US commercial real estate lenders are hoping for a speedy renewal – and some long-anticipated changes – for a popular component of the EB-5 Immigrant Investor Program, a federal programme that expired in July that guaranteed permanent green cards to immigrant investors who make substantial investments in real estate or other job-creating business ventures.
The construction loans, mezzanine debt and preferred equity typically sourced through the programme can be the keystone to getting projects launched and could serve a further function as the US economy recovers from the covid-19 pandemic.
“EB-5 is a great source for construction lending and is a great financing vehicle for construction projects. If you are struggling to make projects pencil, EB-5 could be a good source for assisting in that situation and even for providing rescue capital in light of [the covid-19 pandemic],” said Colin Behring, CEO of California-based Behring Companies, a real estate private equity firm that uses and arranges EB-5 financing.
The programme’s expiration capped two years of legislative turmoil. Created as part of the Immigration Act of 1990, its intent was to aid the US economy via job creation. Since inception, it has created more than 820,000 full-time jobs and raised more than $41 billion of capital.
Although the threshold for the programme has long been an investment of $500,000 per person, this rose to $900,000 in 2019 via the EB-5 Modernization Rule. This increase, implemented by the Department of Homeland Security, caused inflows to plummet, said Terri Adler, managing partner and chair of the real estate department at law firm Duval & Stachenfeld.
“There were other factors [included in the Modernization Rule] that made it unworkable, including creating uncertainty around what constituted a qualified investment and target employment area certification,” Behring said.
The EB-5 Modernization Rule was ultimately overturned in June after Behring Companies filed a lawsuit that alleged the Department of Homeland Security did not have the authority to make changes to the programme. In July, a US District Court in California ruled in the firm’s favour and reinstated the original investment threshold of $500,000.
The ruling was a welcome one for Behring Companies, which uses EB-5 capital in several ways, including originating debt, preferred equity and common equity. It also arranges EB-5 financing on behalf of other developers via its EB-5 Regional Investment Center and saw inquiries surge in the brief interlude between the reinstatement of the original investment threshold and the law’s expiration, Behring noted.
“I think the real estate market in general and, in certain sectors, have been hit hard [by the covid-19 pandemic],” Adler said. “Cities like New York and San Francisco are facing pivotal moments and, whether it is through EB-5 financing or other creative structures, we are hopeful that these will be a means for these markets and properties to get back on their feet.”
Behring is looking even further ahead, noting that his pipeline of projects is full.
“The big story is that fund managers have been raising money over the past year, hoping to be able to fill that gap between developer equity shortfalls,” Behring said.
While the Regional Investment Center programme is at a standstill, Behring noted that it is possible – albeit more difficult – for applicants to make direct investments in deals.
Filling out the capital stack
As a mezzanine investment, EB-5 fills the gap between senior equity and senior debt and can be critical for a project to proceed. “This is always the smallest and most difficult piece of the capital stack to put together,” Behring said.
While some companies that use EB-5 financing need the investment for a deal to move forward, Florida-based real estate private equity firm Driftwood Capital has taken a different tack.
Driftwood, a hotel investment platform that has been targeting the sector since the 1990s, is fully capitalised on its developments before it breaks ground but brings in EB-5 financing to recapitalise a project after it launches.
“We do not need the EB-5 financing at the outset because we are fully capitalised when we launch our deals, and we typically replace a portion of the equity or a senior bank loan with the EB-5 financing,” said Alejandro Navia, chief commercial officer. “We find that EB-5 capital can make a good deal better and also allows us to start relationships with new investors.”
Driftwood started using EB-5 financing in 2015 and did five projects prior to the change in regulations in 2019. It is ready and waiting to go on a similar hotel development in Wilmington, Delaware, that is also a part of an opportunity zone programme. However, it is waiting on the next iteration of the programme to launch the deal to EB-5 investors.
“Until Congress renews, we are sitting, waiting to be able to push the button,” Navia said.
Broader investor reach
EB-5 financing can also have the ripple effect of attracting more foreign direct investment into the US, Behring said.
“These [foreign] investors understand the EB-5 programme and the value it has,” Behring said, noting that fund managers which are working with sovereign wealth funds or other international investors would not hesitate to include an EB-5 component. “This attracts additional foreign direct investment above and beyond the EB-5 investment.”
Driftwood’s Navia concurs. The company has a network of around 160 EB-5 investors, many of which have gone on to invest in other deals after their initial EB-5 investment. Many of the firm’s investors are from Latin America, which has seen instability across several countries including Chile, Peru and Argentina, and Driftwood has been fielding a substantial number of calls from prospects who are interested in obtaining green cards.
Across the board, market participants told Real Estate Capital they believe the programme needs holistic reforms through updated legislation.
“Our hope is that lawmakers will see how severe our situation is and provide a solution that results in the passing of a new bill that achieves positive long-term reform,” Behring said.
There are several ways the programme can be updated, with market participants that regularly use it expressing an understanding that the minimum investment likely will rise somewhat from its current level of $500,000.
There also needs to be more clarity around what makes up a Targeted Employment Area, a geographic area in which a real estate investor can make qualifying EB-5 investments, and what makes qualifying project, sources argue. Additionally, there is currently a backlog of investors which have applied to the programme and which are still waiting for their applications to be approved, Navia said.
There is also a particular need for clarity for Chinese investors, which make up the bulk of the applicants for EB-5 visas, market participants told Real Estate Capital.
There are roughly 10,000 visas available each year through the programme, but current limits cap this at around 7 percent of the total amount per country. While visas that are not allocated can be filtered towards Chinese investors, there is still a huge backlog of applicants that have been waiting for several years for visas, market players said.