The Unique Benefits of EB-5 Financing for Developers

The EB-5 regional center program offers hands-off investment opportunities for immigrant investors through the construction or redevelopment of a public or private entity. Project Sponsors who wish to create a regional center by putting together a regional center proposal and submitting it for USCIS approval. This proposal requires extensive and detailed preparation, including registration forms, economic reports, and business plans which establish that the regional center’s pooled investment will be in a “defined economic zone”, when applicable. Regional centers may be created by filing the necessary paperwork or the designation may be “rented” or “leased” from an existing regional center.

Accessing various sources of funds (financing, equity, tax credits, etc.) to build the capital stack for a project is nothing new for developers. The EB-5 Regional Center Program provides another source of capital available to developers that they can place into their project’s capital stack. Relative to other types of funding, EB-5 has certain unique advantages as explained further below.

It is important to note at this point that real estate developments are the most common type of project that uses EB-5 capital, but other projects that do not necessarily involve real estate development may also qualify, provided they can create enough jobs.

Flexible Investment Structuring

The Regional Center Program allows for flexibility in structuring the investment offering. The regional center pools investor funds into a New Commercial Enterprise (NCE), which then invests the pooled funds into a Job Creating Entity (JCE), AKA the development project. This process allows for solicitation of EB-5 funding through either loan and equity (common or preferred) investments, depending on the needs of the project. The loan to the job creating enterprise carries a fixed interest rate and a fixed term, like a traditional commercial loan. Another common model exists wherein the new commercial enterprise makes a preferred equity or common equity investment into the job creating enterprise. The equity model allows developers to tap less risk-averse and patient capital in exchange for a generally higher cost of capital compared to the loan model. This allows for project developers to fill their capital stack with the necessary form of financing. 

Projects can also be structured to allow EB-5 equity investments with preferred returns. Terms of investments are typically three to seven years, with the opportunity for multiple years of loan extensions.

The flexibility of EB-5 capital is further demonstrated by the variety of project types which qualify for EB-5 financing. While most projects are run-of-the-mill real estate developments, EB-5 financing has been used for transportation routes, clean energy infrastructure, medical facilities, factories and industry plants, and much more. No project is outside the scope of EB-5 financing.

To understand what an EB-5 investor looks for in an EB-5 offering, read about the investment process for a prospective EB-5 investor.

Cheaper cost of capital

The cost of EB-5 financing, whether as common or preferred equity, subordinated or senior loan, is lower than equivalent financing from other traditional sources such as banks or equity funds. This is because the investment opportunity grants an additional return for investors – the opportunity for a green card for themselves and their families – as opposed to capital gains through interest. This is one of the major draws of the EB-5 program for large-scale project developers who may have a hard time seeking high interest financing from third parties. 

As per one estimate, EB-5 capital in the loan position can be cheaper by anywhere from 350 to 500 basis points. This spread is even wider for equity model investments.

An important part of calculating the cost of capital is the cost of marketing. Most project offerings charge an administrative fee to cover these costs, however, it is not always a zero-sum game. For many, the costs of marketing can be more expensive for the first few projects, while additional consultants are employed and/or while marketing networks are being established in various overseas markets. Over time, the reputation of a regional center or a project operator combined with establishing strong marketing channels, can significantly improve the cost of capital.

High-Value Pooled Investments

The regional center program allows multiple EB-5 investors to be pooled into a single investment offering, facilitating larger capital raises. The number of investors that can participate is only dictated by the amount of jobs which can possibly be created, which in turn is a function of the size of the project and its estimated capital expenditures and operations. This essentially means that businesses can raise their desired amount of EB-5 capital so long as they can generate the jobs required to do so. Some projects take advantage of this by using EB-5 capital to fund all of a project’s third party funding needs. However, it is more common for EB-5 capital to account for up to 20-30% of a real estate development project’s financing, in order to mitigate risk and diversify sources of income.

Access to Capital

Investment from EB-5 investors can be an especially viable option for construction and development projects which may find it difficult to secure commercial financing in an insecure lending market. In fact, when institutional lending was restricted during the 2008 recession, the EB-5 program played an integral role in funding businesses and developments across the United States. Because the demand for a green card is so high across all visa classifications, the EB-5 program attracts thousands of eager immigrants annually – each who is willing to invest up to $1.05 million into a project for a green card.

By providing subordinated loans or preferred equity, which have a lower priority in repayment, EB-5 can also be an option for businesses which may not qualify for commercial lending, or can be used to meet loan-to-value ratios for lending. In this way, the EB-5 program serves as a middle ground in the traditional binary structure of debt vs. equity.

Turn Key Process or Direct Oversight

EB-5 investment capital can also offer hands-off benefits to project developers, depending on their needs and affiliations, making the EB-5 program an attractive source of financing for major construction projects. Below are some of the merits of working with EB-5 investors on development projects:

Any project raising capital through the regional center program is sponsored by an authorized regional center. A regional center is a designation given to an entity to serve as a middleman between project developers and EB-5 investors, identifying projects, structuring the offer for marketing abroad, and simultaneously coordinating with securities attorneys and other professionals to prepare offering documents and project filings. Following the capital raise, regional centers are required to track and report job creation, project expenditures, and other compliance matters related to the project and program. 

The services provided by investment issuer/regional centers and associated professionals can vary but can result in a turn-key process for project developers and businesses, allowing them to access an alternative capital market without fully assuming the burden of reporting and compliance for an unfamiliar, niche government program.

It is important to note at this point that real estate developments are the most common type of project that uses EB-5 capital, but other projects that do not necessarily involve real estate development may also qualify, provided they can create enough jobs.