EB-5 and its Impact on Commercial Real Estate
Earlier this month, Congress extended the EB-5 Immigrant Investor Program again, giving foreign investors an opportunity to apply before the next expiration date of April 28, 2017. The program, which issues permanent residency to foreigners who invest at least $500,000 in a commercial enterprise and produce at least 10 full-time jobs, has benefited many industries including real estate. In this article, we will describe the impact of the investor program on the real estate industry, which receives a significant amount of EB-5 funding.
EB-5 Financing has been a popular way for non U.S.-born individuals to obtain green cards for themselves and their immediate family. It brings a large number of individuals to pool funds together for a large-scale real estate project. These pooled investments are raised through real estate “regional centers,” which often also manage and develop the same CRE project for which they are raising funds. A few examples of Regional Centers include Invest LA, California Real Estate Regional Center, and Related Company’s EB-5 Regional Center.
Although commercial real estate is not the only way to acquire a visa through EB-5, many individual investors will resort to it since another party is typically responsible for the day-to-day management of the property. They also don’t have to be near the project, so they are able to live in another area or city if they wish. The developers also benefit because of favorable financing options, compared to traditional lending. The project will create many jobs, fulfilling the requirement of 10 full-time jobs per investor. In all stages of the project, from construction workers during the building stages to service staff when the project is complete, hundreds if not thousands of jobs will be created due to just one large-scale development, such as a hotel, resort or mixed-use property. Therefore, these types of projects are seen as a win-win-win situation since everyone involved in the real estate development, from EB-5 investors, real estate developers and workers/employees, benefit.
Examples of commercial real estate projects in Los Angeles County financed through EB-5 funding include the Waldorf Astoria Hotel currently under construction in Beverly Hills, Colorado at Lake mixed-use project in Pasadena, Marriott’s Courtyard and Residence Inn by the Staples Center, and the Hyatt House by the LAC+USC Medical Center .
Funding from EB-5 investors has been significant for CRE projects. For instance, $150 million in EB-5 financing was raised for the Beverly Hills Waldorf Astoria project and over $24 million in financing for the USC Hyatt development. There are investments outside of LA that have also been noteworthy. Developer Related Companies received $800 million of EB-5 financing for the massive, 28-acre Hudson Yards project in Midtown Manhattan.
Individuals who wish to invest the minimum of $500,000 can do so only in rural or highly unemployed areas, others who want to invest in urban centers and low unemployment areas must invest at least $1 million. Most opt to invest in the latter, so most of EB-5 funds have benefitted relatively prosperous areas of the country, such as Los Angeles, Las Vegas, Miami and New York City. There has been discussion of reforming the EB-5 program, however, in order to incentivize investors to target more disadvantaged areas.
It will be interesting to see what happens to the EB-5 program when it is up for renewal next April. Will the program simply be extended, again? Will some parts of the program be revised or will it see a complete overhaul? What will be the impact on CRE? President-elect Trump is a real estate developer so it is expected that EB-5 will thrive under his term in office, according to former NY Governor George Pataki. He mentions that the next president will “magnify the need for a program like this” and “understands the need for capital [&] investment.” While Trump may have some indirect influence in what happens, it will be up to the Republican controlled Congress to decide the fate of the visa program.
Hudson Yards image: Metropolitan Transportation Authority – Creative Commons License