QUANYU (CHARLIE) LU

EB-5 Program In Commercial Real Estate

Brief Overview of the Program

Employment-Based Fifth Preference program is an immigrant Investor Program

Created by Congress in 1990 to stimulate the US economy

General Requirements: EB-5 investors must invest in a new commercial enterprise and it cannot invest in

noncommercial activity such as owning and operating a personal residence. 

Create or preserve at least 10 full-time jobs for qualifying US workers within two years or under certain circumstances within a reasonable time after the two-year period of the immigrant investor’s admission to the US as a Conditional Permanent Resident. The jobs requirement can be fulfilled by direct or indirect jobs creation

Capital Investment Requirements in terms of cash, equipment, inventory, other tangible property, cash equivalent and indebtedness secured by assets owned by the alien entrepreneur

Qualifying investment in the US can be $1M or $500,000 (Targeted Economic Area)

EB-5 Regulations

United Citizenship and Immigration Services manages the EB-5 program

Allocates 10,000 “EB-5” immigrant visas per year to qualified individuals seeking Lawful Permanent Resident status

Congress has reserved 3000 of the 10,000 EB-5 for EB-5 investors who invested in Targeted Employment Areas

Immigrant Investor Pilot Program is a program for investors to invest in an economic unit known as a “Regional Center” which allows for a less restrictive job creation requirements based upon creation of indirect jobs

The number of indirect jobs created through an EB-5 region center is based upon a business plan and detailed economic analysis, which is evaluated and approved by USCIS

On May 1st, imposed a Chinese “retrogression” (wait list) for Chinese investors meaning that the anyone who applies now from I-526 petitions will be at the end of the line

EB-5 Program dictates that no more than 7% of the visas can be allocated to the investors from the single country. If other countries didn’t use their allotted visas, the visas were offered to Chinese Investors

Detailed Requirements

Qualified employee: US citizen, permanent resident or other immigrant authorized to work in the US, no H-1B visa holders 

Direct jobs creation: Actual identifiable jobs for qualified employees, EB-5 investor has directly invested his or her capital 

Indirect jobs creation: created collaterally or as result of capital invested in a commercial enterprises affiliated with a regional center by an EB-5 investor. May only use the indirect job calculation if affiliated with a regional center 

Full time employment status must includes minimum of 35 working hours per week

Targeted employment area: rural area or an area experiencing unemployment of at least 150% of the national average rate or any area outside a metropolitan statistical area that is designated by the Office of management and Budget or outside the boundary of any city or town having population of 20,000 or more 

Details on Job Creation

Jobs creation can be permanent jobs (35 hours per week) or construction jobs that last two or more years.

Indirect jobs creations is the result of an economist’s report using a forecasting model like RIMS II or IMPLAN Direct impact of capital investment in specific “industry cluster” in a specific

geographic area on final demand of sales, using databases of economic activity of that area.

Indirect impacts generated from the suppliers and vendor of that industry and also the underlying effect of the increased level of employments of the local community

EB-5 Regulations permit the allocation of 100% of a project’s job creation benefits to EB-5 investors when the total project capital consists of both EB-5 and non-EB-5 capital Example: 200M solar energy project, might have a total job creation impact of only 6

jobs per 500,000 invested due to the capital intensive and low employment profile level of the project. Thus the total job creation is 2400. But if the EB-5 capital is only 100M of the total investment, then the resulting 2400 jobs will provide 12 job credits for each EB-5 investor, satisfying the 10 jobs requirement.

Details on Targeted Employment Area

Unemployment TEA:1. Aggregate annual unemployment for that area is 150% of the national average

unemployment rate, designated by the Governor of each state or an agency or individual designated by the Governor. Normally this will be either the state agency responsible for maintaining the unemployment database or the agency responsible for economic development

2. Normally maintain employment data for MSA’s at the census tract level. Some states will permit regional centers to propose designation of areas that combine qualifying census tract with non-qualifying census tracts such that the aggregate average annual unemployment is in excess of the 150% national average

3. Example: Affluent areas of Manhattan might be designated as TEA’s if combined with high unemployment areas of Harlem

Rural TEA: 1. Outside the limits of any metropolitan statistical area-as designated by US

Department of Commerce2. Not within the limits of any incorporated (city, village etc.) area with a population of

more than 20,000

Regional Center Requirements

1. Must focus on a contiguous geographical region of the US

2. Promote economic growth through increased export sales, improved regional productivity, job creation and increased domestic capital investment

3.Demonstrate in verifiable detail how jobs will be created directly or indirectly

4. Commit sufficient funds to promote and oversee capital investment opportunities in the regional center

EB-5 Process for Developer

Step 1

•Determine if the project has the necessary characteristics to successfully raise financing through the EB 5 Program. Mainly on identifying the job generation potential and the location of the project

Step 2

•Determine Regional Center options (if not a direct EB-5 project). Find the approved Regional Centers for the geographic area where the project is located and discuss the terms which the Regional Center would agree to sponsor the project.

Step 3

•Targeting investors as China accounts for over 50% and South Korea accounts for over 20% of all EB-5 visas in recent years.

Step 4

•Have offering documents prepared for the EB-5 financing. Most of the financing go through the channel through limited partnerships and thus involve the sale of securities. The business owner will need a private placement memorandum, limited partnership or limited liability agreement, and subscription agreement for the EB-5 offering.

Step 5

•Negotiate with other financing sources for the conditions that typically pertain to the exit strategy for the EB-5 investor and security for the EB-5 financing

EB-5 Process for Developer

Step 6

•Preparing the offering for sale to foreign investors. The Regional Center or marketing agents generally will assist in the translation of the offering memorandum

Step 7

•The marketing agents will coordinate with emigration agents or financial institutions in the foreign country to market the offering to investors

Step 8

•Obtain subscriptions for the limited partnership or limited liability company interests and commence the EB-5 visa process for each foreign investor. Investor will sign a subscription agreement and put the full amount of money into escrow and commence the immigration process by filing I-536. Currently timing of the releasing of the fund can be shortened with agreements.

Step 9

•Completion of the project, provide the requisite documentation for the investors to have the condition removed from their legal permanent residence status. The project would require proof that the proposed project was completed in accordance to the business plan and the requisite job were in fact created.

Step 10

•Reputation of the developer is important in the EB-5 world. Developer must have the track record for completing projects and reputation of a professional project team

Details Structure for EB-5 Funding

Regional Center vs. NCE(New Commercial Enterprise) vs. JCE (Job Creating Enterprise) Investor does not invest in the Regional Center. Instead he “associates” with the

Regional Center by investing in a project that Regional Center sponsors or arranges EB-5 investors invest in the NCE which needs to be equity capital NCE must invest all of that capital in the JCE NCE investment can be deployed as a loan or equity

Loan model vs. equity model Most of the investments are structured under the loan model Immigrant investors capital deployed by the NCE to JCE as a loan Loan can be secured by a first or junior mortgage against the property, secured by

equity interests (mezzanine financing) Loan closing, JCE pays origination fees or points to the NCE During the loan term, JCE makes periodic interest payments which are equal to the

total of the migration brokers gees, management fee to the NCE’s manager and interest component payable to the immigrant investors

Loan model involves two-tier structure while equity model can be a one-tier or two-tier structure

Details on Loan and Equity Structures

Debt Model: Two-tier structure NCE and JCE are separate entities NCE is the lender and the JCE is the borrower Investors equity investment will be in NCE which uses the proceeds to

invest in the JCE NCE would be a creditor and not have an equity interest in the JCE. One-tier structure is not permitted or appropriate for loan model

Equity Model: One-tier or Two-tier structure One-Tier: Immigrant investors can contribute equity capital directly to

the entity that owns the property and will create the jobs. NCE and JCE are one and the same entity

Two-Tier: investors can contribute equity capital to the NCE. Pooled capital would be contributed as equity capital to the JCE.

One-tier structure is more common for EB-5 investment in equity model

EB-5 Loan Model Chart

Sample EB-5 Mezzanine Debt Structure

Usually EB-5 loans are structured as fully non-recourse mezzanine loan structure in capital stack

Loan maturity is typically a 5 years loan with possible 2-12 month extension option; after I-829 removal of conditions approved

Total Cost for developer in EB-5 Mezzanine loan (8-10%)

Deal Terms with Existing Regional Centers

Rental Model Terms: The developer sets its own interest rates and term Pay rental fee to the regional center -$200,000 a year annually or 1.0-2.0%of the loan annually -$7500 flat fee per investor

Loan Model Terms: Interest rate offered will vary between 3.0-5.5% Origination fee will vary between 0-2.5% of the loan Legal Costs from borrower range between $50-200K Marketing costs range from $20-100K plus the administration fee Termination fees if borrower cancels

Pricing and Terms for EB-5 Loans

Sample Mezzanine Loan Term

Capital Stack for Commercial Real Estate with EB-5 Loans

Senior Lender (Construction and Acquisition) 55%

Developers’ equity 10-15%

EB-5 Funding (Mezzanine and Preferred) 30-35%

55%

10%

35%Senior LenderDevelopers EquityEB-5 Funding

Timing of EB-5 Funding

Time to create a Regional Center (Approximate)

Preparation of application: 2-3 months Processing by USCIS: 6-8 months Regional Center Approval: 8-11 months

Time to syndicate an offering and obtain approvals releasing funds from escrow (Approximate)

Start time: all project documents prepared for offering Marketing 40 units (20M) 4 months Processing legal 2 weeks Audit 2 months Firm’s report on investors' source of funds 2.5 months

(report can be prepared concurrently or in advance) All I-526 approved-5 months after last unit submitted 5 months All capital released to investment 6- 12 months after start

EB-5 Process for Investors

Step 1-Investors who wants to invest into regional center needs to identify the potential regional centers that he or she would like to invest in and to file the state to qualify as an “accredited investor”

Step 2-Fill out the subscription agreement and fund the investment to Regional Center. One time administrative fee charged to the investor by the Center. Then the regional center will submit the documents to file your I-526 Petition. If the I-526 approved , the investor executes and submit a form to request an interview with USCIS or the Department of State. Then if favorable family member must enter in the US within 180days, and starts 2 years conditional period

Step 3-Filing of the I-829 petition to remove the conditional visa. If granted,

investor will receive unconditional green card status.

Timeline for EB-5 Investors

1. I-526 Application-adjudication process 12months

2. I-485 interview and conditional visa issued 3-6 months

3. Time lapse before eligible to file I-829 21-24 months

4. I-829 application-adjudication process 8 months

Total 4-5 years

EB-5 Loans Default Situation

USCIS stated that EB-5 investment must be at risk which means the loan cannot be guaranteed

Regional Center can charge a larger default interest rate and may obtain collateral in the event of default

The mezzanine structure in the capital stack of the project allowed the EB-5 loans' to obtain a option to replace the developer and assume the first mortgage obligation

Major Borrower from EB-5 Funding

Related Realty- Raised more than $800M from approximately 1600 investors and controls 1/3 of the EB-5 market nationwide. Raised $600M for Hudson Yard Project alone

Forest City Ratner-Raised $728M for its Barclays Center project-Phases I,II &III

Silverstein-Raised $250M for its Fore Seasons Tribeca

Acadia Realty-Raised $180M for its City Point Project

Major EB-5 Lenders

In house Regional Centers: Silverstein Related Extell

EB5 Capital Focused on Washington, DC Metropolitan Area and California Equity investment Operates 2 regional centers

Can AM Regional Center Focused on Philadelphia and Pennsylvania area Operates 6 regional centers underneath

Golden Gate Global Regional Center (GGG) Based in San Francisco Sponsor of multi-phased redevelopment project in San Francisco by Lenner Corporation. GGG raised $200M of EB-5 capital for this project

USIF-US Immigration Fund Sponsored numerous project in EB-5 portion in exceeding $100M $500M for phase 2 and 3 of Barclays center