Originally published spring 2021 Regional Center Business Journal
by Mona Shah, Partner, Mona Shah & Associates Global & Christina Dilbone, Attorney, Mona Shah & Associates Global
The dominance of large real estate projects in EB-5 investment financing began as a result of the 2008 Great Recession in the United States. The years 2008 and 2009 were historically catastrophic years for real estate development in general, and for hotel development in particular. Obtaining financing from conventional lenders became increasingly difficult, construction loans notably being the first victims. On January 16, 2009, USCIS released a policy memorandum that would facilitate the infusion of EB-5 funding into the real estate industry through the counting of indirect and induced jobs created through construction. The result was to provide alternative financing for real estate developers that could be structured as short-term, low-interest, and sometimes unsecured or membership interest only secured, loans. During this period, EB-5 investors came to the rescue of many troubled hotel and real estate developments. Following the recovery of the market, real estate developers continued to seek low-interest EB-5 financing, most often used in place of mezzanine capital, saving themselves millions of dollars. The collateral value of a tangible asset ensured that EB-5 investors would continue preferring real estate projects over alternate industries, with hotels, condominiums and hospitality leading the way.
Fast forward twelve years, though real estate projects continue to dominate the EB-5 industry, there has been a divergence that may be explained by a variety of factors, including the increase in the minimum investment amount, a swing in the cultural origins of investors and a global pandemic that wrought havoc to the hospitality industry. These factors have led to a noticeable increase in the shift towards more entrepreneurial projects in non-real estate industries and may continue to do so as we enter yet another era of EB-5.
Factor One: Sufficient Startup Capital
Prior to the 2019 EB-5 Modernization Regulations, the minimum capital investment of $500,000, encouraged investors to file with a pooled regional center project rather than their own entrepreneurial project, which likely would require additional investment to achieve viability. The initial investment in a new operating business is often the venture’s “startup capital,” which is used to pay for the required expenses to start the new EB-5 business, including paying for initial hires, obtaining office space, permits, licenses, inventory, research and market testing, product manufacturing, marketing, or any other expense. Depending on the project, these costs can be quite substantial and $500,000 is often insufficient to support the initial stages of the business, requiring an additional injection of capital that may be unavailable to the average EB-5 investor. Thus, even for entrepreneurs, investing into a pooled development project made financial and practical sense at the $500,000 investment level. However, with the introduction of the EB-5 Modernization Regulations, a single investment of $900,000 could be enough startup capital to launch a credible operating business venture, allowing entrepreneurial investors to pursue their own, or their family’s or friend’s, new operating business with their EB-5 investment…Continue Reading