By: Kurt Reuss on September 16th, 2019
Making an EB-5 investment? Discover 7 key considerations
1. Real estate projects had advantages historically — what’s changed
Real estate construction projects often require a substantial investment with abundant job creation that EB-5 investors can rely on.
EB-5 regional center projects are allowed to count direct, indirect and induced jobs based on the construction budget; an economic study will determine how many total jobs will be created. One needs only spend the project budget to ensure jobs will be created.
For the reasons of job creation, in the past investors often preferred real estate to investing in a business where job creation estimates are tied to operational revenue; it’s more common to miss revenue targets in a new business than coming in under budget on a construction project.
However, the EB-5 regulatory changes made November 21, 2019, have changed the EB-5 investment landscape. While 95% of projects in the past — including giant real estate developments like Hudson Yards in New York — qualified for the lowered investment amount required for a Targeted Employment Area (TEA) investment, the revised regulations have changed that. In an effort to promote areas truly in need for economic stimulation, TEA rules are much more strict and many of the projects that once would have qualified for such designation will no longer. This means that many of the big real estate development projects will now require the standard $1.8 million investment amount, rather than the lower $900,000 TEA amount.
Is investment in a big-city real estate development worth the extra $900,000? I don’t think so. And for many investors who don’t have the budget for a standard investment, it’s a moot issue.
2. Viable investment project locations are expanding
The new EB-5 landscape is literally expanding. There is a multitude of viable non-real estate projects now on the market, and many of them don’t need to be built in a big city like New York or Chicago, contrary to the needs of the large EB-5 real estate projects of the past.
For example, the tech sector offers some intriguing and appealing projects that are not location dependent. They can easily be built in TEA locations — either rural or with high-unemployment. The COVID-19 experience, as difficult and painful as it has been, has taught many businesses that working remotely can work. EB-5 projects are no exception. Investors looking to invest at the lower TEA level should no longer look exclusively to big cities for very good EB-5 investments; they can and will happen everywhere now.
3. Progress is positive
The more progress a project has made to date, typically the less risk there is for immigration purposes and financial success. Construction progress and other aspects of business development mitigate risks associated with permitting, financing, and can mean job creation is already under way.
Progress also means market fluctuations have less time to impact a project. The closer you get to completion, the sooner operations and stabilization of the asset occur, allowing permanent financing to be put in place, which is often used to return capital back to EB-5 investors.
4. Exemplar and I-526 approvals
Once USCIS approves at least one I-526 petition, the Immigration Service is highly likely to defer other petition reviews to this approval. A single I-526 approval indicates that the project documents meet the EB-5 program requirements and job creation methodology has been accepted.
Often people think that an exemplar approval is a special type of approval issued by USCIS, but it is actually an approval of the project documents before they are filed with an I-526 petition.
Regional centers file for an exemplar in order to provide confidence to the market that their offering will not be rejected in a petitioner’s I-526 submission. So regardless of whether an exemplar gets approved or a single petitioner’s I-526 is approved, both indicate acceptance by USCIS — so long as no material changes have happened since then. This is crucial.
It’s also important to note that while exemplar approval can inspire a degree of comfort, it does not mean a project has less financial or immigration risk.
5. Exit strategy coincides with your I-829 filing date
Ideally, you want to select an EB-5 fund whose investments have an exit strategy, or maturity date, that coincides with your anticipated I-829 filing date. To do so, determine how long you expect it will take to file your I-829. You should consult with your lawyer on this. This is the date that ends the requirement of maintaining your capital “at-risk.”
Next, you’ll want to add in a cushion of time to this date, say one year, for potential delays in processing your petition. It is around this date that you want the EB-5 Fund to have funds available for repaying their investors.
The calculation is different if you were born in country that has retrogression. If you were born in India or Vietnam, you are probably facing a longer wait for an EB-5 visa to be available. But it may be possible to go straight to the I-829 stage after entering the U.S., so with a 1-2 year cushion, 8-9 years may be the optimum date to have your capital returned to you.
Loan vs. equity
Loans offer more certainty to estimating maturities as they have maturity dates, while with an equity investment, the Developer does not have an obligation to repay at a specified time. A loan must be repaid at the maturity date or it would be considered in default.
But, of course, loans often include loan extension options. It is therefore imperative to identify who makes the decision to extend the maturity date of a loan, and to ask if all investors are subject to the new maturity date.
Some EB-5 funds have multiple loans to the borrower with different maturity dates, thereby enabling investors to get repaid at different times as they meet their conditional residency requirements.
6. Rates of return — they are changing in the new era of EB-5
As with the element of TEAs, rates of return have evolved due to the new EB-5 regulations. Investors can now see significantly better returns than in the past.
While in the past, in order to get a rate of return of 3%-4% on your EB-5 investment, one had to invest in a Project where a similar non-EB-5 investment would earn 12%-18%, that’s no longer the case. Higher investment amounts have spurred EB-5 investment projects to offer higher rates of return to entice investors to enter the new market.
Investors are now being offered expected rates of return as high as 8-10% on some EB-5 investments.
Still, an investor’s appetite for higher returns needs to always be balanced with the immigration and financial risks of a project — remember, an EB-5 investment is primarily designed to result in a Green Card.
7. Trust independent due diligence
There are lots of great regional centers out there. But understand what they give investors is “marketing” — it’s designed to showcase an EB-5 project's best features. And it’s not meant to highlight risks or negative elements. Unless you’re both an EB-5 immigration expert and a financial analyst, you should rely on independent due diligence that examines the strengths and risks of all your investment options — and gives you an unbiased and completely transparent analysis.
Too many EB-5 projects have failed due to poor execution or even willfully criminal acts. And too much depends on the outcome — a Green Card and at least $900,000 — to take chances. Get a third party with experience reviewing EB-5 investments.
Conclusion: EB-5 is changing and so are investment options
For investors who don’t want to, or simply can’t afford to, invest at the $1.8 million level, there are many strong projects that meet the new TEA standards. Real estate — and location — are not the prime considerations they used to be. And investors can see significantly better returns than in the past.
Look for investments that offer a maturity date that coincides with the timeline of your I-829. Exemplar approval can inspire a relative degree of confidence but does not mean a lack of risk.
And lastly, count on independent analysis of any and all projects you’re seriously considering.