The visa program known as EB-5 was established in the 1990’s for foreign investors who want to gain permanent citizenship in the United States. This visa is based on investing a minimum of $500,000 in projects that must create at least 10 jobs per investment. These investments are funneled through regional centers, which act as liaisons between the applicants and the immigration officials. Since 2008, the use and acceptance of the program has exploded, with nearly 11,000 applications submitted last year.
The rise of the EB-5 program coincides with the enormous wealth creation that has taken place over the past 15 years in China. Today, 85 percent of EB-5 applications are Chinese investors. U.S. commercial real estate developers have largely come to view these immigrant investors as a favored source of capital.
EB-5 investors’ main motivation of citizenry accounts for the relative flexibility and favorable terms granted to commercial real estate developers in the U.S. even when the investment must be legally at risk, according to program guidelines. Investors can pay additional money to obtain a temporary green card when the project begins. However, repayments to the investors are not released until their EB-5 visas are approved, so the investors are assuming a significant amount of risk.
Some predict that by July of this year, 10,000 applications for visas will have been received by the U.S. Immigration and Citizenship Services, meaning any additional applications won’t be processed until next year. Furthermore, the U.S.C.I.S. lacks the necessary infrastructure to properly process 10,000 applications for a program that had little appeal for years. In addition, rumors abound of the imminent censure, or even closing, of some very high-profile regional centers and investor recruiting shops.
The biggest issue is the inherent mismatch in the timing of a typical real estate development project and the time necessary to actually receive immigrant investor cash. Time is always of the essence for the developer; they need to keep in mind that immigrant investor applications may take up to 12 months or more. With the expected surge in applications this year, this bottleneck may get significantly worse.
Bridging the time gap with a bridge loan, in an equal amount to what is expected from the EB-5 investors, could be a solution. However, the universe of lenders willing and able to make such loans is not large. The interplay between the EB-5 rules and regulations makes such lending complicated.
The legislation behind this program requires it to be renewed by Congress every five years, with the next renewal coming this September. Even though the political landscape may be slightly turning against it, the general consensus is that it will again be renewed. However, commercial real estate developers will need to focus more energy than ever on solving the time gap between funding a development project and receiving immigrant investor funds.
Tanya Little is CEO of Hart Advisors Group. Contact her at tlittle@hartadvisorsgroup.com.