10 keys to making your real estate development project attractive to immigrant investors in the EB-5 marketplace
An immigrant investor has two primary objectives when shopping for an EB-5 project — to minimize the immigration risk and to minimize the investment risk.
No immigrant wants to move to the U.S. under a conditional green card (that requires them to generate jobs in the U.S.), buy a house, enroll children in school, and then be put in the untenable position of losing their entire investment and their green card two years later if the project fails both as an investment and as a jobs generator. Immigrant investors are understandably choosy about the investments they make under the EB-5 immigrant investor visa program.
There are 150 existing regional centers in the U.S. and 83 new regional center applications pending approval, all with projects trying to receive EB-5 funding. How do developers make their projects stand out from the rest?
How can you differentiate your project and make it more attractive than other EB-5 projects vying for the same money? A strong project will always trump a weaker one, but what does that mean for EB-5 projects?
Here are ten ways you can make your project stand out to immigrant investors in the competitive EB-5 marketplace:
1. Make sure your project is in a Targeted Employment Area (TEA)
To be competitive in the marketplace, a project must be located in a Targeted Employment Area (TEA). A TEA is a high unemployment area (150% of national average) or a rural area. Having a TEA designation permits the minimum qualifying investment to be reduced from $1 million to $500,000. There are too many $500,000/investor projects in the marketplace for a $1 million/investor project to be competitive. Work with your State agency to determine if your project location qualifies for TEA designation.
2. Locate your project in an area with global recognition
We’ve heard it a million times before – location matters. From an Asian perspective, projects in major metropolitan cities are the most appealing. Choosing an area where property prices have historically risen lessens the risk of loss. Investors also want to be able to easily visit and see where their money is going. If they recognize the location of the project and know it is a hotspot for commerce, they are more likely to believe that the project will be successful.
3. Emphasize the real estate component of the project
There are many examples of successful non-real estate based EB-5 projects. However, there is a clear bias among Asian investors towards real estate projects. Real estate is tangible and Asian investors understand it, particularly with businesses such as hotels, hospitals, assisted care facilities and commercial buildings.
4. Obtain strong branding for your development
A project that is associated with a brand name recognizable in the investor’s home country provides familiarity and credibility. If your project is affiliated with a successful brand, investors will feel more at ease that their investment will be successful. In the context of a hotel development, recognizable brands such as Sheraton, Marriott, and Hilton, together with their affiliated brands, are prestigious and popular in China. It should be noted that many hotel brand owners position their brands differently in the U.S. than overseas. A brand that may be considered a tier 2 brand in the U.S. could be a tier 1 brand overseas. Brands can also come in the form of affiliations with universities or governmental entities (see number 7, below).
5. Provide information about your past successes
An experienced developer with a good reputation and a strong balance sheet is favored. This is no surprise for an investor in any project. However, the consequences for EB-5 investors can be dire if a developer fails to start and complete the project according to its business plan. If there are material changes to the business plan, investors may be denied permanent green card status when they petition the U.S. Citizenship and Immigration Services (USCIS) to remove their “conditional” status (the I-829 petition). Investors must trust the developer to have a good business sense, to protect the investment, and to complete the project according to the business plan. Providing information regarding your past successes is critical to gaining trust.
6. Create more jobs than the minimum required
The bigger the job creation “buffer”, the better the project. The EB-5 program is predicated on job creation, and each investor (regardless of investment amount) is required to create full-time employment for a minimum of 10 U.S. citizens or aliens legally authorized to work in the U.S. If the project creates only 9 jobs per investor, then the removal of conditions for the investor’s green card will be denied. Work closely with your economist to determine the projected job creation and then determine how much EB-5 funding to raise for your project. If a project is anticipated to create 100 jobs, raising $4 million with 8 investors (12.5 jobs/investor) results in a 2.5 jobs/investor buffer, which is more favorable to the investor than raising $5 million with 10 investors (10 jobs/investor) and no job buffer.
7. Line up governmental support
Investors like to see government support for a project. City, state, or federal support lends credibility to a project. There is also a mistaken but widely held belief that governmental support for a project can facilitate the immigration process. Support can come in the form of tax credits, redevelopment funds, affiliations with state universities, letters of support from government officials, or more direct participation such as officials participating in overseas trips and seminars.
8. Make sure your capital stack includes more than EB-5 funds
From a financing perspective, developers with a significant equity position in a project are favored. This is no surprise. A 70% LTV is often quoted by immigration consultants but can be negotiated up or down depending on the project, risk, and amount being raised. Similarly, projects that consist of too much EB-5 financing are disfavored because of the perceived risk that the project will fail if the developer is unable to raise all of the EB-5 funds. Of course, these rules of thumb should just be considered that. The financing model should be reviewed closely — particularly if there are senior lenders on a project.
9. Provide security to protect EB-5 interests
It is important that the EB-5 investor have adequate protection for his investment. Under the debt model, security in the form of mortgages, deeds of trust, assignments of rents, and security agreements are common. For mezzanine debt, a security interest in the borrowing entity is also common. Care should be taken to protect the interests of the EB-5 investor when negotiating the inter-creditor agreements with senior or junior lenders. For commercial buildings, a build-to-suit project with a well-recognized, credit-worthy tenant provides an investor with additional security that the project will succeed.
10. Communicate a clear exit strategy
An investor wants a clear path to exit after the investment period is over. Most EB-5 investments are structured on a 5 year term with a purchase and sale of the investor’s interest after the end of the term. Under the loan model, a 5 year term loan is typically made by the funding entity to the borrower, and principal repayment is made either through a sale of the project or a refinancing of the EB-5 loan at the end of the term. Under the equity model, the project entity will either arrange the sale of an investor’s interest or distribute the proceeds after the sale. While there is debate as to whether an equity or a debt model is better for an EB-5 investor, the current trend among regional centers appears to be the debt model. From an investor’s perspective, this may be because the exit path is more clearly defined by the borrower repaying the EB-5 loan.
Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.
Victor T. Shum is the Chief Executive Officer of the Advantage America EB-5 Group, Advantage America California Regional Center, LLC and Advantage America New York Regional Center, LLC. He was previously a corporate and securities partner at the law firm of Jeffer Mangels Butler & Mitchell LLP. Victor has significant experience advising clients on cross-border transactions, including representing investors and companies in inbound and outbound technology and real estate transactions with China, and representing high-net worth individuals, real estate developers and USCIS regional centers with the EB-5 immigrant investor program, a topic in which he is a frequent publisher and speaker.