The proposed Senate Bill reauthorizing the EB-5 Regional Center Program would restrict the types of projects that can be funded with EB-5 financing and amount of funds that can be raised with EB-5 financing.
The proposal to allow only 90% of the requirements for job creation to be satisfied through indirect jobs would effectively eliminate EB-5 financing for all construction projects to be completed in two years or less which are not associated with operating businesses following completion.
One of the provisions of the Bill states that up to 90% of the jobs required to be created in order to qualify for EB-5 financing may be created indirectly through investment. The EB-5 Program currently has no requirement that any portion of the jobs created be direct or indirect jobs, and requires simply that at least 10 new jobs be created for every investor. If the Bill is passed with this provision, it would mean that at least 10% of the jobs for every EB-5 project must be direct jobs. It is not clear in the Bill if that means that the entity in which EB-5 investors invest their funds must have direct employees (i.e. W-2 employees), or that the project must include direct effect employees, as calculated by an economic model such as RIMS II or IMPLAN. We assume it means the latter, because if it meant that the entity in which the EB-5 investors invested must have its own employees, that would be an extremely severe restriction, because most EB-5 investment entities are formed as financing vehicles for specific projects, and are not themselves employers of any employees.
Even if this provision is intended to mean that the project must include direct effect employees from an economic model, it would automatically exclude many construction projects. This is because EB-5 regulations currently do not allow any construction project that will be completed in under two years to count any direct construction jobs for EB-5 purposes. Therefore, this provision requiring at least 10% direct employees would automatically exclude any multi-family, condominium, office or other construction project that took under two years to build and was not part of an operating business. This requirement of at least 10% direct employees could be met by developers of real estate intended to be used for an operating business, such as hotel, restaurant, or assisted living facility, because those projects would have direct employees in their operating phase. In addition the requirement could be met by a construction project that would take over two years to build, because those projects are allowed to count direct construction jobs. However, it is unclear why the requirement for at least 10% direct jobs should be required at all, given that its effect would be to automatically shut out of any EB-5 financing construction projects to be completed within two years for multi-family, condominium, office or other types of commercial development. Moreover, since smaller, short-term projects which are completed in less than two years are the most viable types of projects in economically disadvantaged communities, this requirement would appear to be counter to the intent of the EB-5 program of promoting job growth and economic stimulus.
The proposal to limit job credit to no more than 30% of all jobs created by non-EB-5 financing would significantly reduce the amount of EB-5 financing that could be raised by many projects, and thereby jeopardize the ability of these projects to be built at all.
One of the provisions of the Bill states that EB-5 investors may only receive credit for job creation based on capital investment provided by non-alien entrepreneurs for the percentage of total jobs created that is equal to the percentage of total capital investment provided by such non-alien entrepreneurs in the commercial enterprise, and that percentage may not exceed 30% of all jobs created, even if the capital investment by non-alien entrepreneurs does exceed 30%.
There is no definition of the term non-alien entrepreneur in the Bill, and it is unclear whether that term refers only to the equity investors in an EB-5 project, excluding commercial lenders, or if it includes all providers of debt and equity capital to a project. In today's typical EB-5 real estate development project, a senior lender will typically provide up to 50% of the total cost of a development project, with the EB-5 investors contributing 20% to 30%, and the developer contributing the remaining capital. Thus, in the typical EB-5 real estate development project, if the senior lender's investment was not counted as capital provided by non-alien entrepreneurs, that would automatically cut the job count, as well as the maximum amount of EB-5 capital that could be raised, by 50%. The more debt financing that was provided by commercial lenders, the more it would cut the maximum amount of EB-5 capital that could be raised.
If, on the other hand, the term non-alien entrepreneur is interpreted to mean all sources of debt and equity capital to a project other than EB-5 capital, then the credit for jobs will be decreased in direct proportion to the percentage of EB-5 capital that is used for a project. In other words, if EB-5 capital is 10% of project capital, then the project can only count 10% of the project jobs plus the maximum 30% of the remaining jobs, for a total of 40%. If EB-5 capital is 20% of total project capital, the project could only count 20% plus the maximum 30%, for 50% of the total jobs, and so on. The reduction in the percentage of jobs that may be counted will create a direct reduction in the maximum amount of EB-5 capital that may be raised for any project, based on the basic formula of 10 jobs for every EB-5 investment. Thus, a project with EB-5 capital of 30% that can count only 60% of total jobs created would have to reduce EB-5 capital to 60% of the maximum amount that could be raised under the current EB-5 program.
This proposal also results in a kind of death spiral for EB-5 financing, because the smaller the amount of EB-5 capital that is raised, the less credit for job creation the project will be allowed to count. For example, if a project sought to raise 30% of EB-5 capital, but because of insufficient job count due to the changes proposed by the Bill, the project could only raise 20% of the total capital, there would be a further 10% reduction in the job count, which could lead to an insufficient number of jobs even to raise 20% of the total capital through EB-5 financing.
This would not necessarily impact EB-5 capital raised for projects with substantial excess jobs, which are typically the largest and longest term construction projects, but it would impact the bulk of smaller businesses and middle market real estate developers who have tended to raise as much EB-5 capital as possible based on the job count. It is unclear why the Senate Bill seeks to penalize small business and middle market real estate projects by reducing the amount of EB-5 capital they can raise. In our view, these proposed changes in job count are arbitrary and unduly complicate the burden on U.S. businesses seeking to use EB-5 capital to provide the necessary capital to complete projects for which financing is not otherwise available.
Changes to the EB-5 Program should be designed to strengthen the Program, but not arbitrarily penalize some U.S. businesses or complicate the EB-5 Program for those U.S. businesses seeking to use it.
If there is a rationale to explain why the effects caused by the proposed legislation would benefit the U.S. economy or strengthen the EB-5 Program, the Senators proposing the Bill should explain it. If not, the provisions should be dropped because they unintentionally penalize certain U.S. businesses who should have the same access to EB-5 financing as other U.S. businesses.
There are many other provisions of the Senate Bill that will make substantial changes in the requirements for immigrants seeking to obtain visas through the EB-5 Program, and these may also impact the ability of U.S. businesses to obtain this much needed form of financing. We anticipate that there will be changes as the Senate Bill is debated in Congress, and we hope that when the final form of the Bill is passed, it will strengthen the EB-5 Program without making it unduly difficult for U.S. businesses to create jobs by raising financing through the Program.
Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, the publisher of the Investment Law Blog, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.
Victor T. Shum is the Chief Executive Officer of the Advantage America EB-5 Group, Advantage America California Regional Center, LLC and Advantage America New York Regional Center, LLC. He was previously a corporate and securities partner at the law firm of Jeffer Mangels Butler & Mitchell LLP. Victor has significant experience advising clients on cross-border transactions, including representing investors and companies in inbound and outbound technology and real estate transactions with China, and representing high-net worth individuals, real estate developers and USCIS regional centers with the EB-5 immigrant investor program, a topic in which he is a frequent publisher and speaker. Contact Victor at vshum@aaeb5.com or (415) 886-7486.