The EB-5 program is a multi-billion dollar/year industry. The EB-5 program allows foreign investors to obtain green cards, leading to permanent residency. In order to obtain a green card under the program, the foreign investors need to make an investment that leads to job creation. The benefit of the E5-5 investment is that the cost of funds is minimal compared to mezzanine financing. Also, the key is that the EB-5 investment must be “at risk,” which means that if the project fails, the EB-5 investors lose his or her money, and, more importantly, the conditional green card is lost. This program gained mainstream recognition when the market collapsed and the capital markets froze. Developers, not able to tap prior sources, scrambled to find alternative ways to finance projects. Prior to the 2008 collapse, the EB-5 program was obscure to many developers. However, there were a few developers who did use the program for project financing. Now, there are over 20,000 investor applications pending with USCIS. The demand for the EB-5 visa is strong, bringing billions of dollars each year in investment capital to the U.S. No matter the location of the a real estate project, EB-5 financing has become familiar to most sophisticated real estate developers.
Most EB-5 investments finance real estate development projects. Most foreign investors prefer marquee projects, like the $20 billion Hudson Yards development in Manhattan because of notoriety and the perception of less risk. The Hudson Yards development spurs $150 million each month in construction costs alone, creating thousands of jobs. Depending on the location of the investment, a foreign investor will either make a $500,000, or $1,000,000 investment. Over 98% of the investments are at $500,000 mark. In order to qualify for the lesser amount, the investment must be made to a targeted employment area (TEA). A TEA is an area which includes a census tract, city, county MSA, or state that has an unemployment of a least 150% of the national average at the time of the investment. Generally, the industry uses census tracts because the data is readily available and reliable. The high unemployment census tracts are considered distressed.
Because the EB-5 program was not intensely legislated, it allowed the industry to set many of the rules for the program. For example, the EB-5 program allows geographies (generally census tracts) to be gerrymandered, which means that if a specific area does not quality as a TEA by itself, then adjoining geographies are allowed to be joined to that non-qualifying TEA for the purpose of meeting the unemployment rate of 150% by aggregating and averaging the employment numbers of the joined geographies. The number of geographies that can be aggregated is determined locally in each state (not necessarily by the state). In some states, there is a limit to the number of geographies that can be aggregated while in other states there is no such limit. It is important to keep in mind that most states see little benefit in limiting the number of geographies that can be aggregated because the foreign investment spurs economic growth without cost to the state.
The ability to gerrymander geographies (census tracts) is controversial. The problem with gerrymandering is that the geographies (census tracts) that are distressed lose out because many EB-5 projects are located in wealthier areas. Areas that are distressed and need access to capital are unable to compete against wealthy census tracts, which in some cases have an average income of 200% (double), or more, of the overall median household income. The issue is that wealthy census tracts have available capital for investments, whereas distressed census tracts starve for needed capital. It’s important to consider that even though the EB-5 program benefits non-distressed census tracts, the EB-5 program is a necessary catalyst that allows certain real estate projects to happen. The need for cheap, non-recourse financing makes it possible for some projects to get off the ground. It is often the case that land and labor costs are more expensive in wealthier census tracts, which may thwart development. The way the developers are able to mitigate the higher costs is through the use of the EB-5 funds to source part of the development costs.
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