Richard Biegel: EB-5 Construction Financing and Student Housing

by Katie Sloan

By the numbers, $16.9 billion worth of foreign direct investment in the U.S. has been through the EB-5 program since 2008, according to Invest In the USA (IIUSA). Consider that this activity is generated by less than 1 percent of total legal U.S. immigration, all at no cost to U.S. taxpayers. China accounts for the majority of that investment. In 2014, China accounted for 84 percent of EB-5 activity, according to the DHS Yearbook of Immigration Statistics and State Department preliminary data.

The Employment Based (EB) visa program was initially put into place in the 1990s to use visas to help stimulate the U.S. economy. The five programs are called “preferences.” The 5th preference (EB-5) uses foreign investment to create U.S. jobs.

Each financier invests either $500,000 or $1 million — depending on whether or not the project is located in a Targeted Employment Area (TEA) — into a business that creates jobs. If the immigrant investor can show that their investment created at least 10 new full-time jobs, the investor and their immediate family receive lawful permanent residence — known as a “green card.”

Depending on the portion of the capital stack allocated to land cost (which obviously does not generate jobs) a typical large real estate development project can anticipate creating enough jobs to support EB-5 for up to 60 percent of the capital stack. Occasionally, those new to EB-5 prejudge their projects ability to utilize EB-5 money based on their estimate of the number of jobs their project will create. The job calculation is a function of econometric models (one commonly used is published by the U.S. Bureau of Economic Analysis) that account for direct jobs, indirect and induced jobs. The reliable way to establish the number of jobs, and the EB-5 potential, is to engage an EB-5 economist to make the estimate.

EB-5 typically participates in the capital stack through a mezzanine construction loan. The reason why it works for investors to take the mezzanine position can be attributed to several factors:

First, consider the immigrant investor’s priorities with respect to the EB-5 program from highest to lowest, with the first two being close in priority:

  • Obtaining green cards for himself and his family
  • Return of invested capital
  • Return (if any at all) on invested capital.

Putting the EB-5 money in the senior position would require the developer going to the U.S. mezzanine debt market and paying double digit rates, resulting in a weighted cost of capital that would exceed traditional construction financing. Further, it gives the immigrant investor confidence that independent due diligence, completed by a ‘boots on the ground’ bank in the U.S. has given that bank confidence to invest the balance of the capital stack in the proposed development.

Why it Works for Developers

It is difficult to find construction financing. Developers are often faced with a senior lender only willing to fund 60 percent to 65 percent of the total construction cost. With EB-5 in the mezzanine position, senior construction loans can be compressed to 50 percent or lower loan to cost (LTC) and can generally negotiate away any recourse.

At 50 percent or less LTC, the senior construction debt is often in the 4.X percent range. The resulting average cost of capital is almost universally lower than a typical 75 percent construction loan, with no recourse. With an EB-5 loan, generally interest only increases the project’s cash flow and stability. Developers with a well developed plan and sound model can stand to benefit from looking closely at EB-5’s opportunity.

EB-5 and Student Housing

The vast majority of EB-5 investors are immigrating to the U.S. for the benefit of their children who are generally of college age. They recognize that the United States has the best post-secondary education system in the world. On a scale of one to ten, it has been said that the Chinese like real estate at a “10” and student housing at a “15.” It’s a product they easily understand. As more and more developers have looked to EB-5, and the market for investors has become more competitive, student housing holds a unique competitive advantage over other commercial real estate in attracting EB-5 investors. 

The timeline for EB-5 presents a challenge and an opportunity for student housing developers. The majority of EB-5s are SEC Regulation S offerings that require all marketing to be done offshore to non-U.S. persons. The typical timeline for an EB-5 raise is 90 to 120 days to document, translate for the offshore market and position the offering with an offshore marketing agency. Then, depending on the size of the raise and when it’s brought to the market, it takes six to nine months to complete the raise. With proper planning and the selection of a respected team, this timeline can be effectively managed.

The EB-5 program requires that the immigrant investors investment be “at risk,” or invested during term of their application — which is currently estimated to be seven years for Chinese nationals. The current practice is to structure the EB-5 loan with a term of five years with two optional one-year extensions, chosen at the discretion of the lender. This may work for portfolio developers who build and hold, and are willing to keep the EB-5 loan in the project for the full term, but merchant developers who build and sell may give pause to such a structure. In reality, it creates a potential opportunity for both the merchant and portfolio developers.

The need for the immigrant investor to have their funds invested presents an opportunity, especially for the student housing industry where projects are completed and stabilized to sell or refinance in three to four years. Given the EB-5 reality in the market and that the investor has to have their investment “at risk” —or the EB-5 lender has a duty to keep the funds invested — they essentially have to keep the funds invested. Student housing has one of the lowest recessional risk exposures. With a potential seven-year term, any non-student housing development project will not only face the same strong likelihood of redeployment of the EB-5 loan, but also will then face greater recessionary risk exposure.

This forward-looking analysis of redeployment risk identifies several positive considerations for immigrant investors with respect to student housing. Investors should have a preference for student housing because of the known lower risk versus the unknown, and the all but guaranteed higher risk of redeployment. It is important for the EB-5 team to underwrite not just the project, but also the developer and the developer’s portfolio with an eye to solid developers with a pipeline of quality projects where redeployment could occur with a risk profile to the immigrant investor that matches or is an improvement over the original project.

— Richard Biegel is the managing partner of Immigration Capital LLC based in Las Vegas, Nevada.

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