New EB-5 regulations will usher in minimum price increases, which will go into effect in November. The two primary types of investment will see a significant increase in minimum investment amounts.
Beginning in November, a TEA-related project will require a minimum of $900,000, up from $500,000 previously. Non-TEA project minimums will also increase from $1 million to $1.8 million.
This nearly doubling of the minimum investment amounts starting next month has EB-5 investors rushing to get registered before these new rules take effect. Construction firms across the country are reporting an increase in calls from prospective investors looking to tap into the EB-5 program as quickly as possible.
Although the program has gotten a new spark with the rush of investors trying to beat the guideline changes, experts believe that EB-5 could soon level out once the new investment minimums (among other rules) kick in.
As the minimum investment requirement rises to nearly one million dollars in targeted employment areas and $1.8 million in all other regions, the prevailing thought is that the pool of eligible investors will shrink. The program changes also restrict developers from the practice of inserting a small piece of property in a targeted employment area into an overall project in a wealthier neighborhood to capitalize on the lower minimums.
The new minimums are adjusted for inflation. This is the first time they have been raised in more than 30 years – since the program’s inception in 1990.
Industry experts contend that the new rules will make it more difficult to raise financing for certain projects, and that concerned developers are already reaching out to prospective EB-5 investors looking to get in before the changes go into effect.
The new regulations also affect the demographics of specific projects already underway, as targeted employment areas are now mapped and approved by the Treasury Department rather than state governors. Experts are also concerned that these new requirements will translate into less business for regional centers, which act as intermediaries between developers and EB-5 applicants. Some industry stakeholders believe more than half the regional centers will close their doors.
Steve Yale-Loehr, a Cornell Law School Professor who is an expert on immigration, says that most of the existing EB-5 investments across the country are at the $500,000 level. He claims that after the new rules go into effect, fewer than half of the projects will be allowed at that threshold.
Other experts are worried that some states will lose half of their targeted employment area designations due to the rule change. The thought behind the rule change from legislators and regulators was that state governors were using a loophole in the program guidelines to direct EB-5 investment into wealthier neighborhoods, thereby negating the intended benefit of the program.
Changing Investor Demographics
When most developers consider tapping into the EB-5 investor base, they think of Chinese nationals. That assumption has mostly been the case, as, over recent years, nearly 80 percent of all EB-5 visas went to Chinese investors. However, as a backlog of applicants overwhelmed the system, the average wait time for Chinese investors rose to 16 years. In 2018, the number of EB-5 visas issued to Chinese immigrants fell by 3,000 from a year earlier.
The long backlog and restrictions on moving money by the Chinese government have slowed Chinese demand, and Latin America is filling the void. In 2018, the Department of State issued 730 EB-5 visas to investors from South America, with Brazil taking up about 8 percent of those visas.
This new Latin America interest will drive investment moving forward into the next decade, provided Congress renews the program. However, not as desperate for an American visa as their Chinese counterparts, Latin American investors want a higher return in addition to the green card benefits they will receive.
Once changes take effect, experts believe that the program will shift more toward funding smaller projects such as restaurants and small hotels, rather than the multi-billion dollar real estate developments of the past. The majority of that Latin investment is expected to pour into projects in South Florida.
In the past, the interest rates on EB-5 loans have been generally much lower than other forms of commercial financing since the priority of most investors has been obtaining a U.S. visa. Developers who have enjoyed those low rates for the past several years (some as little as a quarter percent) are worried the new increased minimums will prompt investors to ask for higher returns. Moreover, recent high-profile stories of fraud and abuse will prompt more investors to seek some type of guarantee on the return of their principal.
The new rules could prompt investors to seek a priority equity position within the project instead of a debt position, which would offer significantly higher returns upon the project’s completion. Current projects are offering investors interest of less than 1 percent, and this new group of savvy investors from Latin America are not going to invest in a project over $1 million with that small of a return, regardless of any desire they have to obtain a permanent U.S. visa.