EB-5 Overview: Educational Facil it ies

Travis C. Hook

SDEB5 Consultant I BRE: 01927399

T: 415.866.6906

E: Travis@sdeb5.com

W: www.SDEB5.com

SDEB5 Consulting San Diego, CA 92101 T 415.866.6906 E: Travis@SDEB5.com W: www.SDEB5.com

SDEB5 Consulting MyCityShares, LLC

SDEB5 Consulting, MyCityShares LLC

Table of Contents

Disclaimer: The materials in this document are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to our website or any of the e-mail links contained within the report do not create an attorney-client relationship between SDEB5 Consulting or associated partners with the user or browser. The opinions expressed in this report are the opinions of the individual author. This document has been prepared in good faith on the basis of information available at the date of publication without any independent verification. SDEB5 Consulting does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. Readers are responsible for assessing the relevance and accuracy of the content of this publication. Every effort has been made to ensure the accuracy of the information supplied in these pages, and to the best of our knowledge. However, we are conscious that there may be unintentional errors or omis-sions, and we are anxious that any which are discovered should be reported to SDEB5.com and we will correct them as soon as possible.

Introduction 3

How EB-5 Works 3

Why EB-5 For Investors 3

EB-5 Program Structure 4

Top Countries Investing 5

EB-5 for Schools 7

Basic EB-5 Example: Private University 7

EB-5 Timeline 8

Conclusion 9

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Introduction

The Employment Based Fifth Preference (EB-5) Visa program is estimated to have raised $8.6 billion and created at least 57,300 jobs since 1990. Resultant of the recession and construction 1

crisis in 2008, alternative sources of capital through the EB-5 program have increased in popu-larity. In particular, small hotel developers, assisted living and commercial real estate developers lead this trend.

The US Government sets aside 10,000 EB-5 immigrant green cards each year. Over 3,000 of these are reserved for foreign investors who invest through a pre-approved Regional Center ap-proved by the United States Citizenship and Immigration Services (USCIS). A Regional Centers’ mission is to stimulate the US economy through job creation and foreign capital investment.

The program has recently been plagued by allegations of fraud and charges of mismanagement by immigration officials. That has led to increased scrutiny of the program by the immigration agency, which has caused delays in the application process. As the program evolves, developers and project owners must seek assistance of EB-5 professionals to reduce these risks and explore creative uses for EB-5 funds. Recent projects have deployed funds into city infrastructure, inno-vation, energy, the private sector and private/public ventures including educational facilities.

The ability to structure a project and outline economic impact properly will facilitate the EB-5 process for developers and ultimately project success. A deep understanding of the types of projects that attract EB-5 investors and how to structure the offering is needed to benefit both investor and the project. The ultimate goal of the investor is to gain a green card for permanent residence for themselves and immediate family.

How EB-5 Works

Foreign investors can invest $500,000 into high unemployment areas in the United States and receive EB-5 green cards for themselves, their spouse and any children under 21. After two years of meeting EB-5 conditions, the investor and their family can petition to remove all conditions and receive a permanent residence card. The EB-5 investment goes into either a direct invest-ment project by the entrepreneur or into a designated regional center sponsoring a project.

Why EB-5 For Investors

The EB-5 Visa program is an excellent opportunity for foreign nationals, investors, professionals or parents of students with $500,000 saved or available, seeking permanent residency in the US, essentially buying their way past the long naturalization and visa lines. Often investors are repaid their investment, with any agreed upon interest, after a minimum 5 years when the development or project is refinanced, sold or cash flowing.

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The EB-5 visa is one of the most flexible paths to obtaining a green card. The immigrant investor is not required to manage the business’ day-to-day operations. The investor can invest in a new or existing business. The investor is not required to live in the region where the investment is made. Additionally, funds may come from any legal foreign or US source; including sale of real estate, gifts, loans, and divorce settlements. Borrowed investment funds qualify as long as the assets of the target US business do not secure the loan.2

EB-5 Program Structure

The foreign national invests a minimum of $500,000 in a new commercial enterprise in the U.S. A new commercial enterprise is defined as any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to:

• A sole proprietorship• Partnership (whether limited or general)• Holding company• Joint venture• Corporation• Business trust or other entity, which may be publicly or privately owned

The minimum investment amount may be raised to $1 million per investor in a Direct EB-5 in-vestment. The amount of capital may be reduced to $500,000 should the new commercial enter-prise reside in a target employment area (TEA). This is defined as 150% of the national average or a “rural area.”

The investment will need to create or maintain a minimum of 10 jobs (direct/indirect/induced) for a minimum of two years for each investor seeking to qualify for permanent residency. This is analyzed using an economist and special softwares based on operations, revenues and their im-pact on the region. The main focus of the program is to create at least 10 US jobs per EB-5 in-vestor green card.

Direct Jobs are those identifiable verified by payroll records. Indirect and Induced Jobs indicate a job at the project or spending level. These are calculated using multipliers by an economist using software. Based on direct and projected jobs created by the projects, a project may raise $500,000 per investors for every 10 jobs created.

EB-5 capital is available to any job creating enterprise, even those unable to borrow from banks. EB-5 funding may take seven to nine months to complete due to processing and marketing time. After the investment is made, the return to the investor on the amount funded is significantly lower than any traditional financing.

EB-5 Regional Centers (RC) serve an important role and act as an economic unit to accelerate the EB-5 program aiming to help foreign investors obtain EB-5 visas. Acting as a loan origina-tion shop, developers and project owners can submit their projects to a RC to indicate they are

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seeking EB-5 capital for their project. The RC will review the projects and issue a non-binding letters of intent that outline terms on which loan can be made using the EB-5 program.

Top Countries Investing

Last year, 6,895 Chinese nationals were issued visas through the program, outpacing all other nationalities by a wide margin, according to State Department data. South Koreans, the next largest group, were issued 364. A single EB-5 application can account for multiple visas for in-vestors' immediate family.3

The 5% rate of growth in the program in 2013 was lower than in recent years, when the number of applications increased by 58%, in 2012, and 94% in 2011. I-526 petition numbers correspond directly to the number of investors, making the data a more precise measurement of demand than State Department EB-5 visa numbers, which include investors as well as their family members. 4

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In the pre-Recession period, Hong Kong, India, Japan, Chile, and Germany ranked just below the UK by number of investors. Of these, only India has held its ranking since 2009. Countries growing in significance in recent years include Iran, Mexico, Venezuela, Russia, Vietnam, Brazil, and South Africa. Meanwhile, India, Canada, Japan, Netherlands, and Germany have continued to supply a moderate number EB-5 investors.

While mainland China has been an increasingly dominant source of EB-5 investors, the total number of countries contributing investors has also grown. I-526 approvals since 2009 represent EB-5 investors from a total of 118 countries, while 106 countries were represented prior to 2009. Demand trends for countries other than China become especially significant as EB-5 visa num-bers approach the annual quota, raising the possibility of quota backlogs for Chinese investors. 5

���In just the first couple of months of FY2014, 4,748 EB-5 are spoken for already.  That number is up 50.2% in the same period as last year.6

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EB-5 for Schools

EB-5 funds have become increasingly useful in the funding of charter schools and for profit ven-tures/partnerships with universities. Private and charter schools are privately managed, but often funded by the government. For this reason, EB-5 investors see schools as very safe investment opportunities.

Universities and colleges seeking to start commercial ventures should consider raising capital through the EB-5 program. EB-5 investors desire large scale projects and education is likely high on their values. Should a university be considering building a new student union, fund a new department or build a stadium as a for-profit venture, EB-5 financing may be a practical option.

The San Diego region is renown for innovation and higher education. The EB-5 program may also be used to fund a technology licensing enterprise, to commercialize new innovations, or to finance an incubator/accelerator for emerging businesses.

The state of Florida estimates that more than $30 million has been dispersed into state charter schools as the expectation is that money flowing from EB-5 programs into educational enterpris-es will increase significantly in the near future. Since state governments pay for the schools, they are economically viable immediately when they open, creating jobs immediately, reducing any concern with the EB-5 program job creation requirement.7

A great example of this is The University of Miami partnering with a regional center in Miami to get funding for a Life Science and Technology Park. The EB-5 program provided $20 million which was used in the first phase of the project.

Other examples of EB-5 for universities include the funding for Temple University Medical cen-ter and EduFundAmerica is an example of how one Regional Center is capitalizing on this niche 8

market to fund charter schools.

Basic EB-5 Example: Private University

Consider a private university in San Diego, CA that plans to offer a new graduate studies pro-gram. The university is interested in the EB-5 program as a source of funds and showing eco-nomic impact on local community. The program is expected to increase tuition receipts by $10 million and attract international and domestic students. Tuition receipts serve as one approach for estimating new program output. A more complete method would be to use all expenses incurred from the new program with the exception of non-job creating activities like land/building pur-chase, equipment and software investments. No other university in the area plan to offer a similar program.

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*According to regional final demand changes in the junior colleges, colleges, universities, and professional school industry, economic impact and job creation are calculated. The numbers above serve as example and actual results may differ.

EB-5 Timeline

The time to syndicate an offering, obtain approvals and release funds from escrow varies and is often limited by governing bodies.

• Start time: All project documents prepared for offering. Including but not limited to:EB-5 Business Plan (Mater of Ho) Economic Analysis Private Placement Memorandum International Marketing Document

• Marketing 24 units ($12 million): Estimated four months

• Processing: Estimated two weeks for law firm, two months for audit, two and a half months firm’s report on Investor’s source of funds

• All I-526’s approved: Estimated five months after last unit submitted

• All capital released to investment: Estimated twelve months after start date

• Assured Return of Capital: Within five years to investor

NAICS Code Output Multiplier

Value Added Multiplier

Earnings Multiplier

Employment Multiplier (jobs/$1m)

611310Educational Services

2.1871 1.2982 0.7603 24.0101

Input Output Value Added Earnings Employment

$10 million (new tuition)

$21,871,000 $12,982,000 $7,603,000 240 Jobs

Number of Investors Total EB-5 Loan Amount

24 $12 million

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Investors do not want to be stuck in a long term deal. They want their funds returned within five years and the project’s business plan and structure of investment must provide such assurance. The project is responsible to repay the investors at the end of five years. The investment is essen-tially a very flexible form of interim financing. The repayment of the principal is generally ac-complished by a refinancing after the school reaches stability in their operations. Refinancing can be accomplished through a bank or bond financing. Also a percentage of profits/reserves created during the five years can be used to pay back the investors. 9

Conclusion EB-5 financing may be a solution for universities or colleges seeking funding for ventures that qualify as new commercial enterprises and create jobs for U.S. workers. EB-5 deals may be structured as debt or equity offerings, ultimately up to project owners business model.

Building a new department, student union or a stadium as a for-profit venture would make EB-5 financing a practical option.The EB-5 program could also be used to fund a technology licensing enterprise to commercialize new innovations or to finance an incubator for emerging businesses.

Universities will benefit from growing international interest in the EB-5 program and desire to live in the states. Prospective investors from China, Vietnam, Brazil and other countries often wish to secure permanent residence so that their children may live and study in the United States. The EB-5 program will continue to be an attractive immigration option for these investors and their families.

EB-5 projects connected with a university or college may be particularly attractive to such for-eign investors, who may have a favorable view of investments that have a connection with edu-cational institutions and children attending these universities.

EB-5 SWOTStrengthsEB5 offers a source of alternative capitalInexpensive borrowing costs (3-5%)No Pressure to produce high rates of returnOffered at risk investment to investorPotential capital to push projects to completionForeign interest in EB5 green cards is very strongForeign desire to live in US is very strong

WeaknessesProcessing time for investors limited by governing bodiesFunds are held pending petition approvalNo guarantee of full investment amount desiredInternational marketing takes time and effortInvestment amount is limited by job creationIncreased competition among regional center and projects Limited number of EB5 Visas issued a year

OpportunityCreative uses for projects that create many jobsFinance phasing approachReplace bridge financing Increase global awareness and marketabilityAdvertise in 2nd and 3rd tier counties (not China)

ThreatsEvolving investor market trendsGovernment regulation changesLegal accountability: securities issues, loan structuring, etc.EB5 cost of capital is increasingNeed for reliable job/fund tracking

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