Major changes are in store for the wildly popular visa-funding program
June 01, 2015
By E.B. Solomont http://therealdeal.com/issues_articles/shaking-up-eb-5/
EB-5签证提供美国绿卡甚至永久公民身份给外国投资者以换取对美国经济的投资。在纽约，开发商利用该渠道获得的资金来资助了一系列高关注的项目如Hudson Yards redevelopment 和 701 Seventh Avenue。然而EB-5所提供的“廉价”又似乎用之不竭的资本即将面临重大转折。来自Paul Hastings的房地产与结构性金融部门的Joel Rothstein律师说：“我们有过与中国投资相关联的爆发增长期，现在在某些方面上我们面临泡沫爆炸。”
5月1号，联邦政府对来中国的EB-5投资者实施加了等待名单限制。长远上这个等待名单会损害投资者的利益，短期内的影响将会增加开发商在贷款期限上的风险。美国移民基金的CEO Nick Mastroianni II认为中国经济的放缓和政府对腐败的打击都会影响到EB-5。与此同时，该项目的更新还在国会受理当中，这迫使开发商要从EB-5项目中榨取尽可能多的资金，因为没人知道该项目在秋季将被如何修改。特别的是，国会将改变其中关于在何处修建项目的规则。目前的规则限定受EB-5资本支持的开发商必须将项目建在高失业率的地区。在纽约市，开发商已经通过合并统计地区来将项目建在富有的地段。
虽然EB-5的未来还不确定，但是来开发商和投资者的需求都没有减少。其中的原因是EB-5资金的利息远远低于传统银行。来自金融服务公司Greystone的总经理Justin Gardinier说尽管资本充裕，但是还是有充足的市场给EB-5的资金。虽然一个开发商可以获得建设贷款和无追索权融资，这也只覆盖到项目65%~70%的总资金需求。剩下的部分则利息更高或者需要提供追索权，这也是EB-5资金大显身手的地方。EB-5资金仅仅被用来提高整体的投资回报。Steve Polivy，法律事务所Akerman的经济发展与刺激业务主席，说目前的EB-5市场倾向于大型项目或者难以通过常规渠道获取资金的项目。
传统上，投资者的资金会被交由第三方保管，在EB-5申请通过后就会被释放。现在，有些贷款有“提前释放”条例，这意味着开发商可以在投资者的申请被通过前就获得资金。但是提前获得资金会把双方都置于风险当中。开发商需要保证这笔钱一定可以奉还。政府可以拒绝一个投资者的申请，比如因为无法提供资金合法性的证明。如果这种情况一旦发生，开发商就必须返还这笔钱，并且面临11个月的资金短缺。而银行则从不会因为情况的改变而要求借款人退换贷款。Peebles Corporation 的首席投资官和Peebles Capital Partners的董事长兼首席运营官–Tawan Davis认为尽管EB-5集资在信誉缩紧期间是很吸引人的选择，但是不再经济上诱人了。他说Peebles在全国范围内有价值35亿美元的正在进行的开发项目，在过去3年里考虑了用EB-5为多个项目融资，但是每次都拒绝了。尤其是在过去的一年，Davis说他看到EB-5的利息和费用一直在增长。此外，传统的出借人在经济衰退期间不会覆盖到项目总资金的50%以上，而现在则愿意覆盖到60%到70%，大部分EB-5出借人不会更高。如果将增长的手续费和利息加在一起，Eb-5资金的成本就会和传统银行贷款差不多了。事实上，传统贷款在很多时候都更合算，而且可以在执行开发计划时有更高的确定性。
During the dark days of the credit crisis, New York developers discovered something of a silver bullet in a little-known U.S. immigration program.
Now wildly popular and well-publicized, the EB-5 program offers a green card and potential citizenship to foreign investors in exchange for economic investment in the U.S.
In New York, developers have used the program to finance high-profile projects like the Hudson Yards redevelopment and 701 Seventh Avenue, where developer Steve Witkoff and others are building a 39-story, mixed-used tower to be anchored by Ian Schrager’s Marriott Edition hotel.
But after reeling in developers with the promise of cheap — and seemingly endless — capital, sources said the EB-5 visa program is now at a crossroads.
“We had this boom period, and that corresponded with the rise of Chinese investment,” said attorney Joel Rothstein, a partner in Paul Hastings’ real estate and structured finance department. “Now, we’ve reached the balloon-bursting point in some respects.”
Last year, for the first time since its inception in the 1990s, the EB-5 program allocated 10,000 visas, the maximum allowed. And interest is only rising: Investors filed 10,928 EB-5 applications with the U.S. government in fiscal year 2014, up from 6,346 a year prior and just 1,258 in 2008.
While numbers are hard to come by, more than $3.7 billion in EB-5 money has flowed into several dozen New York City projects over the past several years, according to an analysis by The Real Deal, using publicly available information as well as data compiled for an academic paper by a New York University professor.
Ironically, unprecedented demand for EB-5, particularly among Chinese investors seeking U.S. citizenship, has saddled the process with delays and increased competition to attract investors, which has turned some developers off to the program (see related story on page 56).
But on May 1, the federal government imposed a waiting list for EB-5 investors from China seeking green cards.
While the waiting list could dampen investor interest in the long term, the immediate impact has been loan terms that some say are riskier for developers.
On top of that, China’s economic slowdown and the government’s crackdown on corruption could “absolutely” impact investment in EB-5, said Nick Mastroianni II, CEO of the U.S. Immigration Fund, a Miami-based regional center that specializes in EB-5 fundraising and has worked with major New York developers.
“The government has changed its philosophy a few times over the last five, six years and every time they do it effects the market,” he said during a panel discussion at TRD’s New Development Showcase & Forum last month.
Meanwhile, the program is up for Congressional renewal in September, placing more pressure on developers to squeeze as much funding as possible out of EB-5 now, since no one knows if, or how, the program will be modified in the fall.
In particular, Congress could change the rules pertaining to where projects may be built. Current rules say developments supported by EB-5 capital must be in areas with high unemployment. In New York City, developers have worked around that and managed to build in wealthy areas by cobbling together census tracts. But that practice could be curtailed.
“The reality is, as we get closer to August and September, the fundraising will kind of trickle down,” said Mark Edelstein, chair of the real estate finance practice at the law firm Morrison Foerster. “If you’re starting now with a new deal, it’s dicey,” he said. “We’ve been telling clients, ‘If you can’t get into the market by July 1, just wait.’”
No panacea, but close
To date, the Related Companies has been one of the biggest beneficiaries of EB-5 in New York and nationally. The company has raised more than $800 million from approximately 1,600 investors and controls one-third of the EB-5 market nationwide.
Related raised a record $600 million for its Hudson Yards project alone: That translates roughly to 1,200 investors chipping in $500,000 each (the minimum amount required by each investor). It’s unclear exactly how many jobs will ultimately be created, but the EB-5 program requires each investor to create 10 permanent jobs.
Related continues to be bullish on EB-5’s future.
“We find this program to be a tremendous program for the U.S., in terms of job creation and in terms of allowing investments to proceed at a pace that they wouldn’t otherwise be able to,” said CEO Jeff Blau during a forum in April hosted by the China General Chamber of Commerce at business news and data firm Bloomberg headquarters. But speaking alongside Blau at the event, Extell Development’s Gary Barnett — who raised $75 million in 2011 for the International Gem Tower, a commercial condo at 50 West 47th Street — offered a more tepid assessment of the program.
“It’s not quite as simple as it seems,” he said. Investors’ “primary focus is to be able to get legal residency in the U.S., but they absolutely want to get paid back … I’m concerned that there will be some stories where people don’t get paid back.”
While Barnett didn’t elaborate on why, investors could easily lose their cash if the market turns or if a development falls through.
Generally speaking, EB-5 loans have five-year terms, since it takes that long for investors to wend their way through the immigration process. Also, depending on the project’s capital stack, the developer may need to pay the senior lender first.
Investors are only paid after their permanent green card is approved, said EB-5 attorney Kate Kalmykov of Greenberg Traurig. “But,” she added, “the law specifies that the amount of repayment cannot be guaranteed.”
Uncertain capital for cheap
A small program at first, EB-5 investment took off in 2009 when other lenders pulled back amid the financial downturn.
At this point, the program has gained so much popularity that some say it’s becoming a victim of its own success.
There are now more investors who want to get in on the action than there are opportunities, creating aggressive competition and frustration. Many have rushed to file paperwork for their visas, since green cards are processed on a first-come, first-served basis.
As a funding vehicle, EB-5 has always been a double-edged sword. On the one hand, developers pay much lower interest rates than they would on a conventional loan. On the other, raising money can be arduous and riddled with bureaucracy, uncertainty and expenses like paying immigration agents and so-called regional centers, which spearhead fundraising operations.
Some big developers have created their own regional centers to funnel investments to their projects. Others use designated regional centers to raise money. In recent years, such centers have become a booming cottage industry.
Yet, noted Morrison Foerster’s Edelstein, “There is no regional center that will guarantee how successful the raise is.” He added: “There are all sorts of stories about [trying to] raise $80 million and only being able to raise $50 million.”
Even the terms of EB-5 loans , five years or more, can turn out to be a positive or a negative, depending on how the cards fall in the market and on a project’s construction schedule.
Asaf Shuster, vice president of business development for Victor Group, said most developers don’t need the loan for five years. “You need it for two and a half, maybe three,” said Shuster.
On the flip side, he pointed out, the five-year term can be a safety net for a developer whose project is delayed, since they’re locked into low interest rates.
Shuster’s firm has raised $22 million from EB-5 investors for the Charles, a condo building on First Avenue at 73rd Street, where a unit is now in contract for $37.9 million. (The developer also obtained a $157 million construction loan.) The Victor Group is now raising $90 million for a condominium project at 281 Fifth Avenue.
EB-5 in overdrive
Despite EB-5’s uncertain future, demand from both investors and developers has not slowed. The reason? While capital is readily available, especially to New York developers, EB-5 money is far cheaper than what traditional banks offer.
Sources said that for large-scale construction projects in New York, developers might pay 10 to 15 percent interest on a mezzanine loan — the layer of capital between the senior debt and developers’ equity — but only 6 to 8 percent on an EB-5 loan.
Justin Gardinier, a managing director at the financial services firm Greystone, said that despite the availability of capital, there’s ample room for EB-5 in the market. Even if a developer obtains a construction loan, non-recourse financing — in which the loan is secured by collateral but the borrower is not personally liable — typically tops out at 65 to 70 percent of a project’s capital stack, he said.
“Any higher than that, you’re stepping into a higher rate or you’re providing some level of recourse,” he said.
That’s where EB-5 comes into play, said Gardinier, who joined Greystone in February to build up the firm’s EB-5 business. He said developers are using EB-5 dollars to offset the equity they otherwise would need to chip in to cover the balance of the construction costs.
“EB-5 is used to simply enhance the overall returns to the developer and reduce exposure,” he said. Theoretically, a developer who needs to put in 35 percent equity could tap EB-5 to lessen their loan and still retain ownership of the whole project, he said.
Steve Polivy, chair of the economic development and incentives practice at the law firm Akerman, said the current EB-5 market favors large projects, as well as projects that, for one reason or another, have difficulty attracting a conventional loan.
“The [New York] Wheel was financed with EB-5 funding because no one knows how to analyze that project for conventional bank
financing,” said Polivy, whose firm represented Plaza Capital in the Staten Island project’s fundraising. Empire Outlets, the neighborhood’s mall, “was financed with EB-5 because at the time we were looking to start construction, we didn’t have all of the leasing commitments a conventional lender would be looking to see.”
The biggest issue developers have is just how long the process can take. And in recent months, it’s taken even longer than usual for developers to get their hands on funds because of the logjam of applications and concerns about potential changes to the law.
The delays have altered the way loans are structured.
Typically, investor funds have been placed in escrow as a safeguard to both the developer and investor, and released once the EB-5 application was approved. Now, some loans have “early release” provisions, meaning the developer can access the capital before the investor’s application is approved.
“It’s one thing for the money to sit in escrow for six months. It’s another if it’s sitting in escrow not doing anything for 18 months,” said Julia Park, managing director of the Manhattan-based Advantage America New York Regional Center, explaining the reason for early release.
But removing the money exposes both sides to risk. “Developers may have access to the money earlier, but they have to provide assurances that the money can be refunded,” Paul Hastings’ Rothstein said.
For example, the government could reject an investor’s application — some investors are rejected if they cannot document a lawful source of the funds. If that happens, the developer must return the money, and may face an 11th-hour funding shortfall.
“The bank never calls and says, ‘Our source of funds for the money was an investor and the investor had a change in circumstances and you need to give the money back,’” said Polivy.
Tawan Davis, chief investment officer of the Peebles Corporation and president and COO of Peebles Capital Partners, argued that although EB-5 financing was attractive during the credit crunch, it’s no longer economically compelling. “It’s not free money,” said Davis.
He said Peebles, which has $3.5 billion worth of active developments nationally, considered EB-5 financing for all of its projects over the past three years — rejecting it every time.
In the past year in particular, Davis said he’s seen EB-5 interest rates and fees creep up. Plus, he said, traditional lenders who wouldn’t cover more than 50 percent of a project’s cost during the recession are now willing to cover up to 60 percent or 70 percent. Most EB-5 lenders won’t go higher.
“If you add in the fees and you add that to the interest rate, the cost of capital for an EB-5 loan becomes more or less the same as a more traditional bank loan,” he said. “It’s actually more economical many times, and we have a better certainty of executing [development plans] with traditional financing.”
To that end, Davis said EB-5 doesn’t have the certainty of traditional institutional lenders.
“I can’t show up to the groundbreaking without the certainty that on a $400 million project, my debt financing is in place,” he said. For a project of that size, he said you’re talking about several hundred investors. “Many times, it’s just too big of an ask,” he said.
The EB-5 community expects changes to the program in September, when EB-5 comes up for renewal. For example, some believe the minimum investment of $500,000 could be raised to $800,000.
Lily Guo, president of the Flushing-based American Regional Center for Entrepreneurs, predicted that delays and heightened competition would inflate costs for developers in the long-term. Approved in 2013, the American Regional Center has worked on lining up investors for six projects to date, including the Oosten in Williamsburg.
With hundreds of regional centers to choose from, Guo said investors may start shopping around for more competitive returns.
Typically, EB-5 investors receive 0.5 percent interest on their investment, according to attorney Gary Friedland, who co-authored a paper on EB-5 financing with a New York University professor.
Greenberg Traurig’s Kalmykov said she’s seeing deals get done with higher interest rates, a function of a more sophisticated market.
“It has become a cottage industry,” she said, “where brokers take significant fees for raising funds.”
But Guo said she is seeing investors hungry for more. “We have seen investors saying, ‘It’s not worth it. I’m not happy with the return just for a green card.’”