EB-5 Extension Spells Good News for CRE Owners and Developers
There has been a lot of buzz in the past six months on the relatively obscure EB-5 real estate financing program. Yet after months of heated debate, Congress voted on Dec. 15th to renew the program as-is for one more year.
That was welcome news to many investors and borrowers who utilize the program, which provides more than $1 billion per year in financing to various real estate projects ranging from hotels and manufacturing facilities to solar energy farms and charter schools. In fact, the program reportedly generated at least $5.2 billion in private investment between 2005 and 2013, according to an economic impact study commissioned by the EB-5 Investment Coalition.
What exactly is EB-5?
The EB-5 investment program has been in place for about 25 years, but it surged in popularity post-recession when developers were scrambling to find new sources of capital. It was originally created as part of the 1990 Immigration Act as a means to boost economic development and create jobs in both urban and rural areas. Foreign nationals receive a visa for making a minimum investment of $1 million, or $500,000 in qualifying “Targeted Employment Areas.” Investors also are required to meet requirements for creating a certain number of jobs, either indirectly as part of construction or directly at the newly built project.
The program has been expiring every five years on a rolling basis. Technically, its last end date was this past September 30th. However, there was a proposal in Congress to extend it for another five years and also make significant changes to the program. Notable changes called for increasing the minimum investment thresholds, changing some of the definitions for Targeted Employment Areas, and adding more oversight to prevent abuses and fraud.
The proposed changes unleashed a firestorm of criticism. But, in the end, the program got a reprieve when legislators agreed to a temporary truce with a one-year extension. Congress is expected to pick up the debate again next year. In the meantime, developers and foreign nationals can once again take full advantage of the existing program.
Good news for developers
This extension is good news for many real estate developers — especially those with ongoing projects. Despite greater liquidity in the commercial real estate market, there continues to be healthy demand on behalf of borrowers. For example, EB-5 has helped to provide financing for iconic projects such as the Panorama Tower, an 83-story development that is currently under construction in Miami.
EB-5 money is attractive for a number of reasons. Topping the list: it’s relatively cheap. Generally, borrowers use EB-5 to put higher leverage on a property such as a mezzanine loan on top of a senior loan. Typically, mezzanine financing rates are 9 to 18 percent, while a developer’s cost for EB-5 money is 5 to 8 percent. The rates are lower, because foreign investors are motivated by the desire to secure a visa and preserve capital, not necessarily make a big return.
However, the downside to EB-5 is that developers need to have patience – a luxury that many don’t always have when time to market is critical. Structuring the deals and getting funds in place can take anywhere from nine months to two years. And while it will be business as usual for the EB-5 program in the coming year, the long-term future of the program is less certain with legislators expected to resume their attempts to revamp the program in 2016.