By: Santiago J. Padilla, Esq.
Congress added the EB-5 category as part of the Immigration Act of 1990 to stimulate the creation of new jobs through investment by immigrants. Under the EB-5 Program, if an immigrant invests $1,000,000 in a U.S. business that creates 10 direct full-time jobs, that immigrant investor can obtain permanent residency or a "Green Card" for himself or herself and his or her dependents. However, if the U.S. business is located in a Targeted Employment Area ("TEA"), the investment threshold is reduced to $500,000. A geographic area is classified as a TEA if its unemployment rate is at least 150 percent of the national average.
This formulation, however, resulted in being somewhat problematic for most businesses because the "direct jobs" that a business can normally create is usually limited. Indeed, few businesses have the capacity of hiring 50 to 100 workers, regardless of the investment.
However, if the business or project is affiliated with a government-approved "Regional Center," an additional category of jobs may be counted towards the job creation requirement - these are the so-called "indirect jobs". The Regional Center concept was not part of the original legislation enacted in the year 1990. The Regional Center Program was enacted in the year 1992 in response to the fact that very few businesses could generate a sufficient number of direct jobs to support a large EB-5 business or project. Under the Regional Center Program, "indirect jobs" as well as "induced jobs" can be counted towards the job creation requirement. Indirect jobs are those held by the potential suppliers to the newly created business or project, e.g., the workers that supply and deliver linens to the hotel project after it opens for operations. Induced jobs are a subcategory of indirect jobs and are those generated when workers (both direct and indirect) spend part of their increased compensation on consumer goods and services. In any case, the counting of indirect jobs and induced jobs typically yields dramatic increases in the size of the capital that can be raised.
Therefore, under the EB-5 Regional Center Program, multiple number of immigrant investors can invest in a single U.S. business or project and, provided that 10 direct, indirect and/or induced jobs are created for each immigrant investor, all of the immigrant investors would be able to obtain permanent residency in the United States. It should be noted that the calculation of indirect and/or induced jobs requires a sophisticated economic analysis of the effects of the project on the local community. Under some economic models, a multiplier factor is applied to the construction spending or operating revenues to arrive at the number of jobs created. A separate multiplier applies to calculate the direct jobs and the indirect jobs likely to be created by the project. The multiplier factor varies depending on a number of inputs or variables, such as project location, industry or property type, and construction activity and techniques.
Unique Opportunities for Developers
Nevertheless, from a developer's perspective, the EB-5 Regional Center Program presents a unique opportunity to raise capital at fairly low interest rates because the immigrant investor's primary motivation is obtaining permanent residency and not necessarily obtaining a return on his or her investment. Therefore, most developers seek to either obtain Regional Center status for their project or affiliate with an existing Regional Center so that indirect jobs can be counted towards the job creation requirement. The great majority of smaller developers choose to affiliate with a Regional Center particularly because obtaining Regional Center status is time-consuming and rather expensive for a small project. As such, only the largest projects seek to gain Regional Center status on their own.
In addition to affiliation with a Regional Center, one of the most important first steps that a developer needs to determine is whether or not the project will be located in a TEA so that the immigrant investors will be able to invest the reduced amount of $500,000. Determination of the TEA is made by designated State authorities. For example, in Florida determination of the TEA areas is made by the Department of Economic Opportunity of the State of Florida. However, prior to committing significant resources in acquiring land, etc., the developer should obtain a determination letter from the designated State authority, although USCIS is the final authority as to whether a project is located within a TEA.
Project Capital Stack
EB-5 capital can fill any space in the capital stack of a project and may take the form of debt or equity; ranging from unsecured loans to senior mortgage loans to equity. However, in most cases, only about 30% to 40% of the total funds required for the project come from EB-5 immigrant investors.
Two basic investment approaches are available to invest the immigrant investor's equity capital in the project - the "loan model" and the "equity" model. Most EB-5 investments are structured under the loan model. Under the loan model, all of the immigrant investor's capital is deployed by the new commercial enterprise ("NCE") to the job creating entity ("JCE") as a loan. Usually, the Regional Center forms the NCE that makes a loan to the JCE. The loan could be secured by a first or junior mortgage against the property, secured by equity interests (mezzanine financing), or even unsecured.
Simply stated, the third- party Regional Center (or often its principals, affiliates or other related parties, referred to as "affiliates") acts as a "middleman" between the investors and the developer JCE, utilizing the investors' capital as the loan proceeds.
Securities Law Compliance
Another aspect of an EB-5 project is that the developer should also affiliate with a licensed securities broker-dealer in order market the investment opportunities. Because capital contributed by foreign nationals under the EB-5 Program typically takes the form of an investment in a business entity, the Securities and Exchange Commission has taken the position that EB-5 investment offerings are subject to U.S. securities laws, even though EB-5 investments may be mostly offered outside the United States to non-U.S. Residents.
In many cases, a migration agent in the foreign country or countries that are targeted as potential EB-5 immigrant investor countries may need to be engaged in order to raise capital in that particular country. Generally, at the time the developer is raising capital, most investors will live in foreign countries rather than in the United States. In such cases, migration agents market the securities of EB-5 Projects to investors overseas. These intermediaries are usually located in the same country as the investors and speak the same language as the investors. However, some investors may live in the U.S. under a temporary visa, such as a student visa or a work visa. These persons are more likely to be solicited by securities broker-dealers in the United States.
Immigrant Investor's Exit Strategy
The immigration laws require that the immigrant investor's investment be completely "at risk" and, as such, there can be no guarantee that the monies will be returned to the immigrant investor. Nevertheless, most loan structures provide for a repayment of the loan made to the JCE (not to the immigrant investor), but such repayment cannot occur prior to the final approval of the immigrant investor's permanent residency. Moreover, the timing of this "exit" usually depends upon the JCE's liquidity and ability to repay the loan or to distribute equity. In most cases, an immigrant investor will not be able to "exit" for at least 5 years, not only because of the project's timeline and ramping up its production of income, but also because of the retrogression in the number of EB-5 visas that are granted every year.
Process to Affiliate with a Regional Center
In order to affiliate with a Regional Center, the developer must apply for affiliation and sign an Affiliation Agreement. In this affiliation, the Regional Center will usually request an affiliation fee (normally $20,000 to $50,000) and also require that each immigrant investor pay an administrative fee for investing in the project (normally $30,000 to $50,000).
An application to become affiliated with a Regional Center, usually requires the developer to prepare the following documentation and present the same to the Regional Center for approval:
(1) Business Plan (which complies with Matter of Ho, 22 I&N Dec. 206 (Assoc. Comm'r 1998));
(2) Corporate Documents of the business entities involved;
(3) Summary of the capital stack of the project, including equity contributions, commercial financing, EB-5 funds, and other sources of funds;
(4) Private Placement Memorandum;
(5) Summary of Marketing Plan to attract EB-5 investors;
(6) Economic Analysis from a qualified economist indicating that the project will create the requisite direct and indirect jobs; and
(7) Escrow Agreement for the deposit of EB-5 funds.