Is the Convergence of EB-5 Capital with Traditional Private Equity the

EB5 investment program

Sponsored by NES Financial

By Reid Thomas

Whether in the news or in real estate development circles, you’ve probably heard about the EB-5 program.

Also known as the “immigrant investor” program, EB-5 was launched in 1990 to encourage foreign investment into projects that stimulate U.S. job growth. Though the process gets rather complicated in the details, the basic premise is simple: A foreign national wishing to immigrate to the U.S. may make an investment in a new commercial enterprise —usually a commercial real estate development project. As long as they can demonstrate that their investment created at least 10 jobs, after a conditional residency period, they become eligible for a permanent green card.

Though relatively underutilized for almost two decades, since the 2008 financial crisis, developers have increasingly welcomed EB-5 funding into their capital stacks, in part because it is relatively low in cost—EB-5 petitioners tend to care primarily about securing a green card for themselves and their families, and less about a return on their investment. As the program has grown, EB-5’s success as an economic driver has been widely recognized, and use of EB-5 funding in major commercial real estate projects is now mainstream.

A traditional capital stack for a development utilizing EB-5 funds looks like the column on the left:

However, NES Financial project data from the last few years has revealed an interesting emerging trend. While the portion of the development capital stack comprising the senior bank loan has shrunk—presumably due to banks’ tightening of construction loan standards since the financial crisis (and particularly in light of the most recent Basel regulatory standards)—increasingly, we’re now seeing developers using private equity funding to make up the difference.

What are the advantages? In opening their projects to private equity funding, some developers are finding that their EB-5 investors are doubling down: their due diligence already satisfied during the EB-5 process, they’re looking to move additional wealth into the U.S. through a PE investment in the same project. In this way, developers are able to raise more capital from the very same EB-5 investors, without additional job-creation requirements.

With this influx of private equity, EB-5 development projects stand to benefit from the increased security, transparency, and institutional rigor to which the private equity market is already accustomed. But they will also need to be structured differently—to be built on new operational and compliance platforms, and to appeal to a class of investor that expects higher levels of servicing, reporting, and transparency.

Put simply: though developers will undoubtedly face new challenges as the market and the EB-5 program continue to evolve, they may gain a competitive edge if they get out early ahead of the trends.

If you have any questions about the EB-5 process, or if you’re interested in employing EB-5 and/or PE capital in your next development, please contact us. We look forward to hearing from you!

Reid Thomas is executive vice president as well as general manager of the EB-5 business unit at NES Financial, a Silicon Valley financial technology company offering escrow, immigration workflow, and fund administration solutions for the entire EB-5 program life cycle.

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