EB-5 Funding and Tax Credits: An Alternative Source of Financing for Developers

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Given the increased difficulty of obtaining all the dollars needed to develop real estate projects generally, and affordable rental housing in particular, developers are looking for alternative funding sources to bridge the gap between the available financing and total project development costs. An innovative federal program called EB-5 is gaining popularity as an alternative source in the capital stack and a creative solution for infrastructure and housing projects.

The EB-5 program, which provides an opportunity for foreign nationals to invest in U.S. projects that create jobs in exchange for permanent residency in the United States, also drives public-private partnerships and reduces the need for public capital.

As developers become more familiar with the EB-5 program, we have seen increased use of EB-5 financing in combination with other federal tax credit programs, such as low-income housing, new markets, and historic rehabilitation tax credits. EB-5 is an excellent source of gap financing to assist projects that incorporate tax credits in the capital stack but need additional capital or financing to be financially viable.

Background on EB-5 Program

The U.S. Citizenship and Immigration Services (USCIS) administers the EB-5 program (officially the Employment-Based Fifth Preference Immigrant Investor Program), which was created by Congress in 1990 to stimulate the American economy through job creation and capital investment by foreign investors.

In 1992, Congress established an EB-5 pilot program under which certain EB-5 visas also are set aside for investors in Regional Centers designated by USCIS based on proposals for promoting economic growth. This pilot program has been extended multiple times by Congress. The latest, in 2012, renewed the program through September 30, 2015.

The EB-5 program allows a foreign person – and qualifying immediate family members – to obtain permanent resident status in the United States by making an investment in a new commercial enterprise in America (e.g., real estate project, business) that creates or saves 10 full-time U.S. jobs. The minimum investment is $1 million; $500,000 if the investment is in a rural area or “targeted employment area” (TEA). A TEA is a designated geographic area with high unemployment (at least 150% of the national rate).

Regional Centers

USCIS designates qualified applicants (public or privately sponsored entities) as Regional Centers, which can accept EB-5 investments from foreign investors to generate job-creating economic development ventures within their geographic jurisdiction.

As of April 1, 2014, there were 487 approved Regional Centers in 56 jurisdictions across the U.S.

An advantage of an investor going through a Regional Center is the ability to count both the direct and indirect jobs produced by the job-creating activity toward the EB-5 program’s minimum job requirement. After approval of his or her application by USCIS, the foreign investor receives conditional resident status for a period of two years. At the end of this period, the investor’s status is changed to unconditional permanent resident status, provided that the investment has been maintained and the required jobs have been created.

Combining EB-5 and Tax Credits

Although funds raised under EB-5 can be placed within the capital stack for a project in several different ways, the most common uses of EB-5 investments are as a first mortgage, preferred equity, or mezzanine debt.

EB-5 financing does not typically utilize traditional institutional lenders’ underwriting criteria. As a result, EB-5 dollars can be deployed as first mortgage debt for projects that might not satisfy the leasing requirements or other criteria typically imposed by institutional lenders. Given the current costs of institutional first lien financing for projects (where available), EB-5 mezzanine debt is a far lower cost alternative to traditional mezzanine debt and can be used to replace higher cost equity, in the form of either subordinated secured debt or preferred equity.

For large projects with construction periods longer than 24 months, the job creation generated by construction may support EB-5 investment in the range of 20% to 35% of the total capital stack, with a loan term of five or more years, no amortization, and an interest rate in the 6% range. We have seen several projects where EB-5 capital is combined with low-income housing, new markets, or historic tax credits to complete the capital stack.

Public Use of EB-5

States and municipalities have realized that EB-5 can be an important source of funding for high-priority projects, either public or private. A publicly owned Regional Center can be a great tool to complement existing public and private financing sources for such projects. For example, the Commonwealth of Puerto Rico recently submitted an application for designation of a statewide Regional Center that would channel EB-5 funding to high-priority projects, including affordable housing developments. Given the lack of grants and subsidies in Puerto Rico for new affordable housing projects, combining EB-5 funding with low-income housing tax credit equity would provide the much-needed gap filler for these transactions. An

Increasingly Vital Tool

At a time when financing options remain limited, the use of EB-5 funding for new construction real estate projects utilizing federal tax credits can provide the extra capital that fills the gap to make a development viable. In addition, as more and more states and municipalities recognize the advantages of EB-5 to complement their traditional funding efforts, we expect to see more public entities create their own Regional Center. By doing so, municipalities and states can leverage the dollars from foreign investors to help finance important projects.

Rogelio Carrasquillo is a Partner in the Real Estate Practice Group in the New York City office of the law firm of Akerman LLP. Steven Polivy is Akerman LLP’s New York Office Managing Partner and Chair, Economic Development & Incentives Practice. Carrasquillo may be reached at 212-880-3800, rogelio.carrasquillo@akerman.com; Polivy may be reached at 212-880-3800, steven.polivy@akerman.com.