Real Estate Weekly
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Debt & Equity

Changes to Visa program will impact real estate developments

By Janire Lamiquiz, Borah, Goldstein, Altschuler, Nahins & Goidel, P.C.

The EB-5 visa program will experience substantive changes in the upcoming months as the current program will expire in September 2015 and Congress is expected to pass a more restraining regulation when renewing it.

In addition, the recent announcement by the federal government regarding the waiting list for the granting of Conditional U.S. Residency to Chinese nationals applying for EB-5 and the expansion of the economy after the end of the recession, may have substantial impact in the Immigrant Investor Program.

First of all, it is important to note that the EB-5 program requires the project in which the investment is made to be located in what is known as a “Targeted Employment Area” (TEA), a census area in which the unemployment rate is 150 percent higher than the national average.

However, many of the developments that received EB-5 investments are located in wealthy areas such as Midtown, Upper West Side, Tribeca and Chelsea.

The reason why EB-5 investments in those areas were approved is that, due to a loophole in the current regulation, the use of contiguous census tracts is allowed.

The proposed legislation for the renewal of the EB-5 program amends the definition of TEA to mean only an area consisting of a single census tract.

This would mean that many of the new developments in several areas of New York City and Los Angeles (the top two beneficiaries of the EB-5 investments) would no longer qualify for EB-5 investments.

Second, the EB-5 program gained special importance during the recent recession because after 2008 the traditional financing channels were significantly tightened with more stringent lending regulations specified in the Dodd-Frank Act.

Consequently, banks were not willing to take as much risk as before the recession and real estate developers looked to foreign investors to raise capital. In addition, the interest rates for EB-5 loans were lower than for mezzanine loans offered by the banks at the time.

Since then, the economy started to recover from the crisis and banks are once again willing to cover up to 70 percent of a project’s cost at lower interests than seven years ago.

As a result, those developers who during the past years decided to take advantage of the EB-5 program may find traditional financing sources more appealing.

While EB-5 loans have low interest rate they also come with Regional Center and Agents associated fees, and of course with the risk that there is no guarantee that the amount required for the project will be raised.

In addition, a developer seeking to get EB-5 investments has to deal with the visa regulations which require that, if the visa application gets rejected or denied, the EB-5 investment be returned to the investor. Obviously, such a risk is not at issue for a developer once it receives a bank loan.

Finally, in 2013, for the first time since its creation, the EB-5 program issued the maximum number of visas allowed by the regulations.

To balance the influx, in May 2015, USCIS imposed a waiting period for the issuance of U.S. Conditional Legal Residence for EB-5 investors from China who filed EB-5 applications after May 2013.

Given that more than 85 percent of EB-5 investments come from China, this new development can have a substantial impact on the program.

Currently, EB-5 loans have five-year terms because that is the projected time it takes for an EB-5 investor to secure his or her U.S.

Permanent Legal Residence through the process and the investment cannot be returned to the investor before he or she receives the permanent residence. This is already a long time for most developers, who usually only need the loan for a period of two and half to three years.

The waiting period announced by USCIS means that there is now an indefinite waiting period for such investors.

This also means that the developers may have to wait to return the money to the investors for an indefinite period of time (and, of course, keep paying interest on the loan).

If that uncertainty were not enough, the delay in the visa adjudications also presents a second problem for investors – because the 10 jobs requirement needs to be satisfied for at least a two-year period beginning with the grant of the conditional legal residence, if the waiting period imposed by USCIS happens to be too long, there could be a situation in which the real estate project is already finished and the 10 jobs requirement is not met because construction workers are no longer needed.

Consequently, the investor’s application for permanent residence will be denied.

In sum, the new developments in the EB-5 visa program and the proposed changes to its renewal impose both timing and geographical constraints on developers while presenting new hurdles to foreign investors.


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