July 25, 2019
It just became a lot more costly to apply for U.S. green cards through the EB-5 Immigrant Investor Program, and the change may throttle an important source of low-cost capital for commercial real estate projects.
On July 23, 2019, the Homeland Security Department raised the threshold investment levels for EB-5, which provides immigration visas for qualifying investors and their immediate family members in exchange for investments that create at least 10 U.S. jobs. Effective Nov. 21, 2019, applicants will need to invest at least $1.8 million to qualify, up from $1 million that has been the standard since 1990, when Congress created the program to stimulate job creation by foreign entrepreneurs.
That also raises the more accessible minimum for qualifying investments in a Targeted Employment Area (TEA). The rule retains a 50% differential in TEAs, but half of $1.8 million is $900,000, a significant increase from the $500,000 that previously sufficed in those designated areas. The rule also removes state authority to designate a TEA and makes those decisions a Homeland Security responsibility.
EB-5 pumps billions of dollars into the U.S. economy annually and has become an important source of equity capital for commercial real estate, funding portions of such high-profile projects as Related Cos.’ Hudson Yards development in Manhattan and Lennar Urban’s Hunter’s Point Shipyard in San Francisco.
Because EB-5 investors are primarily motivated to obtain visas, they often agree to returns just large enough to keep pace with inflation and eventually recover their investment amount. That means a developer accessing EB-5 capital may only be required to pay a single-digit return, compared with the 20% annual returns that some mezzanine lenders demand for a similar investment position today.
In its latest rule, Homeland Security contends its revision brings EB-5’s minimum investment levels back into line with Congress’ intent, adjusted for inflation through 2015. In fact, the revised regulations include a mechanism to automatically adjust the program’s investment thresholds for inflation every five years using the Consumer Price Index for All Urban Consumers.
The agency states that it cannot predict how its changes will affect overall EB-5 investment volume. Indeed, it remains to be seen how the effects of an 80% increase in minimum investment size will play out against a potential reduction in program participation due to the higher threshold’s discouraging effect on some real estate investors.
Michael Snodgrass is an Executive Managing Director specializing in structured finance. He is responsible for arranging debt financing and equity investments for Transwestern’s institutional and corporate clients nationally.
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