The EB-5 program is responsible for contributing more than $51 billion into the U.S. economy since the program’s inception in 1990. During the 07-09 Subprime Mortgage Lending crisis, the program experienced rapid growth.
This was because real estate developers discovered a new method of raising funds for their projects.
This occurred when traditional lending and capital sources became more stringent. After the housing crisis ended, word got out and the EB-5 program has played a vital role in major real estate projects ever since.
So, why do developers want to use funds from EB-5 investors for their projects?
Developers highly seek the EB-5 program, especially when they face limited access to capital due to higher interest rates and increasing prices. When interest rates rise, projects become more expensive because of the increased cost of borrowing. This pushes developers to seek lower-cost alternatives to finance their projects.
More Flexibility for Developers
The primary motivation for EB-5 investors is the pursuit of U.S. residency, which often leads them to accept lower returns on their investments. This preference can result in more favorable financing terms for developers.
However, the choice of investment structure is crucial. The utilization of third-party Regional Centers likely will introduce fees, affecting the project’s cost significantly. In contrast, leveraging EB-5 preferred equity through a vertically integrated Regional Center can avoid these additional expenses, as it does not incur costs during construction and generates dividends only upon the project’s success.
Noting that EB-5 capital is not always significantly less expensive than traditional debt is worth. Typically, EB-5 debt will only be 1-2 percentage points less than traditional debt, however, developers are more inclined to seek EB-5 capital due to the few covenants and restrictions that it has.
Most EB-5 projects have a senior loan from a bank or institution alongside the developer equity in the project. Most senior lenders will not permit a Regional Center to take over a project from a developer if the EB-5 loan is defaulted on. This is due to the bank wanting a competent and capable party to bring the project to fruition, something most Regional Centers do not have the development experience to facilitate.
Further, taking over a project from a developer can be a very costly and drawn-out legal process as developers often fight back against the claim. Since 3rd-party Regional Centers profit from fund-raising while funds are deployed to the project, they’d rather extend the loan-term to continue earning interest rather than pursue an expensive legal process.
Historically, EB-5 capital, serving as a form of long-term financing, can remain invested in a project for 5-10 years, and in some instances even longer. This gives developers flexibility by providing time to mature or stabilize a project while retaining a cheaper source of capital.
Usually, EB-5 projects do not have intercreditor agreements. Intercreditor agreements determine the priority and order of repayments for multiple lenders in a project should a default occur. If there is no such agreement, then a Regional Center would not have the right to attempt taking the project over from the developer if there is also a senior lender involved. The senior lender is only concerned with their loan being paid and not being in default, and the lender will not jeapordize their note by allowing a subordinate lender to take the project over if the Regional Center has no development experience.
Additionaly, EB-5 capital invested in projects most often does not have enough value in collateral to repay all the EB-5 funds. Most 3rd-party regional centers and developers will often inflate the land value to be based off the stabilized (completed project) value as opposed to real equity that the developer invested in the project. This is done to mislead EB-5 prospects that the project has more equity behind the EB-5 capital than it really does. This enables developers to shift the increased risk of a project to the EB-5 investors without putting much of the developer’s own capital in the game.
Catalyzing Project Development with EB-5 Capital
For all intensive purposes, most senior lenders view EB-5 capital as equity in a project’s Capital Stack. One of the substantial hurdles in real estate development is the requirement by financial institutions for developers to demonstrate a significant equity investment in their projects.
EB-5 funds can satisfy this requirement, enabling not just the initiation of projects but also the attraction of additional capital investment. This ability to leverage EB-5 funds significantly enhances the financial viability and attractiveness of projects to other investors, creating a ripple effect that can lead to greater project success and profitabilit if structured correctly.
Variety of Structures
The unparalleled flexibility of EB-5 financing allows for its application in a tailored manner to meet the unique needs of diverse projects. EB-5 funding can be structured as senior debt, mezzanine financing, or preferred equity, and this level of adaptability is invaluable for developers who seek to optimize their projects’ financial structures for maximum efficiency and profitability.
A Cost-Effective Alternative to Bridge Financing
EB-5 funds present a viable and cost-effective alternative to traditional bridge financing, offering a solution that can replace more expensive capital sources, such as private equity. This strategic substitution not only helps in bridging financing gaps but also contributes to a reduction in the overall financing costs, thereby enhancing the profitability and financial attractiveness of the project. It is worth noting that the USCIS only permits EB-5 funds to be used in retiring Bridge Financing if the financing is short-term and was always intended to be retired by EB-5 funds.
Balancing and Optimizing Capital Costs
The integration of EB-5 funding into a project’s capital structure can effectively reduce overall project costs. EB-5 financing typically features more extended repayment periods than traditional loans, providing developers with increased flexibility and more time for their projects to stabilize, achieve profitability, and prepare for refinancing or a sale. This strategic benefit is particularly useful in navigating the cyclical nature of real estate markets and ensuring long-term project success.
Maximizing Funding Potential Through the Regional Center Program
The Regional Center Program enhances the attractiveness of the EB-5 program by enabling the pooling of investments from multiple investors. This feature allows for the amassing of significant capital, especially beneficial for projects located in targeted employment areas (TEAs), including rural and high-unemployment regions. The EB-5 Reform and Integrity Act of 2022 (RIA) further supports this advantage by reserving a portion of EB-5 visas for projects in these areas, facilitating a quicker visa acquisition process for investors from countries with high demand.
Conclusion
The EB-5 Immigrant Investor Program offers a sophisticated and multifaceted financing solution that addresses the unique challenges and opportunities faced by real estate developers. With its range of benefits from flexible and cost-effective financing options to the potential for significant capital accumulation, the EB-5 program is an increasingly attractive option for developers looking to navigate the complexities of project financing especially during unfavorable economic times.
As the program continues to evolve, its role in supporting major development projects and providing a pathway to U.S. residency for foreign investors is expected to expand, further emphasizing its indispensable value in the realm of development financing. Through strategic utilization of EB-5 funding, developers can not only advance their projects but also contribute to the broader goals of economic growth and job creation, underscoring the program’s critical importance in the landscape of real estate development.
