Simplifying the EB-5 Capital Process for Developers

The simplest way to look at this is through the eyes of the source providing the investment capital and what motivations are driving that investment. The monetary return on investment is a distant third when it comes to what an immigrant investor in the EB-5 program is seeking. An immigrant investor’s green card is dependent upon the creation of qualified jobs so the immigrant investors participating in the EB-5 program are seeking job creation and the greatest likelihood that the job creation will occur. These same investors are seeking a return of capital and an assurance that the return of capital will occur at some predetermined point in the future.

Traditional aspects of a developer’s project blend well with the two primary goals of the EB-5 investor. Normally a large project is either recapitalized after construction is complete or, in many cases, the project is sold. Both of these events provide the mechanism for repayment of an EB-5 loan. EB-5 investors are not seeking a high return on investment so EB-5 capital can serve as a replacement for higher cost mezzanine capital that a developer would normally be seeking.

The EB-5 program requires investments to be made into a “new commercial enterprise”, which is defined as any for-profit, lawful business that conducts ongoing and continuous business activities. Various types of projects can be eligible for EB-5 funding, as long as they meet the program requirements, such as job creation and investment amounts. Simply acquiring an existing business is not likely to provide the net new job creation EB-5 investors need in order to be successful. Existing jobs can only be relied upon if the underlying business qualifies as a “troubled business” as defined under the EB-5 Program. Expansions of existing businesses may carry with them “net new” jobs that investors could rely upon.

Some common types of projects that utilize EB-5 funding include:

Real estate development: This includes residential, commercial, and mixed-use developments, such as hotels, condominiums, shopping centers, and office buildings. Real estate projects are often popular because they typically create a significant number of construction jobs.

Infrastructure projects: This category includes transportation infrastructure such as highways, bridges, and airports, as well as energy projects like solar farms or hydroelectric plants.

Manufacturing and industrial facilities: Projects that involve the construction or expansion of factories, processing plants, and other industrial facilities can also qualify for EB-5 funding, as they create employment opportunities in manufacturing and related sectors.

Health care facilities: Hospitals, medical centers, and other health care facilities can utilize EB-5 investments to support the development of new facilities, expansions, or improvements.

Hospitality and tourism: Hotels, resorts, and other tourist attractions may benefit from EB-5 investments, as they often create numerous jobs in service, management, and operations.

Agriculture and agribusiness: Large-scale farming, ranching, or food processing operations can use EB-5 investments to fund the development or expansion of their facilities, creating jobs in rural areas.

Retail and entertainment complexes: Shopping malls, movie theaters, and other retail and entertainment centers can qualify for EB-5 funding if they create a sufficient number of jobs.Educational institutions: Schools, universities, and other educational facilities may be eligible for EB-5 funding, particularly if they create jobs and promote economic development in the surrounding community.

The specific eligibility of a project for EB-5 funding depends on factors such as the location, investment structure, and job creation potential. It is essential to work with experienced EB-5 consultants, immigration attorneys and regional centers, to ensure that a project meets all the necessary requirements.

The answer to this question depends on a number of factors. When referring to EB-5 capital being incorporated into the "project" as debt financing, the regulatory requirements for the developer are minimal. Most of the obligations of the developer/borrower are contained within the loan agreement/loan documents. Most regulatory requirements are obligations of the regional center and the New Commercial Enterprise (NCE) established by the regional center that will serve as the lender. (This would be the approach with the least amount of EB-5 regulatory obligations of a developer.)

The opposite extreme would be where a developer establishes a regional center in order to fund the projects of the developer or where a developer establishes the New Commercial Enterprise and operates the NCE under a sponsorship agreement with an already established regional center. Not only would there be EB-5 regulatory requirements that must be met there are additional issues related to securities law compliance that must be met and adhered to.

The key to answering this question is in understanding what role or roles the developer is wanting to take on. If the developer is solely seeking EB-5 capital as a replacement for higher cost capital then there is a path that places minimal obligations on the developer beyond the terms and conditions contained within a loan agreement and its associated documents.

This is dependent upon the role or roles of the developer. First, the developer needs to work with a highly experienced team of professionals that have successfully incorporated EB-5 funding into projects similar to the project of the developer. The measurement for "success" should go beyond just having raised capital as EB-5 investors measure their success in having obtained US permanent residence and a return of the capital they invested.

Next, a developer needs to think about terms and conditions that can be incorporated into a loan agreement (debt model of EB-5 investment) that place obligations on the regional center and the New Commercial Enterprise to remain compliant with all aspects of the EB-5 program and a failure to do so would be an event of default under such loan agreement. Specific terms and conditions within the loan agreement are there for the benefit of the lender however, specific terms and conditions can be built into this loan agreement to also protect the borrower . This is why it is so important that the developer works with an experienced and "successful" team of EB-5 experts.

Initially a developer would be presenting his/her project to one or more EB-5 professionals in order to determine if the project is suitable for EB-5 investment funding. To “structure your project” to be eligible for EB-5 funding implies that the developer is planning to be involved in all aspects of EB-5. This is rarely the intent of most developers as most developers are simply seeking a low cost alternative to mezzanine financing. If a developer is seeking to be totally immersed in the EB-5 offering and capital raise activities, the developer will need to ensure that all aspects of the project meet the EB-5 program requirements and the EB-5 securities offering is attractive to potential investors. Here are some steps to follow and typical terms associated with EB-5 investments:

Job creation: confirm that your project will be able to create at least 10 full-time jobs for qualified U.S. workers per EB-5 investor within the required time frame, which is generally within two years of the investor's admission to the U.S. as a conditional permanent resident.

Investment structure: You can structure EB-5 investments as either equity or debt. In an equity structure, foreign investors either become direct equity partners in the project, sharing profits and losses or these EB-5 investors invest into a New Commercial Enterprise (NCE) and that NCE makes an equity investment into the developer’s project. In a debt structure, the investment is structured as a loan from an NCE to the project with a fixed repayment schedule and interest rate.

Engage a Regional Center: Regional centers can assist with project structuring, pooling investments from multiple investors, and ensuring compliance with EB-5 requirements. It is critical to understand that the regional center operates on one side of the financial transaction and the developer operates on the other side of this financial transaction. A developer, especially one unfamiliar with the EB-5 program and its unique requirements, needs to engage experienced EB-5 professionals to assist the developer throughout the entire process.

Typical terms of an EB-5 investment may include:

Return on investment: The EB-5 program requires that EB-5 investors make an “at risk” investment into a for profit enterprise. Most EB-5 investors are prepared to accept a modest rate of return on their investment as the true ROI being sought is US permanent residence. As such, the cost of capital to the developer may be lower than traditional financing, as the primary motivation for investors is not a significant monetary rate of return

Investment term: The period of investment that most EB-5 investors are anticipating is an  investment term from five to seven years. This would be the overall period of time the NCE would be investing into a developer’s project. Equity and debt have differing exit strategies so the actual amount of time the NCE anticipates the investment term to be will be dictated by a loan agreement or the operational plans of the project in the case of an equity investment. The period of time for individual investors can vary based upon the amount of time it takes each EB-5 investor to achieve what is required under the EB-5 program in order to obtain US permanent residence . A timeframe of five to seven years allows sufficient time for job creation to occur in the event operational phase jobs are being relied upon by EB-5 investors. 

Exit strategy: Develop a clear exit strategy such as the sale of the project, or refinancing. This would allow investors to recover their capital once their investment has met the requirements of the EB-5 program.

Remember, it's crucial to work with experienced EB-5 professionals to help structure your project to meet all EB-5 requirements and successfully attract foreign investors.

EB-5 Funding - Loan Model:

As an experienced property developer using EB-5 funding via a loan for your project, you should be aware of the following risks and consider the following strategies to mitigate them:

Importance of the Initial approach to EB-5: Most developers do not take on every aspect of each large scale construction project they become involved in. It would be impossible to do so. Approaching EB-5 funding is no different. The smart developer engages outside experts that have success in achieving what the developer is seeking to accomplish. All too often, developers are steered towards establishing a regional center when that is not the objective of the developer. If the objective is obtaining a replacement funding source for higher cost capital, why would a developer want to take on the equivalent of establishing a bank in order to get a loan.

Regulatory and compliance risk: The EB-5 program is subject to complex regulations, and non-compliance by irresponsible parties may result in harm to the immigration pursuits of EB-5 investors, civil and/or criminal penalties and disruptions that could jeopardize the funding that a developer is seeking. To mitigate this risk, work with experienced professionals including legal counsel and experienced and successful regional centers to ensure that your project and their actions comply with all relevant requirements.

Funding delays: The EB-5 process can be lengthy, and delays in obtaining funding could impact your project’s timeline. To address this risk, consider having contingency plans in place, such as alternative financing sources (short-term bridge financing) or adjusting your project timeline to account for potential delays.

Loan covenants and restrictions: EB-5 loans may come with strict covenants and restrictions that could limit your flexibility in managing the project. To mitigate this risk, carefully review the loan agreement terms so you understand why certain requirements are needed in order to ensure that those covenants and restrictions align with your project's needs and goals.

Repayment obligation: As with any loan, there is a risk that your project may not generate sufficient returns to repay the EB-5 loan as well as the ongoing interest on the loan. To address this risk, conduct thorough financial planning and feasibility studies to ensure that your project is viable and can generate the required returns to meet both the debt service and repayment obligations.

Immigration-related risks: Depending upon the terms and conditions in the EB-5 loan agreement, the financing plan of your project could be negatively impacted if a significant number of EB-5 investors fail to meet immigration requirements or have their applications denied. To mitigate this risk, the regional center you work with should work with experienced immigration attorneys who carefully screen investors who are more likely to successfully obtain their visas. Additionally, the EB-5 loan agreement needs to differentiate between a denial of an EB-5 investor petition for project related issues as compared to the denial of an EB-5 investor petition for reasons unrelated to the developer's project.

Economic and market risks: Changes in market conditions, interest rates, or other external factors could impact the success of your project and its ability to repay the EB-5 loan. To mitigate these risks, conduct regular market assessments, and be prepared to adjust your project strategy accordingly.

Investor relations: If the developer is operating solely as a "borrower" of EB-5 funds there will be little to no communications with individual EB-5 investors. If the developer is operating in a capacity beyond being just a borrower the developer should anticipate devoting a significant amount of time and resources to investor relations. Managing relationships with EB-5 investors can be time-consuming and require frequent and ongoing communications and reporting in multiple languages. To address this risk, consider working with a regional center or establishing a dedicated investor relations team to handle investor communications and reporting requirements.

EB-5 Funding - Equity Model:

Many of the challenges in an EB-5 capital raise are the same no matter if the investment is coming into a developer's project as debt or equity. An additional perspective needs to be brought into the mix when EB-5 funding, as equity, is being considered.

EB-5 investment capital is directly linked to how likely the Job Creating Entity (a developer's project) will be able to meet the goals of these immigrant investors and the level of risk associated with the creation of jobs and the return of capital to the EB-5 investors.

Most EB-5 practitioners will tell you that EB-5 investors have three primary goals which are:

1. Obtain their green cards
2. Return of their investment capital
3. Some rate of return on their investment.

In reality, things are slightly different than just these three as outlined here. The real objectives are: get me the job creation for my green cards as quickly as you possibly can and with the greatest assurance you possibly can and once that is achieved get me my money back as quickly as you possibly can. Green cards and return of capital are the primary motivators when EB-5 investors are determining which EB-5 investment opportunity is right for them. High rates of return on investment normally equate to unacceptable risk so the monetary return on investment is not, or should not, be a key factor.

This is where equity faces its biggest challenge. EB-5 investment capital, as debt financing, tends to be second only to a senior lender. The EB-5 loan agreement has a maturity date so EB-5 investors have a specific time in the future that the borrower is obligated to repay the loan from the lender. Equity tends to operate differently. Equity tends to be lower in priority and equity normally has to wait until late in the project's waterfall of distributions to see any returns. These are uncertainties and risks that many EB-5 investors may find unacceptable. As a developer you need to look at things through your eyes and the eyes of prospective EB-5 investors in order to achieve the best results for all involved.

Here are the risks and potential strategies to mitigate such risks when using EB-5 funding via equity:

Regulatory and compliance risk: The EB-5 program is subject to complex regulations, and non-compliance by irresponsible parties may result in harm to the immigration pursuits of EB-5 investors, civil and/or criminal penalties and disruptions that could jeopardize the funding that a developer is seeking. To mitigate this risk, work with experienced professionals including legal counsel and experienced and successful regional centers to ensure that your project and their actions comply with all relevant requirements.

Funding delays: The EB-5 process can be lengthy, and delays in obtaining funding could impact your project timeline. To address this risk, consider having contingency plans in place, such as alternative financing sources or adjusting your project timeline to account for potential delays.

Dilution of ownership and control: By using EB-5 funds as equity, you would be required to give up some ownership and control of your project. To mitigate this risk, negotiate the terms of the investment agreement carefully to balance the need for funding with retaining sufficient control over your project's management and direction.

Immigration-related risks: Depending upon the terms and conditions in the operating agreement associated with the EB-5 equity investment, the financing plan of your project could be negatively impacted if a significant number of EB-5 investors fail to meet immigration requirements or have their applications denied. To mitigate this risk, the regional center you work with should work with experienced immigration attorneys who carefully screen investors who are more likely to successfully obtain their visas. Additionally, the EB-5 equity operating agreement needs to differentiate between a denial of an EB-5 investor petition for project related issues as compared to the denial of an EB-5 investor petition for reasons unrelated to the developer's project.

Economic and market risks: Changes in market conditions, interest rates, or other external factors could impact the success of your project and its ability to provide returns to the EB-5 investors. To mitigate these risks, conduct regular market assessments and be prepared to adjust your project strategy accordingly.

Exit strategy: As equity investors, EB-5 investors will eventually be seeking a return of their investment through the sale of the project or some other liquidity event. To address this risk, develop a clear exit strategy and communicate it with investors to manage expectations and ensure that your project's timeline and objectives align with their investment goals. This will be extremely important in the information prospective investors will be reviewing prior to any investment decision. The preservation of capital is paramount to most EB-5 investors. Most EB-5 investors are not motivated by the potential for high returns as there is usually a high risk associated with the opportunity for high reward. EB-5 investors are seeking green cards and a return of their entire capital contribution. Equity investments tend to equate to high risk/high reward or high risk/an unacceptable reduction in one’s capital investment. Developers seeking equity investments through EB-5 needs to be prepared to demonstrate how their project meets the goals of an EB-5 investor as compared to the traditional equity investor a developer may be used to working with.

To ensure that your project meets the EB-5 requirements for job creation and economic impact, consider the following:

Investment amount: Each foreign investor must make a qualifying investment in a new commercial enterprise. As of the date this information was published, the minimum investment amount is $800,000 if the project is in a Targeted Employment Area (TEA) or $1,050,000 for projects outside TEAs. Please verify the current amounts, as they may change over time.

New commercial enterprise: The investment must be in a new commercial enterprise, which is a for-profit entity formed for the ongoing conduct of lawful business. It can be a corporation, limited partnership, joint venture, business trust, or other entity.

Job creation: The EB-5 investment must create at least 10 full-time jobs for qualifying U.S. workers within two years (or, in some cases, a reasonable time after the two-year period) of the investor's admission to the U.S. as a Conditional Permanent Resident. Job creation can be direct (actual identifiable jobs), indirect or induced (jobs created collaterally due to the capital investment).

Targeted Employment Area (TEA): A TEA is either a rural area or an area experiencing high unemployment (at least 150% of the national average). Investing in a TEA reduces the minimum investment amount required. To ensure that your project is in a TEA, consult the appropriate EB-5 advisor, attorney or consultant who will use a tool to determine TEA eligibility.

Regional center: If your project is affiliated with a designated regional center, ensure that it complies with all USCIS requirements and guidelines. Regional centers are third-party entities that manage EB-5 projects and pool investments from multiple investors. They can be an effective way to meet job creation requirements through indirect job calculations and should be able to provide the necessary economic analysis and assist in calculating the maximum amount of investment suitable to your project based upon the number of jobs the project is likely to create. (Not all regional centers and industry professionals are equal in their abilities. A very small number of regional centers and industry professionals account for the overwhelming majority of EB-5 investment capital that has been successfully raised.) 

Compliance and transparency: Maintain accurate records, provide regular updates, and comply with all applicable laws, regulations, and reporting requirements.

Professional assistance: Consult with experienced business attorneys, immigration attorneys, economists, and other EB-5 industry professionals familiar with the EB-5 program to help you navigate the process and ensure that your project meets all requirements.

Please note: It is crucial to consult up-to-date sources and professionals to verify current requirements and guidelines.

The answer to this question depends upon the developer's role in regards to the EB-5 capital that is being sought:

If the developer is acting solely as the borrower of those funds, the obligations will be focused upon terms and conditions within the loan agreement and its associated documents. The EB-5 lender is going to be asking for documentation and reporting that is very akin to what a senior lender would be requiring. There may also be some requirements under The EB-5 Reform and Integrity Act of 2022 however these requirements should not be problematic for the vast majority of developers.

Requirements differ though if the developer is also associated with the securities offering to EB-5 investors. Reporting and compliance obligations expand greatly and the penalties for non-compliance can be severe. A developer, new to EB-5, will want to fully understand exactly what they would be signing up for before becoming a party to any securities offering as there are obligations to the SEC, the USCIS, the New Commercial Enterprise and its investors and more to think about.

Here is some further insight:

Whenever your company takes EB-5 funding through a regional center, either as a loan or via equity, you are required to meet certain reporting and compliance obligations. To ensure you meet these requirements, consider the following steps:

Engage experienced professionals: Work closely with your chosen EB-5 professionals. They can help you understand and navigate the complex regulatory landscape and ensure compliance with USCIS and SEC regulations.

Regional center compliance: Ensure that the regional center you've engaged is in good standing with USCIS and complies with all requirements. This includes annual I-924A filings, which demonstrate the regional center's ongoing eligibility and adherence to EB-5 regulations.

Job creation reporting: Collaborate with the regional center and other professionals to track and report on job creation throughout the project. This includes direct, indirect, and induced jobs created through the investment. (Direct operations phase jobs will require relevant documentation, such as payroll records, invoices, and contracts, that demonstrate job creation.)

Financial reporting and audits: Maintain accurate and up-to-date financial records for your project. Work with your accounting team to ensure that your financial statements are prepared according to generally accepted accounting principles (GAAP) and comply with any other applicable regulations.

I-829 petitions: Assist the Regional Center as may be required under a loan agreement or operating agreement. Information associated with the actual creation of jobs will be needed by EB-5 investors and their legal representatives, in preparing and filing I-829 petitions to remove conditions on their permanent resident status. This includes providing evidence of job creation, investment deployment, and project completion.

Monitor and address changes: This would include keeping the regional center abreast of any changes associated to a developer’s project as well as staying informed about changes in EB-5 regulations and guidelines, as well as any updates to securities laws if a developer is playing an expanded role in the EB-5 offering. Regularly review your compliance processes to ensure they remain up-to-date and effective.

By following these steps and working closely with experienced professionals, you should be able to ensure that your company meets the reporting and compliance requirements associated with EB-5 funding through a regional center, whether as a loan or via equity.