In an EB-5 application, foreign investors can make at-risk EB-5 investments that must lead to the creation of 10 jobs for U.S. workers within two years. This not only fulfills the program’s requirements but also contributes to the local economy.
The EB-5 process requires investors to choose a project first and then make the required capital investment, whether the minimum amount of $800,000 if the project is located in a Targeted Employment Area (TEA), whether it’s rural or a high unemployment area (HUA), or $1.05 million if it’s anywhere else in the U.S.
Once the investment is made, the investor files an I-526 petition with the U.S. Citizenship and Immigration Services (USCIS). This request is a crucial and significant step in the EB-5 process, as it is the first formal application that the investor submits to the USCIS, marking the beginning of the journey toward an EB-5 green card.
Key aspects of an EB-5 investment
An EB-5 investment involves placing capital into a commercial venture that is new. This new commercial enterprise (NCE) can be individual or direct, or through a government-approved regional center (RC). In the case of direct investments, the minimum 10 jobs must be permanent, full-time work.
Different business structures such as a corporation, partnership, or limited liability company (LLC) can be an NCE. This definition does not include a noncommercial activity, such as operating and owning a personal residence.
Investors place their investment money in an NCE, which usually deploys it as a loan to a Job Creating Entity (JCE). Their relationship is crucial to the process because the JCE needs capital to create the 10 mandatory jobs specified by the EB-5 program.
These entities are usually separate, but on occasion, they are the same; many times when it’s a direct investment. However, on occasions, a regional center may act as the NCE and the JCE, depending on whether it directly or indirectly undertakes the development of an EB-5 project.
When investing, EB-5 investors must also consider whether to make a full or partial payment. The first option requires EB-5 applicants to disburse the entire amount, while the second involves a specific quantity, usually half, and investing the rest in an escrow account. This account automatically releases the funds to the investment upon approval of the I-526 form, providing a flexible payment option for investors.
Another aspect concerning investments is the repayment period. Unlike other stages in the EB-5 process with marked time ranges, the timing of the invested capital’s payback depends on specifications stated in the EB-5 project offering documents and the type of financing used.
Overview of trends in EB-5 investments
EB-5 attorneys explain that after the EB-5 Reform and Integrity Act of 2022 (RIA), the quality and location of the investment are crucial to increasing the possibility of a successful EB-5 application.
According to Phuong Le, founding member and partner with KLD LLP, there’s been a shift towards greater flexibility and innovation in investment offerings to cater to a diverse range of investor preferences and demands.
“Over the past two years, I think we are seeing a move towards flexibility and options. In ye olden days, we had vanilla investment options with vanilla funding structures. What I mean is if you liked a project, it would oftentimes have one type of investment class (invest in a debt offering after you fully funded your investment). Those days are long gone and I think projects are forced to think more creatively to accommodate a wider swath of investors who may be demanding different options.”
According to data obtained by the American Immigrant Investor Alliance (AIIA) from the U.S. Citizenship and Immigration Services (USCIS) regarding the total number of Form I-526/I-526E petitions filed between April 2022 and October 2023 by EB-5 visa category and country of chargeability, there’s an ongoing significant demand for investments in HUA locations, over twice as big as demand for rural projects, highlighting the potential of investment in these areas.
Immigration attorney Richard Gump says, “EB-5 is back with investors desiring to identify safe investments primarily in projects in one of the set-asides [categories], rural and high unemployment being the most sought after. Rural projects with strong national interest ties, like drug and alcohol treatment centers, are popular. With the high unemployment TEA threshold being only $250,000 less than a non-TEA project, the high unemployment TEA has less value and is popular more from the standpoint of being in a set-aside category, which arguably will get faster adjudication.”
As for which primary investment pathway EB-5 investors are choosing to make their qualifying investments in the U.S., more EB-5 investors prefer direct investments, as they can control the use of their capital more, unlike through a regional center. Also, standalone investors have a more active role as they find their own projects and take a managerial role.
“I also think standalone will become more popular if at least 10 W-2 jobs can be created,” Gum says regarding this type of hourly or salaried employment that pays taxes and collects benefits.
The immigration attorney adds that processing times and the litigation surrounding capital sustainment are issues regarding investment affecting regional center and standalone investments.
As to the type of projects EB-5 investors prefer to invest in, the founder and CEO of EB5 BRICS, Vivek Tandon, explains it’s mostly rural: “We’ve seen more projects being offered in rural areas; however, the asset classes are certainly going beyond the traditional ones like housing and hospitality.”
Le adds: “Ultimately, for the investor that looks hard enough, chances are they’ll find an investment that fits the key parts of their wishlist. No one project will give you everything so it’s important to consider what’s most critical to your goals. For some, an I-956F-approved project [regional centers] with all jobs created is paramount because they want their green card and peace of mind. Others are looking at projects that allow them the option of exiting as soon as possible after the 2-year sustainment period and are focusing on projects that are almost done/stabilized. Still, others don’t mind keeping their money if the project allows them the chance to participate in preferred/common equity with a higher chance of return. And yes, there are still projects out there where EB-5 is the senior loan. It’ll ultimately be a sliding scale where your final selection will satisfy the majority of your goals.”
How are EB-5 investors financing their investments?
The EB-5 industry consensus is that investors are exploring flexible structures within the capital stack, prioritizing their interests and aiming to ensure timely repayments and potential profits.
Current trends in the structure of EB-5 investments also involve mixing traditional equity and debt with innovative EB-5 project financing approaches.
“Now we have projects spinning off multiple share classes that court investors with different risk tolerances, investment goals, and exit horizons. We have investors who now not only fund with partial investments, but are drawing from loan funds or lenders in the US, loans from 401K accounts, and even self-directed IRA investments into private placements. It’s an evolving world where issuers and projects will have to evolve with market demands in order to ensure they can accommodate investor funding requests. Those who have never set up a loan fund or were even aware of self-directed IRAs for example, expose themselves as a step behind,” Le says.
Meanwhile, according to Tandon, “We are seeing more and more projects with EB-5 in the senior most position. The likely reason is that RCs have better bandwidth to raise large amounts of capital and lend at rates much better than the banks, given the current high interest rate environment.”
The broker-dealer adds: “Most borrowers and developers are avoiding mezzanine debt for obvious reasons as those rates may easily be 15-18% and hence are sticking to equity, EB-5, and perhaps bond financing.”
As to the source of funding backing these investments, Tandon affirms: “We are seeing some regional centers tapping into debt funds that their sister companies might have and loaning to the EB-5 investor any shortfall they may have for the $800k that they need to come up with for an EB-5 investment.”
From the EB-5 project sponsors’ and developers’ perspective, using the EB-5 loan model continues to be the preferred option, says the corporate lawyer at Geraci Law Firm, Kevin Kim. “For most EB-5 projects we do, the loan model is still in full effect as a trend. However, the commercial real estate finance market has changed dramatically in the past five years. Many senior lenders are reticent to permit junior financing. With this in mind, preferred equity as an alternative to mezzanine financing seems to be highly preferred by sponsors.”
Kim says that ensuring that this preferred equity includes mechanisms for default to meet fiduciary duties and prevent accusations of malfeasance against project sponsors is a challenge.
“Following customary deal points used in arm’s length transactions is advisable to avoid any potential accusation of conflicts of interest or fiduciary breach. Provisions such as springing manager provisions, income sweep provisions, black box provisions, and performance deeds of trust or mortgages may be advisable,” the corporate attorney adds.
In addition, he observes more regional centers and EB-5 sponsors acting as third-party lenders in these financing structures.
However, there are some limitations to RCs originating these transactions as actual loans (mezzanine or real estate secured) instead of preferred equity. “Certain states place strict regulations on real estate-related finance, including California, Arizona, Nevada, and the Dakotas. While there are exemptions, they have to be carefully managed. Failure to consider these regulations can result in regulatory investigations, fines, and penalties,” Kim cautions.
Kim concludes that EB-5 investors and their legal teams also pay more attention now to tax preparation and financial reporting when choosing and managing these investments. “These NCEs will not be exempt from the Corporate Transparency Act, so FINCEN reporting may be an issue, especially for smaller NCEs. Further, tax policy changed for debt funds generally after the adoption of CECL [current expected credit loss (CECL) model]. As of 2023, it is imperative that NCEs not follow operating company accounting but rather investment company accounting to ensure proper conformity with tax rules and regulations.”
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