Question of the Month: Looking to finance your next retail development project? EB-5 could be the solution - by Reid Thomas

The EB-5 Immigrant Investor program is a unique source of funding for real estate developers, an immigration program, and the only job creation program that creates jobs at no cost to U.S. taxpayers. Until the 2008 financial crisis, the program was relatively obscure. However, in the last few years, use of the program has exploded as developers for high profile commercial real estate projects of all sizes nationwide have incorporated EB-5 funding into their capital stack. In fact, over 90% of EB-5 projects have a real estate component. Gone are the days when banks would finance 80-90% of a project’s cost. More typically, senior debt comprises 50-60% of a project’s total cost, requiring other capital sources, like EB-5, to fill in the gap. Many developers are finding low-cost EB-5 capital appealing, but it’s important to work with an experienced EB-5 team to navigate the nuances of utilizing these funds. Often EB-5 capital represents mezzanine level financing. However, some projects rely exclusively on EB-5 financing or use it to replace all or a portion of the developer equity already in the project. Since investors are primarily motivated by a successful immigration result, they often accept lower rates of return than might be sought in investments made for other reasons. When EB-5 is used as mezzanine financing it is available at a much lower cost than traditional financing options with interest rates in the range of 4.75-7%. EB-5 is a complicated program impacted by both immigration and securities law, and because it involves investors and funds from foreign jurisdictions, the financial services aspects are unexpectedly, equally complex, making it imperative to hire the right team. To succeed in EB-5, putting together the right team includes economists, business plan writers, securities attorneys, immigration attorneys, and banks, all of whom should have specialized experience in EB-5. The EB-5 program requires that each investment - currently either $500,000 or $1 million depending on the project’s proximity to targeted employment areas - creates at least 10 jobs. A developer’s overall approach to allocating the EB-5 capital will influence how jobs are calculated and, as a result, how much EB-5 capital can be raised. By incorporating an approved EB-5 Regional Center into an offering, all of the direct, indirect, and induced jobs associated with a project can be counted. The number of these indirect and induced jobs is predicted through economic impact modeling programs such as RIMS II, REMI, and IMPLAN. For retail projects especially, this means that in addition to employees hired by the developer or business directly, indirect employees, such as those who support and supply the business, and induced jobs from the trailing economic effects can be included. The greater the job count, the larger the potential EB-5 capital raise may be. Developers who intend to use EB-5 funding repeatedly, or who have some experience with EB-5,  may establish a Regional Center of their own, affording them a high level of control and potentially reducing their costs. Others may choose to work with or rent an existing Regional Center. This allows developers to promote an offering with all of the benefits of the Regional Center program without investing the time and money that establishing and managing a new Regional Center would entail. Rented Regional Centers take on various levels of participation in the EB-5 offerings based upon the developers’ particular needs. Those who are more hands-on might manage investor recruitment and relations, compliance with EB-5 program requirements, and coordination of immigration filings, allowing the developer to focus entirely on the project, while others may do little more than lend their Regional Center designation and make the appropriate filings to maintain that designation with the USCIS. For all developers using the EB-5 program, the investors’ immigration success needs to be the primary focus. Whether renting or establishing a new Regional Center, including a third party administrator in the team to manage the receipt and disbursement of capital contributions, track the flow of funds, and service the loans is a best practice in the EB-5 industry. Third party controls not only improve the efficiency of the Regional Center or issuer but also enhance the security and transparency the issuer offers its investors, lending them a competitive advantage in the marketplace. Though success depends on having an experienced team, EB-5 is still a valuable source of capital for many developers. Is it right for you? Reid Thomas is the executive vice president for NES Financial, San Jose, Calif.