Why Commercial Real Estate Developers Use EB-5 Capital

Summary:

• Commercial real estate developers consider the integration of EB-5 capital into their projects for potential benefits like a lower cost of capital, flexible terms such as interest only payments and diversified funding sources.
• The primary aim of EB-5 investors is to secure U.S. permanent residency, and in doing so, they generally accept lower returns on investments.
• Diversified funding proves critical during economic downturns when traditional financing may be challenging to secure.

The Growing Affinity of Commercial Real Estate Developers for EB-5 Capital

The EB-5 Immigrant Investor Program, a U.S. investor visa initiative, provides a dual benefit for the U.S. economy. Firstly, it offers a unique opportunity for eligible immigrant investors to secure lawful permanent residency by investing in new commercial enterprises. Secondly, these investments must generate at least ten full-time jobs for qualifying U.S. workers, thereby driving economic activity and job growth. Acknowledging these advantages, commercial real estate developers are increasingly incorporating EB-5 capital into their capital stack.

Delving into the Benefits of EB-5 Capital for Commercial Real Estate Developers

Decreased and Predictable Cost of Capital

EB-5 capital, especially at the mezzanine level,  is typically more affordable than traditional financing methods such as bank loans or private equity. Since the primary aim of immigrant investors is to secure residency status, they often accept lower returns, reducing the overall cost of capital for the project. Additionally, interest rates associated with EB-5 capital are generally lower and more predictable, aiding in the budgeting and financial planning stages of a development project.

Worldwide Availability and Long-Term Stability of Capital

EB-5 investors are often associated with a creation of new wealth. This new wealth can be developed in regions throughout the world. Oftentimes EB-5 investors are small business owners that capitalize on changing trends in the worldwide economy and they make the move from small business owner to the owner of a much larger business. As such, the EB-5 program attracts a diverse set of investors from around the globe, providing an additional source of funding. This access to international capital proves particularly advantageous during periods of restricted credit. Moreover, EB-5 investors typically commit their capital for extended periods, ensuring stable, long-term funding for the project.

Non-Dilutive Capital and Risk Mitigation

The nature of EB-5 capital, in the form of a loan, will not dilute the ownership stake of the existing owners. This structure is appealing to developers seeking to retain control over their project. For EB-5 investors, the placement of EB-5 capital within a capital stack—behind the senior debt but ahead of the developer’s equity—can serve as a buffer, mitigating risk and enhancing the project’s overall financial stability.

Cultivating Global Relationships and Fostering Economic Growth

Engagement with international investors can yield valuable global insights and facilitate future cross-border opportunities. By incorporating EB-5 capital, developers also contribute to the local economy by creating jobs and stimulating economic growth. This dynamic relationship not only enhances community relations but can also lead to potential benefits such as easier zoning approvals and public goodwill.

Considerations When Utilizing EB-5 Capital

Though EB-5 capital offers multiple benefits, developers should also be cognizant of potential challenges.

EB-5 funding, unlike traditional funding, is not a “ball” of capital that is immediately available for deployment to a developer’s project. EB-5 capital is funding that is raised through a private placement/securities offering so EB-5 funding is raised one tranche at a time. Remember too, that the “source” for this funding is foreign national investors so the process of transferring money into the United States may be subject to certain restrictions of their home country. (The individual investor and the source of their funds undergo significant scrutiny as a component of their adjudication process.)

A developer seeking funding by means of the EB-5 program tends to focus upon their project solely as a business investment however the focus for the prospective EB-5 investor is much different. EB-5 investors tend to focus upon (in order of importance)

1. Immigration success
2. A return of their investment capital
3. Some sort of rate of return on their investment.

What this means then is that #3, the focus of the traditional developer, is third in importance to the traditional EB-5 investor. Many times developers seeking EB-5 funding are guided towards establishing their own regional center or creating their own EB-5 offering when the approach they would be taking is entirely wrong for the needs of the traditional EB-5 investor. Developers need to “look before they leap” as they may be approaching this capital source in a totally wrong way. Not only can this lead to failures it can lead to very costly failures.

“Developers need to fully explore their EB-5 funding options in ways that cost little to no money up front”

Regulatory and Compliance Requirements

The EB-5 program mandates rigorous regulatory oversight, including strict job creation and investment requirements. Developers must ensure their projects align with all U.S. Citizenship and Immigration Services (USCIS) rules, a process that can be intricate and time-consuming.

A developer seeking a traditional loan does not “build a bank” in order to obtain that loan. The banking industry has its own regulatory and compliance requirements so it would seem foolish to wade into these rules and regulations unless you have the experience, the knowledge and the expertise to do so. The same holds true when approaching EB-5 funding.

High quality projects, containing the attributes that EB-5 investors will be seeking, should command the attention of already established regional centers and come with a cost of capital that is reasonable.

Investor Due Diligence

EB-5 investors, like other investors, will want to conduct due diligence on the project and the developer. Developers, either directly or through a regional center they choose to work with, should be prepared to furnish comprehensive project details and financial forecasts.

Pathway to Procuring EB-5 Capital

Securing EB-5 capital involves a multi-step process. A thorough understanding of these factors can aid commercial real estate developers in making informed decisions about the incorporation of EB-5 capital into their funding strategies.

To effectively incorporate EB-5 capital, developers should work with experienced consultants, understand eligibility requirements, and project structuring, and engage with trustworthy partners.

Transformative Power of EB-5 Capital in the Future of Commercial Real Estate Development

The EB-5 Immigrant Investor Program is not merely a gateway to U.S. residency for foreign investors; it’s a powerful catalyst for commercial real estate developers. By comprehending the benefits and considerations of EB-5 capital, developers can employ this unique funding source to propel their projects, invigorate local economies, and strengthen the U.S. economy. As the global economic landscape continues to shift, the impact of EB-5 capital on commercial real estate development will likely increase in significance.