What Redeployment Is and How to Mitigate Unforeseen Risk to Your EB5 Investment
At Houston EB5, our immigration investment clients frequently ask us what “redeployment” is in relation to the EB-5 program.
Originally only a problem for applicants from countries that surpassed the maximum yearly quota per country of 700 visas (China and Vietnam), redeployment has become an issue that all investors may face as EB5 processing times have become longer than originally intended. It is estimated that at least 75% of EB-5 investments in the past eight years have faced redeployment of their original EB-5 investment.
To provide much needed insight into the query, we’ve assembled information that is comprehensive and detailed and includes advice from one of the industry’s leading experts.
What Is Redeployment?
Redeployment is the answer to the question, “What does an EB-5 commercial enterprise do when there’s been repayment, but the investors have not yet completed their immigration process to be eligible to be repaid their capital contribution?”
The United States Citizenship and Immigration Services (USCIS) responded to this question in 2017, with a redeployment policy saying the new commercial enterprise has to reinvest those repaid proceeds into some other activity to keep the capital at risk until the investor has fulfilled two years of conditional residency. Furthermore, the USCIS has clarified that those funds need to be invested in a similar enterprise as an investor’s original investment and within the same region.
This essentially opens the door for a regional center to use your funds twice and, if an investor is not careful, could lead to increased risk and/or waiting longer than necessary to receive your original investment funds back.
Originally, there was a timeframe for completing the immigration process of roughly four to five years from the date of the initial I-526 filing to the time of fulfilling two years of conditional residency and being eligible to file an I-829 petition. Fulfilling two years of conditional residency and consequently filing the I-829 petition is a key milestone for investors as it marks when an investors funds no longer must be “at risk.” That is to say that an investor is eligible to receive their investment funds back.
In order to match the immigration process and promptly return funds to the investor, most EB-5 investments have been structured as a loan with a term of about five years. This timeframe on the loan repayment has been synced according to the approximate timeframe for EB-5 investors to complete the immigration process and therefore become eligible for potential repayment. This timeframe is partially one of the reasons why new construction real estate developments have become popular in EB-5. If it typically takes two years to build and another two years to stabilize, then the project should be able to repay the investor through a refinance or sale within 4-5 years.
In fact, many regional centers have marketed themselves to developers as dependable providers of short-term mezzanine* debt. They raise money from EB-5 investors and loan it to developers and make a spread for five years on what the developer pays in interest (6-12%) and what they in turn pay to EB-5 investors. A mezzanine loan is significantly more expensive than a senior loan and developers are therefore eager to repay these funds as soon as the project is built and stabilized.
However, the synchronized timing between EB-5 investment repayment and the EB-5 immigration process has received pressure from both directions. On one hand, there has been less overall investment due to the increased minimum investment amount of $900,000 per investor, thereby leading to smaller projects with faster exits. In conjunction, EB-5 processing times have increased substantially the past couple years which has made the topic of redeployment more pertinent than ever.
Evaluating Redeployment When Choosing a Regional Center
Given the business model of regional centers acting as debt providers to developers, one can see how they may indirectly benefit from longer processing times. If an EB-5 loan is quickly repaid by the original project, then a regional center may be required to redeploy those funds into another project. Therefore, providing a second round of profits for the same investment. An investor that is only six months to a year away from being eligible to receive their funds is not going to want to get redeployed for another four to five years. This is the very issue that many EB-5 investors are currently facing.
“Given that the minimum investment amount has increased there is now less EB-5 investment available. Therefore, projects utilizing the EB-5 program are getting smaller which are leading to shorter construction timelines and faster return of capital,” says Houston EB5 Managing Director Roberto Contreras IV. “Therefore, it’s really important to also look at the redeployment terms and make sure you’re comfortable.”
Ideally, the regional center would be able to intricately describe the exact redeployment terms, but an honest regional center cannot accurately predict what redeployment opportunities may be available in the future. This creates a tricky situation bordering on a predicament.
“If you are a regional center that uses the loan model, you need that flexibility since you cannot require a developer to hold on to a mezzanine loan for a long time,” Contreras IV says. “But at the same time, the investor wants that degree of certainty, so those two things are a little bit at odds. If things are not papered up, then you’re at the mercy of the regional center’s word.”
A simple solution would be to make a longer loan term to ensure that requires the developer to hold on to the EB-5 loan for longer but that in turn makes the loan much less attractive. Since EB-5 loan money is more expensive debt, a developer will not want to hold on to that money beyond construction completion and stabilization (4-5 years).
“You’re just becoming very unattractive capital to a project if they’re forced to hold onto more expensive money when they could easily refinance,” Contreras IV says.
However, regional centers like Houston EB5 have greater control and are able to do this, allowing for safer project investments.
“When it comes to redeployment, that’s definitely a major advantage of being vertically integrated. When investors invest together with the project sponsor, we can very easily structure projects that either have no redeployment or can easily provide very short redeployment terms of one to two years in our already existing assets within the same region.”
How Investors Should Protect Themselves from Risk
It’s a very good idea for investors, regardless of where they’re from, to not only understand this issue but to also ask educated questions in advance when considering prospective projects.
Some recommended questions might include:
- What is your plan for redeployment?
- How do the project principals interpret redeployment?
- How have you been dealing with the fluidity of redeployment policy?
Choosing Houston EB5
At Houston EB5, our goal is always to inform people to the fullest extent possible. As far as redeployment, we take every precaution available to do right by each client. At the end of the day, we care about our investors and will always take the advice of our legal team to deliver on what we promise.
Need more answers? Houston EB-5 is a team of immigrants for immigrants. Reach out to one of our investor relations managers today to get the personalized attention you need and deserve.
* Mezzanine financing is a capital resource that sits between (less risky) senior debt and (higher risk) equity. Mezzanine financing helps Developers bridge the gap between their equity and the senior debt a commercial lender is willing to loan.