EB-5 101: EB-5 Basics October 2015
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The EB-5 program, established by the Immigration Act of 1990, provides a pathway to a U.S. green card for foreign investors who invest money in U.S. businesses, requiring a minimum investment of $1 million or $500,000 in targeted employment areas. Job creation is a key requirement, necessitating the creation of at least 10 full-time jobs through direct or indirect employment. The program has seen significant investment, particularly from China, and continues to evolve amid calls for reform and changes in investment thresholds.
EB-5 101: EB-5 Basics October 2015
- 1. EB-5 101: EB-5 Basics Daniel Miles, PhD October 09, 2015 Background Photo Taken by: Nicola Romagna
- 2. Introduction EB-5 101: EB-5 Basics • The EB-5 program was created by the Immigration Act of 1990. • One of the 5 employment-based visas. • It provides a method of obtaining a Green Card for foreign nationals that invest money in the United States. • More than 25 countries have similar programs. What is the EB-5 Program? Background Photo Taken by : Jamesy Pena
- 3. Data Source: D.H.S Office of Immigrant Statistics Visa Allocation by Category of Admission 2013 EB-5 101: EB-5 Basics Background Photo Taken by: Carl Wycoff 990,553 161,110 8,543 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 Total Employment-Based Visa EB-5 Visas
- 4. Data Source: D.H.S Immigration Yearbook 2005-2013 Total EB-5 Visas Issued 2005-2014 EB-5 101: EB-5 Basics Background Photo Taken by: Susan Procario 346 749 806 1,360 3,668 2,408 3,340 6,628 8,543 10,692 0 2,000 4,000 6,000 8,000 10,000 12,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
- 5. Data Source: U.S Department of State Number of EB-5 Visas Issued to Chinese Investors Compared to Investors from Other Countries (FY2006-2014) EB-5 101: EB-5 Basics Background Photo Taken by: Nicola Romagna 0 2000 4000 6000 8000 10000 12000 2006 2007 2008 2009 2010 2011 2012 2013 2014 Mainland China EB-5 Visas Other Countries EB-5 Visas 2006 2007 2008 2009 2010 2011 2012 2013 2014 Mainland China EB-5 Visas 63 110 360 1,979 772 2,408 6,124 6,895 9,128 Other Counties EB-5 Visas 439 683 1,083 2,239 1,113 1,055 1,517 1,669 1,564 Total EB-5 Visas 502 793 1,443 4,218 1,885 3,463 7,641 8,564 10,692 % of Mainland China of Total EB-5 Visa 12.50% 13.90% 24.90% 46.90% 41.00% 69.50% 80.10% 80.50% 85.40%
- 6. 225 129 126 121 0 50 100 150 200 250 South Korea Mexico Taiwan Vietnam Background Photo Taken by: Phillip Pessar Top Four Countries Other than China 2014 Data Source: US State Department Report of the Visa Office EB-5 101: EB-5 Basics
- 7. Introduction EB-5 101: EB-5 Basics Requirements • Invest $1,000,000 – If the project is a TEA the amount is only $500,000 • The investment must create at least 10 full-time jobs. – direct and indirect jobs. • The investment capital must be from a legal source, acquired directly or indirectly by lawful means. • The investment must be “at risk.” Background Photo Taken by : Earl McGehee
- 8. Purpose EB-5 101: EB-5 Basics Job Creation is the Key • Direct Jobs – Must be permanent full-time jobs. – Typically only the direct jobs from ongoing operations count. – Construction jobs only count if longer than 24 months. • Indirect/Induced Jobs – Must result from the investment of the new commercial enterprise. – Can count the jobs generated by the total investment, not just the EB-5 portion. – Calculated using an Input/Output model. Background Photo Taken by : U.S. Army Corps of Engineers
- 9. EB-5 101: EB-5 Basics TEA vs Non-TEA • A Targeted Employment Area (TEA) is either a rural area or an area that has an unemployment rate of 150% of the national unemployment rate. • Reduces the investment threshold from $1,000,000 per investor to $500,000. Purpose Background Photo Taken by: Carl Wycoff
- 10. EB-5 Advantages EB-5 101: EB-5 Basics Advantages • Alternative source of capital • Low-cost source of funding – Significantly cheaper than most sources of mezzanine funding. • EB-5 capital increases the overall liquidity of a business or project, which helps to reduce the cost of acquiring capital from other sources. Background Photo Taken by: Susan Procario
- 11. EB-5 101: EB-5 Basics The Forms • I-526 Petition – Filed by the immigrant investor to demonstrate that they have invested in or are in the process of investing in an approved project. • I-829 Petition – The final step of the EB-5 visa process for immigrant investors to become lawful permanent residents of the United States. • I-924 Application – The application to establish a regional center or expand the boundaries of an existing regional center. Process Background Photo Taken by: Gabe Popa
- 12. USCIS EB-5 Petition Processing Times (Months) 2014 to Most Current 01/31/14 04/30/14 06/30/14 09/30/14 10/31/14 11/30/14 12/30/14 1/31/15 2/28/15 3/31/15 I-526 9.9 12.4 13.4 14.3 14.7 13.8 14.0 14.2 14.2 14.0 I-829 8.7 5.7 8.5 8.6 10.5 11.4 12.3 12.3 12.7 I-924 4.4 6.1 6.8 8.5 10.3 11.1 11.7 11.7 12.1 Data EB-5 101: EB-5 Basics Background Photo Taken by : Earl McGehee Source: U.S. Citizenship and Immigration Services 0 2 4 6 8 10 12 14 16 As of 1/31/14 As of 4/30/14 As of 6/30/14 As of 9/30/14 As of 10/31/14 As of 11/30/14 As of 12/31/14 As of 1/31/15 As of 2/28/15 As of 3/31/15 I-526 I-829 I-924
- 13. EB-5 101: EB-5 Basics Types of EB-5 Investments • Originally EB-5 investments were in an existing business. – For business expansion or – Saving a troubled business • Today most EB-5 projects involve real estate development projects. – Office, hotels, retail, entertainment, residential, infrastructure – Require the use of a Regional Center Investment Types Background Photo Taken by: Phillip Pessar
- 14. Regional Centers • Created in 1992 by Congress • Accept and pool EB-5 capital for investment in economic development projects • Can be publically owned, a PPP, or owned by private sector investment companies. • Allow for the counting of indirect and induced jobs. Regional Centers EB-5 101: EB-5 Basics Background Photo Taken by: Nicola Romagna
- 15. Regional Centers • Identify investment opportunities that will create jobs in local communities. • Act as a matchmaker between investors and borrowers • Ensure the investment offering complies with various laws and regulations. – EB-5 requirements – Federal and state securities law and SEC regulations What do Regional Centers Do? EB-5 101: EB-5 Basics Background Photo Taken by: Jamesy Pena
- 16. Regional Centers • The use of Regional Centers have become the most common way to use the EB-5 program. • Borrowers have three options – Use an existing regional center – Start your own regional center – Rent a regional center Regional Center Options EB-5 101: EB-5 Basics Background Photo Taken by: Earl McGehee
- 17. Regional Centers • All EB-5 applications are required to submit a business plan. • The business plan must be “Matter of Ho” Complaint – Define the business activity – How the capital will be spent – How and when the jobs will be created. • The application also requires an employment impact study Matter of Ho EB-5 101: EB-5 Basics Background Photo Taken by: Earl McGehee
- 18. Data Source: IIUSA Quarterly Data Report Data Source: U.S. Citizenship and Immigration Services (USCIS) Data Set EB-5 Foreign Direct Investment ($Millions) by Quarter (FY2013 – FY2015, Q3) EB-5 101: EB-5 Basics Background Photo Taken by: Gabe Popa 347 417 501 586 727 715 567 550 826 989 1,434 0 200 400 600 800 1,000 1,200 1,400 1,600 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Total: $14.38 Billion Since the beginning of EB-5 Program
- 19. Impact in Pennsylvania • Over the 2010-2013 period, Pennsylvania has been the 3rd largest user of EB-5 funding. – Over $684.2 million has been invested – Generating $1.1 billion in economic activity – Supporting 13,800 jobs – $142.8 million in federal taxes – $65.2 million in state and local taxes EB-5 and Pennsylvania EB-5 101: EB-5 Basics Background Photo Taken by: U.S. Army Corps of Engineers
- 20. Feedback • “The program allows well-heeled investors to leap to the front of the line by simply plunking down $500,000.” • “It isn’t really creating jobs – its merely saving developer’s money on projects that would have been financed anyway.” • “The program is lengthy, labor intensive, and complex process, even in the best case scenario. And the delays are getting worse.” • “The industry is unregulated and it has become a magnet for amatuers and pipe-dreamers, who see it as an easy way to score money for ventures that banks would never touch.” Critics EB-5 101: EB-5 Basics Background Photo Taken by: Jamesy Pena
- 21. Present • The program was originally set to expire on September 30, 2015. • The current program has been extended until December 2015. • There have been a number of competing bills introduced in Congress. The Current Status EB-5 101: EB-5 Basics Background Photo Taken by: Earl McGehee
- 22. Future • Changes to the TEA process • Increased investment amounts. – $800,000 for TEA; $1,200,000 for Non-Tea • Limits on the proportion of EB-5 funding in the capital stack • Elimination of country quotas • Making the program permanent Potential Changes EB-5 101: EB-5 Basics Background Photo Taken by: U.S. Army Corps of Engineers
- 23. • Questions? Daniel Miles, PhD Econsult Solutions 1435 Walnut Street, Suite 300 Philadelphia, PA 19103 215-717-2777 miles@econsultsolutions.com Thank You Background Photo Taken by: Carl Wycoff
Editor's Notes
- #3: The program was created by the immigration act of 1990 to help spur economic development by attracting investments from qualified foreign investors. The investors are able to obtain a visa faster than they would be able to otherwise. However they are still subject to same background checks and national security screenings as applicants in another visa category. The investor along with their immediate family (spouse and children under 21) get a visa for one investment.
- #4: In 2013, the total number of visa admissions to the US was nearly 1,000,000 The 5 emeployment based categories amounted to slightly more than 161,000 visas. EB-5 visas were only 8,540 of the 1,000,000 visss. Very very small The maximum number of EB-5 visas is 10,000 per year. Since the establishment of the EB-5 program in 1990, applicants never used all 10,000 available EB-5 visas until fiscal year 2014 (Oct. 1, 2013 to Sept. 30, 2014).
- #5: The popularity of the EB-5 program has increased dramatically over the last nearly 10 years. The annual quota limit for EB-5 visas is 10,000 As the demand for EB-5 funding has increased, so too has the strignecy of the USCIS review process The level of detail required in the economic impact studies has increased tremendously since I worked on my first EB-5 project in 2008.
- #6: Over the last couple of years China has become the dominant source of investors. This is beginning to create some issues. applicants from all countries are treated equally until it appears that the entire annual allocation will be used up during a particular fiscal year. When that happens, applicants from over-subscribing countries must wait for a future year’s allocation to be available before they can obtain a green card. This allows applicants from other countries to apply for and obtain green cards without additional delay. Until the past fiscal year, worldwide EB-5 visa demand never required a cap on any one country’s visa usage, but visa usage in the current fiscal year, and foreseeable fiscal years, is expected to continually reach 10,000. Because investors from Mainland China use so many EB-5 visas, they will face a growing backlog in waiting to obtain a green card.
- #7: In addition Russia investors are on the rise. https://ebfive.files.wordpress.com/2014/12/fy2014visas.jpg
- #9: The investor must be able to document the path of funds with bank statements and supporting documents. The investments are typically done through a private placements. Private placements are the sale of securities to a relatively small number of select investors. They are regulated by federal and state securities laws and regulations. By law, the Eb-5 investments must be at risk in the same way that any equity, stock, or other type of investment carries inherent risk. There cannot be a guarantee of a return on the investment.
- #11: In most cases a TEA is comprised of contiguous census tracts that meet the unemployment threshold. The project must be located in one of the included census tracts. 90% of all investments has occurred in a TEA. Being in a TEA makes the project much more marketable. If the project is not in a TEA it is very difficult to raise money. Investors are presented with a number of options, they receive a minimal return on the invested capital and are unlikely to choose an investment
- #12: EB interest rates are typically around 5-7 percent Traditional mezzainine funding is probably around 13-15%
- #13: During the EB-5 process you will hear about lots of different forms that need to be filled out. The main one include the following… When the I-526 is approved, the investor is granted a conditional visa which is valid for two years. When the I-829 is approved, the conditions are removed.
- #15: This has lead several large real estate developers, such as Extell and related companies to form their own regional centers.
- #16: A regional center is an organization that is regulated by USCIS that facilitates investment in job-creating economic development projects by pooling capital raised under the EB-5 immigrant investor program. They typically serve a defined geographic area. The job of the regional center is to go out and find investors for their projects, The regional center also sets up the job creating entity that the investors invest in. There are over 750 approved regional centers
- #18: 95% of all EB-5 capital is raised through regional centers. Using an existing regional center allows a developer to avoid the time and expense of setting up a regional center. The regional center is responsible for locating foreign investors. This is becoming more and more challenging. The downsides include that regional center might decide to reject a project. The developer misses out on the interest rate spread on what the borrower pays and the investor receives. The borrower also has to pay a loan origination fee to the regional center. Starting your own regional center allows for the removal of the middle man, which further reduces the financing costs. However there the processing time for regional center approval is over 12 months. There are also significant legal costs associated with setting up a regional center. In addition newer regional centers often find it difficult to compete in the marketing efforts with long-existing regional. Also the costs of located investors has increased in recent years. There is also a relatively large administrative burden. However, if you plan to do several projects, it might be worth setting up a regional center. When you rent an regional center, the borrower is responsible for the entire offering process,while the regional center handles the administrative portion. Either the borrower or the regional center handles the marketing and sourcing of investors. Not every regional center may accept this arrangement.
- #19: Matter of Ho is a decision issued by the administrative appeals office in 1998. It is one of the main decisions that sets forth the requirements of the EB-5 The decision lays out what mist be include the business plan. This includes market analysis (comparison of competitors), description of target market, organizational structure and personnel's experience, timetable for hiring and job descriptions for all position, financial projections, and most importantly, business feasibility
- #20: The EB-5 program has expanded greatly since its inception in 1990. To date nearly $14.4 billion has been invested through the program.
- #21: Pennsylvania 3rf larges user of EB-5 funding over the 2010-2013. A large number of the projects have been here in Philadelphia. Only California ($1.2 billion) and New York ($1.1 billion) has more than PA. Florioda is 4th with $219 million
- #23: The program needs to reauthorized every couple of years. The current version was to expire on September 30th.