 145 market rate units and 40 affordable units interspersed throughout a 12-story building, 4,000 SF of retail space, and 100-space parking ( Building ) The market rate units, retail, and parking are separately owned from the affordable units and have separate financing A condominium structure is used to separate ownership, with 80% owned by the market rate owner and 20% owned by the affordable owner Public Housing Authority ( PHA ) owns the land, and sells it to the project owner for FMV PHA partners with a developer to construct the Building 16
An EB-5/LIHTC Case Study The basic structure of PHA s investment in the Building is captured in the following organizational chart PHA Developer Entity PHA Affiliate EB 5 Investor (Class A Member) Joint Venture Entity (Class B Member) Managing Member (.01%) Investor Member (99.99%) Market Owner (80%) Affordable Owner (20%) Project Owner 17
An EB-5/LIHTC Case Study The Project cost is $56 million, which will be funded with (i) $29 mil first mortgage, (ii) $16 mil EB-5 preferred equity investment, & (iii) developer equity including PHA s sale of the land The Development Budget (market rate units) Development Budget Amount Per Unit Land $10,000,000 $68,965 Hard Costs $33,283,250 $229,539 Soft & Financing $13,334,461 $91,961 Costs Total $56,617,411 $390,464 18
An EB-5/LIHTC Case Study The Project s Capital Stack (market rate units) Financing Source Amount % of Total Construction/Senior $29 million 51.2% Loan EB-5 Preferred Equity $16 million 28.3% (Subordinate) Developer Equity $10 million 17.7% Deferred Developer Fee $1.6 million 2.8% Total $56.6 mil 100% Appraised Value (as stabilized) $61 million 19
An EB-5/LIHTC Case Study The Project s Capital Stack (affordable units) Financing Source Amount % of Total Construction/Senior $4 million 28% Loans Investor Equity $10 million 70% Deferred Developer Fee $150,000 2% Total $14.15 mil 100% 20
What to Expect in the Trump Administration January 13, 2017, DHS published a Notice of Proposed Rulemaking Making ( NPRM ) to amend the current EB-5 regulations. All public comments to the NPRM are due to DHS by April 11, 2017. The NPRM proposed regulations cover -- (1) priority date retention for approved I-526 Petitions; (2) an increase to the minimum investment amounts required for EB-5 to $1.35 million for EB-5 projects located in a TEA and to $1.8 million for EB-5 projects that are not (an adjustment for inflation from 1990 to 2015 as measured by the unadjusted Consumer Price Index); (3) modifications to how TEAs are determined and designated; and (4) other clarifications to the EB-5 program. No one is sure about President Trump s position on EB-5 though he has used it for several real estate projects 21
For Questions and Additional Information Debbie A. Klis, Esq. 1909 K Street, NW, 12 th Floor Washington, DC 20006-1157 Tel 202.661.7661 klisd@ballardspahr.com http://www.ballardspahr.com/people/attorneys/klis_debbie.aspx Atlanta Baltimore Bethesda Denver Las Vegas Los Angeles New Jersey New York Philadelphia Phoenix Salt Lake City San Diego Washington, DC Wilmington www.ballardspahr.com 22