Five Tips for Selecting the Right EB-5 Financing Partner
By: Robert A. Richardson, chief operating officer of EB-5 New York State, a regional center located in Buffalo, New York, and a board member of NAIOP Upstate New York
Winter 2015 2016
The Gates Vascular Institute, a hospital in Buffalo, New York, that has received numerous design awards, was partially financed with EB-5 capital and has received both I-526 and I-829 approvals.
A simple checklist can help developers evaluate prospective regional center partners.
THE U.S. GOVERNMENT’S EB-5 Immigrant Investor Program has become a common source of real estate financing over the past five years and promises to remain a standard financing tool for the foreseeable future. Although Congress created the program in 1990, its emergence into the mainstream is relatively recent. Beginning in 2008, when obtaining financing from other sources became difficult, creative entrepreneurs and developers identified EB-5 as an attractive financing alternative. More recently, it has become a popular resource to lower financing costs and, at times, can make a difficult project viable.
One cornerstone of the EB-5 program is a new type of organization created by the EB-5 legislation, the “regional center.” The U.S. Department of Homeland Security designates these organizations to raise foreign capital and invest in projects that create jobs. A regional center can be publicly or privately owned, or it can be a public-private partnership. At the start of 2009, there were only 20 authorized regional centers. By November 2015, that number had reached 761.
Obtaining an EB-5 regional center designation is not difficult. With a little money (typically $250,000 to $400,000), an experienced EB-5 attorney and a little time (about 24 months), an organization can obtain a license. However, a license alone is not the key to successful financing. Many developers have learned the hard way that their regional center partner isn’t capable of delivering any EB-5 capital. Other developers have sought to become regional centers themselves, only to discover that raising capital is much more complex and riskier than they expected.
The list of things that can go wrong is extensive. But when things go right, the benefits of EB-5 capital — the flexibility, low cost and cost certainty — are compelling. However, EB-5 rules are complex, their nuances are daunting and the market is evolving so quickly that only a specialist who is engaged on a daily basis knows how to reach the goal.
Here’s a simple checklist to help developers determine whether their prospective regional center partner has the market visibility and experience to minimize the challenges and surprises:
1) Good: Has a Designation. It might seem basic, but working with an organization that has already obtained a regional center designation is the first step to protecting your interests. Many people will offer to sell services or advice, or to raise money for your project, without actually having a license. Some may offer to acquire a designation for you as part of their service. Save your money. This isn’t a practical solution and opens up legal issues that can be catastrophic for your company. A serious regional center will be able to immediately provide you with a copy of its designation letter, which you can verify at the U.S. Citizenship and Immigration Services website.
2) Good: Is an Active IIUSA Member. Because the EB-5 marketplace is changing so quickly, the best players in the EB-5 industry are active in its trade association, Invest In the USA (IIUSA). Active members can easily obtain letters of good standing from the association and a list of committees on which they participate.
3) Better: Has a History of Approvals. A regional center’s role is to raise foreign capital to provide funding for a project. To do so, it must take investors through a two-step government process and help them obtain approvals at each stage. Experienced regional centers can easily quantify their experience with the number of approvals received and the number of projects with approvals obtained at each stage. The first-stage approval is known as an I-526 approval, while the second-stage approval is an I-829 approval. It’s not advisable to partner with a regional center on its first project.
The government requires regional centers to report the number of investors receiving each level of approval, as well as denials, during each fiscal year. One easy way to gauge a regional center’s experience is to request copies of this report, called an I-924(a), for the past several years.
4) Best: Has Bridge Financing History. Successful regional centers have established relationships with traditional real estate financing sources. A regional center should be able to produce a bank loan document that clearly states that the bank has provided bridge financing for a past EB-5 project.
5) Best: Has Regional Center and Fund Management Insurance. Qualified regional centers can obtain liability insurance. Insurance underwriters and brokers conduct very thorough due diligence before they issue a liability policy. Ask for a certificate to prove that the regional center has fund liability insurance; only the most reputable regional centers will be able to show you one.
EB-5 capital is advantageous for real estate developers, and choosing an experienced partner can make the difference between creating additional benefits and taking on additional risk.