What do Marriott, Hilton Worldwide, Hyatt, Starwood Hotels & Resorts, American Life Insurance Company and Jay Peak Ski Resort know that you don’t know? They have discovered a way to access substantial amounts of equity financing for a project’s “capital stack” at very low cost — 3 percent to 4 percent annual interest. They have used the capital to build wind farms, ski resorts, film production studios, the Staples Center in L.A., mixed-use real estate developments, nursing and assisted living facilities, hospitals, medical research facilities, manufacturing facilities, and large infrastructure and construction projects, including bridges.
How is this possible? Immigrant investment. These companies and many others have successfully raised significant portions of their required financings from immigrant investors under the EB-5 program administered by the U.S. Bureau of Citizenship and Immigration Services (USCIS). Through this law, which has been in place for more than 20 years, immigrant investors and their families can invest $500,000 in severely economically depressed areas, known as Targeted Employment Areas (TEAs), or $1 million elsewhere in the U.S. As long as the immigration investors’ paperwork checks out and the investment produces at least 10 new jobs during their two-year conditional residency period, their residency status becomes permanent and green cards are awarded.
A Dutch family of four that took advantage of the EB-5 program was recently featured on the front page of the Washington Post. In return for their $500,000 investment in the Marriott Marquis Hotel, being built in Washington, D.C., the entire family will be entitled to stay in the U.S. permanently. Their two college-aged children can also attend U.S. universities. While the family will receive only a very modest return on investment (likely in the 2 percent to 3 percent range, according to the Post), their goals, like so many other immigrant investors in the EB-5 program, are centered more on U.S. citizenship than on ROI.
While USCIS caps the number of visas awarded at 10,000 per year, the EB-5 program has never reached that level of interest. In 2011, the visas awarded topped out 3,463 in 2011; the total was roughly the same last year. While it is anticipated that all of the favorable media reports and articles will increase the number of applicants, there is still room to join these large organizations in accessing immigrant investment through this innovative means of financing development projects.
EB-5 did not always generate glowing press releases and result in ribbon-cutting ceremonies with beaming public officials. In the 1990s, USCIS oversight was modest, at best, and unscrupulous financial brokers often targeted naive immigrant investors. They promised U.S. citizenship and access to U.S. universities for their children, and steered them into dubious investments, many of which failed. This left the immigrant investors with no money, no investment, no green card and very little recourse. Immigrant investors, too, were not above misrepresenting their investment commitment and capabilities, or otherwise manipulating the EB-5 program for their personal or business benefit.
Recognizing these pitfalls, beginning in 2002, USCIS strengthened the sanctioned regional centers by adding administrative support and business plan review expertise and requiring all investments to be made up front. They also steered immigrant investors away from dishonest, independent brokers and toward the regional centers by allowing jobs created indirectly from regional center-sponsored projects to count toward the ten-job requirement, rather than counting only those jobs that flow directly from the specific project. In addition, immigrant investors who work with regional centers do not need to directly manage the development project, while those who pursue their EB-5 process independently must take an active management role. Not surprisingly, nearly 95 percent of immigrant investors now partner with regional centers to make their EB-5 investments.
Of course, all that glitters is not gold. The regulations governing the EB-5 program are lengthy and include many legal and business requirements. The process can be time consuming and costly. In addition, raising funds from foreign investors can be a long “road show” with no certainty. The immigration application process itself can create some additional hurdles.
However, for equity financing at three to four percent many developers have found that they can live with a little inconvenience.
The current EB-5 program, including the regional centers, is authorized through September 2015 and enjoys bipartisan political support. With the substantial increase in successful EB-5 investments in projects sponsored by companies with household names, the “win-win” results will likely continue, fueling more positive news about job creation and increasing interest from immigrant investors, U.S. development project sponsors and federal regulators alike.
Jeff Craven is a partner in Thompson Coburn's Washington, D.C., office.