Development Magazine Winter 2014

Finance

EB 5 Development and Target Employment Areas

Developers have established target employment zones in downtown Manhattan and other major real estate markets, responding to the interest of EB-5 investors looking for safe markets in which to invest. 

When one thinks of high unemployment zones in the U.S., Manhattan, San Francisco and West Los Angeles probably are not the first locations that jump to mind. Yet savvy developers have been able to designate these and other major economic hubs as target employment areas (TEAs), enabling them to attract EB-5 investments.

The Basics 

Under the Immigrant Investor Program, commonly known as EB-5, a foreign investor can essentially “purchase” permanent residency in the U.S. if he or she invests $1 million into a qualified EB-5 project that creates at least 10 new full-time jobs. That investment may be decreased to $500,000 if the EB-5 project is located in a TEA. The vast majority of EB-5 investors therefore will only consider investing in projects located in TEAs.    

headshot of Eric McAllister

Eric McAllister

A TEA is defined as an area that has an unemployment rate of at least 150 percent of the average national unemployment rate. An individual state or the U.S. Citizenship and Immigration Services (USCIS) can designate an area as a TEA.

States typically publish lists of cities and/or counties that have an unemployment rate greater than 150 percent of the national average. However, if a desired geographical area for an EB-5 project falls outside the state’s designated TEA list, the developer can ask the state or the USCIS to designate the individual project area as a customized/special TEA. To receive this designation, the developer applicant redefines the EB-5 project’s “location” to include not only the project’s physical location, but also surrounding areas with higher unemployment that may be the source of the project’s job creation.  

For example, if a developer wants to build a hotel in Manhattan, the project’s specific location would have an unemployment rate of approximately 6.4 percent, well below the national average.  However, if the developer can show that the project may create jobs for residents of the Bronx, he or she may average Manhattan’s unemployment rate with the higher unemployment rate of the Bronx, thus increasing the unemployment rate in the project’s “location.” This practice is known as census tract counting, and it enables places like Manhattan and other areas of low unemployment to receive a TEA designation.

Successful Customized/Special TEAs

A number of developers have been able to receive customized or special TEA designations in areas with strong real estate values. For example, a developer constructing a Courtyard by Marriott hotel in Marina Del Rey, California, was able to designate the project area as a TEA because the hotel’s broader “location” included census tracts in East Los Angeles. That area’s high unemployment rate increased the average unemployment rate for the project area as a whole. Up the coast, in San Francisco, Lennar’s Hunters Point development, now known as The San Francisco Shipyard, raised over $77 million of EB-5 money and reportedly is seeking another $96 million in EB-5 investments.  

Others have developed EB-5 projects in New York City by including nearby high-unemployment census tracts to qualify as TEAs. Such projects include:

  • An $80 million loan from The New York City Regional Center to a joint venture affiliated with The Witkoff Group and the Ian Schrager Company to develop a mixed-use building on Manhattan’s Lower East Side.
  • Between $200 and $250 million of EB-5 investments for the planned $4.9 billion Pacific Park project in Brooklyn, formerly known as Atlantic Yards.
  • A significant portion of the financing for Extell’s International Gem Tower on West 47th Street in Manhattan.  

As these examples illustrate, developers may receive a customized TEA in cities that appear to have a low unemployment rate but, after nearby census tracts are included, actually have an unemployment rate that is greater than 150 percent of the national average.    

Continued Growth

The opportunity to create customized TEAs and increase foreign investment has resulted in tremendous growth in the EB-5 program.  As recently as 2007, there were fewer than 800 EB-5 applicants. This year, the program reached its capacity of 10,000 applicants for the first time ever.  

As the number of applicants has risen, developers have increasingly turned to EB-5 investors as an alternative to the high cost of secondary position financing. Rather than being primarily focused on rate of return, EB-5 investors’ primary goal is to obtain permanent residency. As a consequence, their expected rates of return tend to range from 1 to 3 percent.     

The EB-5 program may be an attractive alternative to traditional development financing for many projects. Developers should not assume that TEAs are reserved solely for rural areas or areas of high unemployment. If Manhattan and San Francisco can receive customized TEAs, then it may be possible to create a customized/special TEA nearly anywhere.

From the Archives: Finance Articles from the Previous Issue

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Crowdfunding Scales Up 

This being baseball season, a baseball metaphor seems apt to describe the stunning year-long rise of real estate crowdfunding: dramatic growth aside, we are still in the bottom half of the first inning. Crowdfunding is much like old-style syndication, but with the turbo engine of the Internet behind it.

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The Impact of Interest Rates on Cap Rates 

What’s the outlook for the economy and for interest rates for the rest of the year? Steady as she goes, as long as the Federal Reserve makes no sudden drastic changes to its monetary policy. Rates are likely to rise moderately over the next 18 months to two years, with steadily improving employment and a gradual pickup in inflation. That’s how JLL sees it, as the company recounted earlier this year in its “Interest Rate and Cap Rate Perspective” report.