1. Intro – New EB-5 Regulations
The U.S. government published final regulations regarding the EB-5 program, which became effective on November 21, 2019. The final regulations made significant changes to two major aspects:
B) TEA designation which determines the minimum investment amount that the project qualifies for, which used to be determined by each state, will now be evaluated on a case-by-case basis by a central government agency – Department of Homeland Security (DHS). Discussed in further detail below.
2. How to choose projects under the new regulations?
Once you have decided that EB-5 is the U.S. immigration pathway for you and your family, the next important step is deciding where to invest your hard-earned money.
As such, investors should consider the following:
A. Targeted Employment Area (“TEA”)
As shared above, the TEA designation of a project will determine whether the project qualifies to accept investors as the lower threshold of $900,000 or at the higher threshold of $1.8 million.
A TEA is a rural area or an area with a high unemployment rate, which is defined as at least 150% of the national average rate. Similar to the previous EB-5 regulations, whether a project is located in a TEA will determine whether that investment qualifies for the minimum $900,000 amount or the substantially more $1.8 million amount. Please see below:
- The new regulations state that TEAs will now be designated by the Department of Homeland Security (DHS) after the investment is made as a part of adjudicating the initial I-526 petition.
- Specifically designated high-unemployment TEAs will now consist of a combination of census tractions that include the tract or contiguous tracts in which the new commercial enterprise is principally doing business, including any directly adjacent tracts.
- TEAs may now include cities and towns with population of 20,000 or more outside of metropolitan statistical areas, provided that they have experienced an average unemployment rate of at least 150% of the national average unemployment rate.
We highlight the above because it is important to know that because of the new TEA regulations, some investments and projects will no longer qualify as being in a TEA, especially those in big cities. Lastly, it’s important that you verify that the project has all documentation in place to show that it should qualify as TEA so that you will qualify for the minimum investment amount.
B. Project Considerations
In today’s EB-5 landscape, the number of quality projects that meet the new, tighter TEA regulations, i.e. qualify for the minimum $900,000 amount, are few and far between. As such, investors should consider the following when being approached by projects/EB-5 issuers or vice versa:
i. Quality of EB-5 Project Team/Developer Track Record:
You should be aware that job creation is arguably the most significant requirement of the EB-5 program, and unlike source of funds, it’s a requirement that you have little control over. As such, you must put your trust and faith into a developer with a successful track record. In order to gauge the quality of the EB-5 project team that you are trusting to A) manage your funds and B) create jobs, you’ll want to consider the following:
- Financing: Has the project secured all financing or is it relying on your funds? If it’s the latter, then this is a red flag. You want to consider a project that has all financing in place so that you can be more assured that construction has already begun, jobs are being created, and the project will probably be completed with or without your funds.
- Equity: Related to the above but consider projects where the developers have “skin in the game.” What we mean by this is, consider projects that is putting their own capital at risk so that they are just as motivated if not more so, to see the project through to completion.
- Experience/Track Record: You will want to gauge how well the project development team understands development within the EB-5 realm. Ask for information and documentation related to past projects and plans for future projects. Specifically, ask them for matters related to your immigration path, i.e. have they been successful in creating all necessary jobs in the past? Have their investors received I-526/I-829 approvals? Have their previous investors been paid back? While past success is not a guarantee of future success, it can be reassuring to see that the project development team knows what they’re doing.
- Reporting: Ensure that the regional center you choose has kept up with its annual I-924A reporting mandated by the government and that the regional center is not subject to termination by USCIS or facing any lawsuits.
ii. Capital Stack
Before investing, you’ll surely want to know what other financing the project has secured, and where you, the EB-5 investor, fit into that financing structure so that you can determine in which order funds are repaid. As such, be sure to ask the issuer, “where does the EB-5 fund fit into the capital stack?”
- Senior Lender/Construction Loan: Typically, a senior lender/construction loan will make up about 60%-70% of project financing and so it usually holds first position. This lender will also have done significant due diligence on the project and will often monitor the loan between the NCE and the JCE. This should provide some reassurance and peace of mind to you.
- EB-5 Fund: Because you’ll want to invest in a project that is already under construction, and not reliant on EB-5 funds, about 20%-30% of project financing will be made up of EB-5 funds. As such, the EB-5 fund will typically hold a second position or equity through a Special Purpose Entity (“SPE”)
- Equity Investors: The balance of the project financing will be made up of private equity investors. If a developer puts its own funds into the project, it will sit in the third position – this means that the developer cannot get paid back until the senior lender and EB-5 funds have been repaid first.
You, the investor, should be cognizant of where your investment is going and how it is being invested. Consider a project that provides regular status updates as to how the project is progressing. This way you can monitor the usage of your investment vis-à-vis the projections in the PPM, the progress of construction and the creation of jobs. For example, some projects provide access to a 24/7 live webcam.
iv. Immigration Collaboration:
You want to consider a project that will regularly stay in touch with your immigration counsel so that you meet the immigration milestones and reporting requirements to USCIS. A good project will have systems and process in place to manage an investor’s status to ensure that critical deadlines are met and that documents and information are provided in a timely manner.
v. EB-5 Compliance:
In order for you to achieve your immigration goals through the EB-5 program, the project of your choice must be “EB-5 compliant.” You will want to consider the track record of the regional center and developer – do they have a record of project completion? Job creation? I-829 approval? You will want to consider the overall EB-5 team that the project works with
Per EB-5 regulations, an EB-5 investor is eligible for repayment of funds once their I-829 petition has been filed (21 months after starting conditional permanent residence). However, visa retrogression and lengthening I-526 petition processing times for EB-5 investors born in China, Vietnam, and India has required projects to “redeploy” funds so that investors maintain EB-5 compliant. As such, it is important for you, the investor, to consider a project that has a viable and sensible redeployment strategy in place and to ensure that you remain EB-5 compliant until you are eligible to apply for the I-829 and hence a refund of your capital at the end of that period.
3. Return on investment v. Security of investment
The number one question asked by investors contemplating the EB-5 visa is, “What is the return on my investment?” Generally, I respond with something along the lines of “EB-5 is not a money-making investment. It’s a secure investment, where your return on investment is permanent residence in the U.S. for you and your family or a pathway to U.S. citizenship.” However, that does not mean you cannot make a good return on your investment; it just depends on what your long-term goals are in the U.S., and the amount of risk you can handle.
While a return of the capital investment cannot be guaranteed, as per EB-5 regulations, investors can expect a return on their investment. Generally, a typical loan-based investment model will yield a return as low as 0.25% and as high as 2%. Equity investors’ earnings will vary based upon the profitability of the enterprise. Often, investors will look at the 0.25%-2% range and ask. “why is the return so low compared to other investments?” This is because the primary purpose of an EB-5 investment is obtaining permanent residency in the U.S., not necessarily to make profit. An EB-5 investor should strongly consider the immigration risk of a project, not its earning potential. Think about this alternatively, a project that promises you a return of 8% likely has higher immigration risk. As such, while you’ll certainly make more money on your capital investment, what’s the point if your original goal of obtaining a green card for you and your family is jeopardized?
In sum, the decision where to place your EB-5 investment is completely yours. However, there is more to consider than just a high ROI. Considering your long-term immigration goals versus the risks associated with the security of your investment.
Experienced EB-5 Team
Trying to navigate through the new EB-5 regulations along with the TEA analysis, retrogression, redeployment, and individual immigration/investment issues can be a daunting task. As such, it is critical to choose a project that boasts an experiencing EB-5 team containing the following:
- Business Plan Writers: An experienced business plan writer is an absolute necessity. An experienced business plan writer works with the project to present their business model in a way that is fully EB-5 compliant with USCIS requirements. To put this alternatively, if you submit a business plan that is not EB-5 compliant, then your initial I-526 petition will be denied.
- Economist: While business plan writers and economists are often grouped together as one, they serve separate critical purposes. An EB-5 economist prepares an economic analysis/job creation study for your intended investment project. Here, economists run government-approved models to calculate how many jobs will be created based on EB-5 investments and qualifying expenditures. As a result, economists will determine whether or not a project meets the EB-5 job creation requirements.
- Securities Counsel: Securities counsel with EB-5 experience will assist in navigating between U.S. EB-5 immigration regulations and U.S. securities regulations. It is the duty of securities counsel to prepare offering documents that serve to provide investors with material information they need to make an informed investment decision. As such, outside securities counsel has engaged in dude diligence of the project before the investor has to decrease the risk of material misstatements and omissions in connection with the offering.
- Immigration Counsel: While the project will be responsible for the security of your funds, an immigration lawyer is responsible for the security of your immigration matters. On the project side an experienced immigration team will review the business plan, economic report, and offering documents to ensure EB-5 compliance. On the investor side, an immigration team will work with you to prepare your source of funds, walk you through the conditional green card application/interview, and when the time comes, work with the project to make sure you are eligible to remove the conditions so that you receive the full 10-year green card.
As a professional, we see 10’s and 100’s of projects, but based on our experience we are in a position to provide our perspective on which project or projects might make most sense to invest your capital in from an immigration law compliance standpoint.
We highly recommend engaging an Immigration Attorney to understand the intricacies of this process and to help you navigate through the details.
On November 21st, 2019, the new regulations came into force, which includes the increase in the minimum investment amount to be $900,000 for TEA approved projects and $1.8 Mn for Non-TEA projects. Please consult your immigration attorney or LCR Commercial Representative for further information.
David Hirson, Esq. has more than 35 years of experience in corporate immigration law, specializing in business and investment immigration. David is the founding and managing partner of David Hirson & Partners, LLP (“DHP”), and he is internationally recognized for his decades of success in business and investment immigration.
Niral Patel, Esq. is a partner at DHP and has experience in many aspects of business immigration law, including both EB-5 and non-EB-5 practice areas. For EB-5 matters, Niral works closely with investors, regional centers, and project developers in formulating source of funds strategies, regional center creation, operations, and annual reporting, and overall EB-5 compliance for projects. Furthermore, Niral oversees the firm’s Indian and middle eastern practice groups and regularly travels to India and Dubai to meet with investors and agents to guide them through the EB-5 process. For non-EB-5 matters, Niral handles a variety of immigrant and nonimmigrant visas for individuals, families, and corporations.
DHP’s attorneys have over 70 years of combined experience in advising individuals, startups, large corporations, hospitals, and universities in navigating complex areas of business and investment immigration law. The firm’s business and employed-based immigration practice provide a full range of services including EB-1-1(A), EB-1-2(B), EB-1-3(C), National Interest Waivers (NIW, EB-2, EB-3, Eb-5, H-1B, E-1/2, L-1(A)/2(B), and other immigrant and nonimmigrant visas. DHP is one of a select few firms that also specialize in immigration for franchise businesses who have foreign partners/managers. DHP also works closely with individuals and HR departments to understand their needs and customize an immigration plan that surpasses their expectations.