Excerpt compiled by Merri Cross, manager of business development, Dentons
How interested are St. Louis-area real estate and development pros in the Gateway to the Midwest Investment Center? More than 100 of them attended the Nov. 19 presentation by Dentons and World Trade Center St. Louis, “Global Capital for Regional Growth: Understanding EB-5 and how to work within the Gateway to the Midwest Investment Center.”
The focused on the innovative investment tool of EB-5 and the impact of the Gateway to the Midwest Investment Center, the regional center approved by the U.S. Citizenship and Immigration Services (USCIS) to promote projects for EB-5 Investment.
After opening remarks from Denny Coleman, CEO of St. Louis Economic Development Partnership; Tim Nowak, Executive Director of World Trade Center St. Louis; and Ronald Fieldstone, Partner with Arnstein & Lehr LLP, the panel was kicked off by moderator Jennifer Marler, Real Estate Partner and Managing Partner of the Dentons St. Louis office.
Also participating in the discussion were Jeff Carr, President of EPR Economic and Policy Resources, Inc.; and Darwin Huang, Associate with Dentons Hong Kong. Below is an excerpt of the discussion.
Jennifer Marler: We wanted to bring together a group that could talk about how you can use this program. So to those interested in doing an EB-5 project, what types of projects really qualify?
Darwin Huang: With the main criteria of job creation, anything that involves construction. Whether you’re a developer or you’re a business looking build headquarters, under most economic models construction jobs are the easiest to qualify. They’re direct jobs as opposed to jobs that are created through economic activity indirectly. There might be no limitation on the type of project as long as construction is a big component.
Jeff Carr: It is a jobs program. Any project that creates new jobs would be eligible for the program. We’re dealing with a federal government agency, so there are rules about which jobs can be brought to bear. The magic number is 10. Either $500,000 or $1 million — but most of the projects are $500,000 — has to be invested in a new commercial enterprise that results in the creation of at least 10 new jobs for U.S. workers. And it’s very important that it’s for U.S. workers.
Marler: What if you’ve got a company operating in St. Louis that is considering leaving the region and it develops a new project but is really just transferring existing jobs to that new project? Is that a new job?
Carr: That’s a good question because you have to prove that not only are the jobs new to the business enterprise when the investment is made, but they also have to be new to the regional economy. Changing the position for a current employee and saying that it’s a new job is probably something that won’t be approved or allowed. They have to be permanent and full-time year-round jobs.
The program is biased toward new construction and developing new projects on greenfields. They tend to create the most jobs. With the USCIS, you have to consider things like competition.
If you’re building, for example, a new hotel with all the latest accoutrements, they want you to provide an analysis that says your new hospitality asset is not going to take away room nights from the 1980s vintage hotels already in the area. We have to develop an application that proves all those new jobs you’re creating are new jobs to not only the business, but to the regional economy that’s under analysis.
Marler: This sounds a lot different than applying for a conventional loan. One of the most common questions I get is why would I want to try to do an EB-5 loan when I can go to a local? Why would someone choose EB-5 as a capital source?
Ronald Fieldstone: In general EB-5 lending is non-recourse. There may be guaranties of completion or “bad boy guarantees,” but most EB-5 models are structured as non-recourse loans.
Marler: Even construction?
Fieldstone: Yes. Guarantee of completion is typical — not always required, but typical. The loan itself is generally not guaranteed by an individual or a very substantial company. The deal stands on its own. It’s effectively non-recourse to the owner. Probably 90 percent of EB-5 regional settlement money today is coming through loan programs, not to a direct equity investment in a project. The other advantage is sometimes EB-5 money can be mezzanine money or second mortgage money. Now, the rates become very attractive.
Marler: When you talk about the rates, there’s a couple different components to that. On paper, it’s a very low interest rate loan with other fees.
Fieldstone: My experience in China would be 4 percent to 6 percent.
Marler: Is the interest paid regularly?
Fieldstone: Sometimes there’s a deferral component because they wait for the project to get started. They add it to maturity. The goal is to make the developer successful. It’s a little different than the normal financial institution. The investing group can’t really afford to foreclose on a project and not create jobs. The incentive is to work with the developer, so they’re going to be very flexible in working out problems that an institution may not be able to do because of regulatory reasons.
A lot of programs have deferrals of 5 percent. Or maybe 2 percent is deferred until maturity; only 3 percent is paid current. Some of it may not have been paid until a project is finished. There’s a lot of negotiation that goes on really between the developer or regional center and the marketing agent.
Marler: Are there certain asset classes that are a little bit more attractive?
Fieldstone: Yes. I would say public/private debt-equity ratios of a low amount, with EB-5 first mortgage lending at 60 percent. For example, hotels are not easy to finance around the country. You’re not going to get a cheap hotel rate today, but hotels create a lot of jobs, construction and operations, subject to certain restrictions. They are very desirable. The rates are very competitive. The term of an EB-5 loan is typically five years, with one or two one-year extensions.
Marler: The other piece we should hit on is an EB-5 lending entity is basically a pool of investors, typically set up as a LLC. How are these entities managed?
Huang: We typically approach a project by creating one lender LLC, and through that lender LLC, each individual investor places a loan, then we are acting for the independent manager. This is really attractive and beneficial to both the developer and the lender entity. An independent manager representing the investor’s interest really helps fund the deal because they know somebody has the experience, and has done many successful projects and endorses this project. The deals are structured so the lender LLC has dual managers. The regional center would act as the Class-A manager, and that manager will oversee everything related to USCIS compliance issues, making sure the project can continue to qualify for this EB-5 program, whereas the Class-B manager representing the investor’s interests does the due diligence and negotiates with the developers. That manager understands the developer’s needs and concerns, and works with the developer to negotiate the loan documents.
Marler: What parts of the country have seen the most EB-5 deals, and do you see any trends in terms of growth and where more of the capital is getting directed?
Carr: If I had to put a geographic profile on the dollar amounts of deals, I think you’d probably see California number one, Florida number two, probably New York number three.
I think there will always be a market for EB-5. There are always going to be projects that are going to have trouble getting conventional financing. EB-5 capital can be an important part that stands behind a first mortgage or something like that. Ordinarily, my rule of thumb is if EB-5 capital is 50 percent or less of your total capital stack, I can usually make the jobs work without doing anything that’s too heroic in assumptions from the standpoint of economic and job impact analysis.
You can’t use the term “speed” and EB-5 program in the same sentence. That’s why what the regional center has done here is so important for you. They’ve done the hard part. They have allowed you to bring to your project both the jobs that are created and the business enterprise and all the jobs that are created out of the economy indirectly, and they’ve probably chopped a good six months off of a development project in terms of when you can file your documents and start raising your capital and actually getting the money in your hands.
Fieldstone: Even though EB-5 takes some time to do and it’s not simple, it’s very doable. In the EB-5 world, USCIS came out with a proclamation on May 30 that formally authenticated bridge financing. USCIS will let the developer bridge the financing and have EB-5 reimburse. You can do both traditional financing for a part of the stack and then have it replaced or supplemented by EB-5.
Marler: What’s the typical time frame between the first petition being filed on a project and a USCIS approval of a project?
Huang: I think the official time is 11 months, because there’s often going to be follow-up questions from the government on what they call RFEs, usually related to the job creation models, source of funds, the capital at risk. You might get one or two requests for additional information. On a good application, maybe 12 to 18 months.
Carr: RFE is what they call a request for evidence. The target adjudication times for RFEs are four to six months. They haven’t been at four to six months now for probably three years.
Marler: Is that because of the increase in applications?
Carr: I think it’s because there’s been an increase in the level of the program, but also it’s because they know they’ve elevated the review standards. Almost every filing gets an RFE. If you are filing your own project, and you file I-526 applications where the USCIS will get a look at your project, it cuts at least six months off the filing.
Marler: Bring it back to the developer perspective during that time period. What’s happening during that time frame?
Fieldstone: The market has adjusted to accommodate developers because they recognize you can’t wait this long to get your money. Investors don’t want to wait, either. The investors want to be in the investment. So that and the bridge financing, those two combinations, that kind of offsets the delay in adjudication.
Huang: After they got their first I-526, the Chinese investors were willing to forego some of the financial preference in terms of project for immigration security. Immigration will be the number-one priority. It’s proving to be an advantage for some of the smaller developers and smaller projects. One thing we’re seeing many developers do is get a few initial investors to agree to sign up on your project, file your petitions with the government, get it approved, and then use that as a huge fund-raising tool when you go to China.
We do all of the legal due diligence. We issue a standard report based on our review of the project and the lender, and immigration brokers from China are able to use this because it’s recognized in the market that we’ve done financial, legal, securities and immigration due diligence.
Marler: As a developer, what do you really need to put in front of those potential investors?
Huang: That would be the offering packet comprised of the offering memorandum, investor questionnaires to identify where the source of funding is coming from, and the business plan and market studies.
Marler: Is it fair to say, the farther along you are, the easier it’s going to be to interface with the investor market? You’ve identified your general contractor, you already own the land.
Fieldstone: That makes a big difference. And the closer you are to showing a deal ready to fund. The investors want to know their money is working for them, they’re going to get their green card fast, and they have a reasonable expectation of getting paid back.
Carr: There are some basic steps. The thing you have to start out with is a well-thought-out project. We have to figure out whether or not your project qualifies for the $500,000 deal. It can’t be a $1 million deal in a $500,000 market. We have to confirm that your project is in a targeted employment area. You’re not looking for investors. You’re looking for migrants who are using investment as a means to come to this country. Therefore they’re never going to pay you $1 million for something they could get for $500,000 from any number of other projects in the marketplace. You need to qualify your project for the $500,000 investment minimum.
There are two ways to do this. You can have your project located in a rural area, i.e. if you are not in a federally recognized metropolitan area. Even if you’re in a new market tax credits zone, that has no bearing on this program at all. You have to also be located in a municipality that doesn’t have more than 20,000 residents.
The other way that most projects qualify is when you’re located in an area with an unemployment rate that is 150 percent of the U.S. average. In Missouri, they use the trailing annual average, so right now they’re using areas that qualify as 150 percent of the U.S. average on data based from the calendar year of 2012.
It is so important to engage the right team. Ask, “How many deals have you been involved in? How many of your materials have been part of successful applications?” Really do your due diligence. The regional centers have a list of professionals they can refer you to, and they can get you pointed in the right direction.