June 17, 2015
Gibson Dunn continues to monitor important developments in the EB-5 space as the September 30, 2015, deadline for reauthorization approaches. The EB-5 program allows for foreign investment in the United States in exchange for permanent resident status if, among other criteria, an investor invests at least $500,000 or $1,000,000 in a new commercial enterprise that produces at least 10 U.S. jobs attributable to such investor. In light of the looming sunset and growing concern about retrogression impacts (i.e., meeting and/or exceeding the quota for Chinese investor visas), attorneys, clients and other professionals in the EB-5 community have inquired about how the current market may be impacted by these uncertainties, and what program reforms can be expected in the fall. To date, we have been able to identify the hot-button topics Congress would likely revisit, but, with the introduction of proposed legislation last week, we now have visibility into the specific reforms under consideration.
Earlier this month, Senate Judiciary chair Chuck Grassley and ranking member Senator Patrick Leahy introduced bipartisan legislation (S.1501 American Job Creation and Investment Promotion Reform Act of 2015) proposing to reform and reauthorize the EB-5 program. The bill responds to, among other concerns, the recent and vocal critique of the program’s national security controls and the call to redirect funds to redevelopment areas. The proposed legislation is sweeping, and the complete text may be found HERE. Set forth below are key highlights and potential impacts for EB-5 investments in the real estate sector:
- The bill proposes to raise the minimum investment amount from $500,000 to $800,000 for targeted employment areas ("TEA’s") and from $1,000,000 to $1,200,000 for non-TEA’s. The bill also proposes automatic increases in these minimum amounts every 5 years to proportionately reflect CPI increases. Impact on investor demand here is somewhat uncertain, however, for those who have the means, the EB-5 visa may remain the most efficient immigration alternative and many migration agents believe this will have little to no effect.
- The bill amends the definition of a TEA — the designation that drops the current $1,000,000 investment threshold to $500,000 — to include an area consisting of a single census tract that has 150% of the national average unemployment rate, a closed military base or a rural area. The intent is to close the loophole that allowed for the historical stitching together of census tracts, and attempts to force investment dollars back to redevelopment areas. The effects could be hugely significant for real estate development in urban areas and, particularly, those located in CA, NY, and TX which are currently enjoying the greatest amount of EB-5 investment in the country according to the IIUSA Report (defined below).
- The bill would appear to untether the filing/approval of the I-829 petition from the receipt of the conditional visa, largely responding to retrogression concerns. Under the current regime, if the visa issuance is delayed, investors are unable to file their I829’s — and remain uncertain as to their immigration status — until the end of that indeterminately extended period. As proposed, investors can file their I829’s even if they haven’t entered the country, and can, theoretically, have conditions removed after 2 years plus processing time. Thus, investors have certainty that their residency in the U.S. will be on an unconditional basis when they finally enter, even if physical entry has been delayed. This would all but eliminate retrogression concerns which have created tensions in negotiating, among other provisions, fixed, 3-4 year loan terms and borrower prepayment rights in EB-5 loan documents.
- The bill includes several departures from current job count calculations. In particular, the bill would:
The bill would extend the program for an additional 5 year period, as per prior reauthorizations. Supporters would push for a permanent reauthorization to bring more stability to the program. Continued uncertainty around reauthorization will likely be disruptive.
The bill significantly increases DHS authority earlier in the process, often giving the Secretary "sole and unreviewable discretion" over matters very broadly pertaining to national security or if there is reason to believe that fraud or program abuse exists. It will be difficult for businesses to comply and to make major decisions in the absence of any standards or review procedures to safeguard against arbitrary decision making.
The bill leaves open questions as to the continuing availability of the Reg S exemption from securities and related broker-dealer laws for EB-5 offerings, by providing that for purposes of any action brought by the SEC, the purchase and sale of securities in EB-5 offerings is deemed to have taken place in the U.S.
The potential costs (registration, compliance, etc.) associated with elimination of Reg S, when coupled with additional costs of the proposed site visit, audit, investigation and enforcement rights of DHS, and the establishment of an EB-5 Integrity Fund into which regional centers would pay an annual fee, would presumably be passed along to investors and/or EB-5 borrowers, begging the question of the true cost of EB-5 capital.
The proposed legislation purports to expedite processing times notwithstanding the increased oversight and involvement of additional regulatory agencies, but it remains to be seen whether this can be achieved or whether processing delays can be expected.
- exclude jobs based on a tenant-occupancy model from the job count. This could have significant impacts for office/retail projects that cannot meet the job requirement without counting induced jobs projected to be created by tenants (less so for ground up office/retail projects where construction jobs are sufficient to meet the minimum job count plus 15% cushion).
- restore some component of the direct job creation requirement — at least 10% percent — even for regional center projects. The elimination of this requirement via the pilot program is largely responsible for the expansion of EB-5 into the real estate space in the first place, and it may be difficult to demonstrate this where the new commercial enterprise (the EB-5 mezz or senior borrower) is not in the business of maintaining employees and does not want (or cannot have) that liability.
- require that jobs created by non-EB capital not exceed 30% of all jobs created by the project, even where the non-EB capital represents more than 30% of the capital stack. This could also have significant impacts for r/e transactions, where the first lien position is most often held by a senior construction lender with EB-5 occupying the mezzanine space.
While representing a bipartisan effort, whether this specific proposal would pass in its current form is debatable, particularly given the disproportionately adverse impact the proposal would have on projects in urban areas. Clear opponents of the bill and/or amendment proponents have yet to emerge, although the political landscape is sure to shift (including a possible extension of the 9/30 deadline) as legislators have the opportunity to review and respond. For now, the potential impacts of S.1501 do not appear to have chilled investor demand; in fact, investors are flocking to EB-5 projects, and immigration lawyers are inundated with petitions and exemplars, as investors seek to subscribe to grandfathered projects before any changes take effect.
Likely to inform the continuing debate is the recently released Invest In The USA Report (the "IIUSA Report") regarding the economic effects and contribution of the EB-5 Program. Based on the most recent 2013 data, the report estimates that spending associated with EB-5 regional center investors contributed $3,580,000,000 to U.S. GDP and supported over 41,000 U.S. jobs in 2013. Construction of new commercial structures was identified as the most impacted sector, with general real estate included in the top 5 most impacted sectors, and EB-5 investment ranking by state identified CA and NY as the top 2 beneficiaries (with $438,000,000+ and $379,000,000+ of investment, respectively).
Overall, despite the uncertainty around reauthorization, the program continues to enjoy bipartisan support and, while the specifics of reauthorization are sure to affect how EB-5 is integrated, the strong consensus seems to be that EB-5 will continue to play a meaningful role in the real estate space.
Gibson Dunn will continue to monitor these important developments in the months ahead.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Real Estate practice group or the authors of this alert:
Danielle Katzir – Los Angeles (+1 213-229-7630, firstname.lastname@example.org)
Andrew A. Lance – New York (+1 212-351-3871, email@example.com)
Jesse Sharf – Los Angeles (+1 310-552-8512, firstname.lastname@example.org)
Please also feel free to contact the following practice group leaders and members:
Fred L. Pillon – San Francisco (+1 415-393-8241, email@example.com)
Alan Samson – London (+ 44 (0)20 7071 4222, firstname.lastname@example.org)
Eric M. Feuerstein – New York (+1 212-351-2323, email@example.com)
Drew C. Flowers – Los Angeles (+1 213-229-7885, firstname.lastname@example.org)
Erin L. Rothfuss – San Francisco (+1 415-393-8218, email@example.com)
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