The EB-5 program was established in 1990 by the Immigration and Nationality Act, 8 u.s.c. § 1153(b)(5) (“INA”). Section 203(b)(5) of the INA allocates 10,000 EB-5 immigrant visas per year to qualified individuals seeking “Lawful Permanent Resident” status on the basis of their capital investment in a U.S. commercial enterprise. The EB-5 program was created as a mechanism to boost foreign investment in job creation and economic development in areas with high unemployment or considered blighted or rural, and to help finance U.S. businesses that would otherwise have a difficult time attracting investors.
The EB-5 program offers permanent U.S. residence to immigrants seeking to enter the United States, who invest specified amounts in a new or established U.S. commercial enterprise that creates or preserves at least ten full-time jobs for U.S. workers (excluding the investor and his or her immediate family) per investor. The United States Citizenship and Immigration Services (“USCIS”) administers the program. The program is known as EB-5 for the name of the employment-based fifth preference visa that foreign investors receive. EB-5 investors include people from all walks of life, including: professional people; business people; persons wanting to facilitate a child’s education; and retirees. An EB-5 investor can invest in several types of business entities, including corporations, limited or general partnerships, sole proprietorships, business trusts, or other privately or publicly owned business structures. See generally the description of the EB-5 Immigrant Investor Program at http://uscis.gov/eb5.
The minimum investment amount required to qualify for the program and obtain the desired visa is $500,000 in a “Targeted Employment Area (“TEA”) and $1 million for projects in a non-TEA area. The USCIS describes a TEA as either in a high-unemployment area (calculated as an area with an unemployment rate that is at least 150% of the national average), or a rural area. A TEA can be made in a single metropolitan statistical area or any “geographical or political subdivision” of a metropolitan statistical area, if the host state approves of the grouping. Nearly all projects use the “state-designated” TEA option, although states actually exercise little to no oversight of developers’ proposed TEAs, most likely because of the perceived benefits of development in areas that are in need of job creation.
EB-5 investments may be structured in a number of ways. Because a secured loan transaction has less risk of losing the initial capital investment given that the lender can foreclose on the security if the loan defaults, immigrant investors generally prefer to give up some of the potential return that could be generated by a direct equity investment in favor of the relative safety of a secured loan transaction. Secured debt is the safest investment form for return of capital, especially for a lender in a first-priority position. And the lender may refinance the EB-5 mortgage debt with “traditional” secured debt at the conclusion of the holding period required for immigrant investors. Furthermore, developers prefer “passive” mortgage lenders to active equity participants, and the immigrant investors’ lender entity may seek to protect the investment with title insurance.
EB-5 loans often have five-year terms; because that is the projected time it takes for an EB-5 investor to secure a U.S. visa and have his/her capital invested for a period of time sufficient to comply with the EB-5 program’s requirements. This is a long time (especially for a construction project), and the investment cannot be returned to the investor before the investor obtains permanent residence. EB-5 money is currently invested in a wide variety of projects, ranging from hotel developments and affordable housing to construction of solar energy farms.
EB-5 projects have experienced rapid growth in the past several years. See 48 No. 12 mortgage and real estate executives report nl-4, 48 No. 12 (2015) (“MREER Report”), which states that, “From 2010 to 2014, there has been a 504% increase in the use of EB-5 financing, with nearly $9 billion in capital invested in the U.S. from 2005 to 2014.” In 1992, Congress enhanced the growth and economic impact of the EB-5 program by permitting the designation of Regional Centers, which allow indirect job creation to be taken into account to meet the required employment numbers. (Indirect jobs are those jobs shown to have been created collaterally or as a result of capital invested in a commercial enterprise affiliated with a Regional Center by an EB-5 investor.) It is relatively easy to form, sell, or “rent out” a Regional Center, and the use of Regional Centers has created a growing – and lucrative – market for promoters and owners of Regional Centers.
The Regional Centers are able to pool investments, so that the individual investor need not be responsible for directly overseeing the specific investments. A number of developers have used this vehicle to finance the acquisition of existing hotels and the construction of new hotels, as it can provide inexpensive financing with favorable terms. They have also become an attractive source of mezzanine financing (secondary financing behind a first-lien commercial mortgage, collateralized with a pledge of borrowing-entity ownership interests), now that capital for construction projects is more readily available from banks and other traditional first-mortgage financing sources. Developers can either solicit investments through existing Regional Centers or set up new Regional Centers to fund their own projects. As of January 4, 2016, the USCIS had approved 790 Regional Centers. Regional Centers can operate in multiple states; thus a Regional Center may be listed more than once in the USIS database of the current Regional Centers.
There have been several instances of alleged fraud, misallocation of funds, and illegal practices in the past few years with respect to the EB-5 program. EB-5 project viability challenges include the complexity and length of the project (i.e., more jobs but also a higher likelihood of failure to timely obtain the full amount of necessary investor funds to complete and operate the project with the consequent risk of mechanic’s liens and/or foreclosure), the location of the project, and the experience, creditworthiness and reputation of the developer (which requires lengthy and costly due diligence). About 90- 95% of EB-5 applicants apply through Regional Centers, which are a major focus of fraud concerns because it is difficult to track where the capital originates, where it ends up, and exactly how many jobs are actually created.
Title insurers generally have no position on the political or social issues regarding the EB-5 program, but such a controversial program obviously increases risk to the title insurer and each transaction must be specially and carefully underwritten with the utmost due diligence with respect to potential problems. The insurability of each such transaction must be evaluated on its individual facts, and the title insurer should be involved early in the process and provided with full disclosure of all aspects of the transaction. There are also non-policy risks that must be evaluated by the title insurer because of the relatively unusual nature of these types of transactions, e.g., some investors may mistakenly (and incorrectly) believe, because of their unfamiliarity with title insurance, that title insurance somehow eliminates risk and “guarantees” the project’s success. In-depth underwriting of both title and “non-title” issues is crucial, with an emphasis on due diligence with respect to the entire transaction, including the financial strength, track record, creditworthiness and reputation of the developer; the location of the project; the likelihood of timely and complete funding; and the projected overall success of the project.
Although there are some businesses that specialize in conducting EB-5 escrows, sophisticated parties generally shy away from being the escrow holder for EB-5 immigrant investor funds, because there is too great a likelihood for litigation in light of the high (often fiduciary) duties of the escrow holder. Title insurance companies generally will not hold immigrant investors’ money in their escrow accounts, whether pending approval of investors’ EB-5 applications or otherwise, because of the inherent risks involved.
The 20-year old EB-5 program, which was set to expire on September 30, 2015, received a temporary reprieve via the passage of a Continuing Resolution (“CR”) by Congress, which funded the federal government for an additional 10 weeks through December 11, 2015. On December 15, 2015, Congress passed an Omnibus appropriations bill containing, among other things, an extension of all current EB-5 rules (with no modification) until September 30, 2016 (“2016 Extension Period”). The months leading up to the September 30, 2016 deadline will be critical in determining whether the various interest groups and stakeholders can work together with Congress to enact meaningful reforms to the EB-5 program. The EB-5 Program will receive heightened scrutiny from regulators during the 2016 Extension Period, both from the SEC and the Financial Industry Regulatory Authority (“FINRA”), which regulates broker-dealers.
