EB-5 proponents see broader financing mandate for newly revamped program 

Proponents of the newly revamped EB-5 Regional Center Program, which made its debut earlier this year, are optimistic that its reach could extend past its traditional use as mezzanine or construction financing in commercial real estate transactions.

The EB-5 Reform and Integrity Act of 2022 was designed to help assuage some of the perceived issues around the program and past abuses. It also opens the door for a more targeted urban use for projects that could benefit densely populated areas, said Reid Thomas, chief revenue officer and a managing director at fund services administration provider JTC Group.

“It is a job creation program and a good financing vehicle for developers who need to get things done,” Thomas said. “Under the new rules, there is more cost and rigor to raising that capital and make sure the rules to prevent fraud and abuse are being followed.”

While the program has changed substantially in many ways, its drivers remain constant. “In 2010, we saw EB-5 financing take off as traditional lenders reduced LTVs, creating a gap,” Thomas said. This gap was often filled with EB-5 financing, and Thomas said he believes a similar situation may arise in today’s market.

“What is different now in EB-5 behavior is that the financing used to almost exclusively be used as mezzanine financing. We are now seeing it sometimes used as equity in some deals,” Thomas added. “The use of EB-5 by real estate professionals has become more sophisticated as they figure out how they can use it in different parts of the capital stack.”

The program, via the EB-5 Reform and Integrity Act of 2022, has been extended until 2027. The current program differs from its predecessor in several ways, including a higher minimum investment of $800,000, compared to $500,000 under a previous iteration.

Chinese investors interested

This has meant that Thomas has seen three major shifts since the legislation was renewed. First, more Chinese investors are once again looking at participating in the program. And secondly, there is more movement toward deals that better fit the program’s mandate, including providing financing for projects in distressed urban areas rather than in less densely populated rural parts of the US, Thomas said.

Finally, EB-5 regional centers are further diversifying the areas from which they are drawing investors due in part to a greater amount of geopolitical turmoil in recent years. In the past, there was a high concentration of Chinese investors. Now, there is more activity from South America, particularly Brazil, and a broad swath of European countries. “I would expect that over time, we will see more activity from European participants,” Thomas added.

Changes also include an independent third party to oversee regional centers and their activity and regular check-ins from US Citizenship and Immigration Services. “There will be more regular audits of these fund managers,” Thomas said. “The disclosure requirements are greater, including having to disclose if they are paying brokers to raise capital and where any brokers are based. The fees are also higher to be involved, which may mean it makes less sense for smaller players to be involved.”

The program is still not permanent, yet Thomas holds out hope this will change. “It is one of the biggest lobbying points in the industry,” he said. “For a regional center to not have to go through a renewal will allow it to grow and, as something that drives foreign investment and creates jobs, why wouldn’t we want to make it bigger? The new regulations will enable the program to demonstrate the good the program is doing and, ultimately, the impact will be more obvious.”

Created as part of the Immigration Act of 1990, its intent was to aid the US economy via job creation. Since inception, it has created more than 820,000 full-time jobs and raised more than $41 billion of capital. The construction loans, mezzanine debt and preferred equity typically sourced through the program can be the keystone to getting projects launched and could serve a further function as the US economy recovers from the covid-19 pandemic, Thomas said.