Immigration Law Insights

The EB-5 immigrant visa investor program has been used as an alternative source of funding for many real estate developers. EB-5 investors have typically preferred real estate related projects, and EB-5 capital has been used to fund high-profile projects by major brand-name developers and chains because it is most often less expensive than other sources. EB-5 capital can be used as any typical source capital: equity, unsecured mezzanine debt, or secured, senior debt.

While differing in structure—both from an immigration and financial standpoint—the E-2 visa program can also serve as a useful vehicle to raise capital for potential ventures. Unlike the EB-5 program, the E-2 program is limited to nationals of specific countries. However, the speed with which foreign nationals can obtain an E-2 visa may make it preferable to some foreign investors.

What is EB-5?

Congress created the EB-5 immigrant visa category to stimulate investment in rural and high-unemployment areas. The EB-5 program generally provides that a foreign national may obtain a visa if he or she makes an investment of $1,050,000 and the investment creates full-time employment for at least 10 U.S. workers. If the investment is made in a “targeted employment area” (TEA), a reduced investment of $800,000 can be made so long as the investment still creates full-time employment for 10 U.S. workers, at minimum. Foreign nationals receive conditional two-year permanent residency from the U.S. Citizenship and Immigration Services (USCIS) after initial approval. Before the end of the two-year period, the EB-5 investor must file an application for removal of the conditions to receive a permanent green card, by showing that the conditions under which the EB-5 investment have been met - namely, that at least 10 jobs have been created.

Most EB-5 investors invest in entities (partnerships or LLCs) created by a “regional center,” and then such entities will either make a loan to, or make equity investments in, a job-creating entity that is controlled by a developer for a real estate or other construction project. A “regional center” is simply an entity that has applied for, and received, a designation as such by the USCIS. Although a regional center is not required for EB-5 investments, using a regional center entity means that you can count indirect and induced jobs, and not just direct jobs. Indirect and induced jobs include, for example, employees of the tenants in a commercial building, and other employees who provide goods and services to such building. EB-5 economists use economic models to predict the total number of direct, indirect and induced full-time jobs.

What is the E-2 Investor Program and How it Differs from EB-5?

The E-2 program generally allows a national of certain treaty countries to temporarily live in the United States if they invest a qualifying amount of capital in a U.S. business and meet other requirements. Unlike EB-5, the E-2 program has an equity component. Specifically, the entity in which the investment is made must have the same “nationality” as the foreign national investor. A company’s “nationality” is determined by the nationality of a majority of its ultimate individual owners. In order to qualify for an E-2, the company in which the investment is made must therefore be at least 50% owned by foreign nationals from the same treaty country. There are currently more than 80 E-2 treaty countries, although China and India are not included.

Similar to an EB-5, a large portion of E-2 eligibility focuses on marginality of the U.S. business. The U.S. business should generally have the ability to create jobs for U.S. workers, and should not exist solely for the purpose of providing a living for the foreign investor.

Unlike the EB-5, the E-2 does not provide legal permanent resident status. However, some foreign investors might see the E-2 as preferable because it is quicker to obtain and still results in a five-year visa that is renewable indefinitely. Additionally, there is no minimum investment threshold for the E-2 program, as long as the investment is substantial enough to reasonably ensure a successful enterprise.

How Can Developers Attract EB-5/E-2 Funds?

Since the purpose of the EB-5 program is to create jobs, investors will be most interested in the budget and timeline in order to determine whether the project is in a TEA and is economically feasible. To receive USCIS approval of a project, it is critical for a developer to provide a detailed construction budget and timeline showing the costs and timeline are reasonable and support the number of newly-created jobs required based on the amount of EB-5 funds needed for a project.

Unless a construction project lasts for more than two years, construction jobs will not be counted, and instead, jobs will be counted based on expenditure on construction costs. An economist will require that the budget is broken down into hard and soft costs since some costs will not go towards the job count - for example, permitting fees, taxes and insurance are not considered to stimulate the local economy. Generally, the only soft costs that will get counted towards job creation with be architectural, engineering and site testing costs. The economic models also take into account the specific region where the project is located, since some regions create more economic activity per expenditure. Most regional centers usually require a buffer of 20% to 30% more jobs than required.

Given the similarity between the programs, E-2 investors are likely to have similar concerns. Given the equity component of an E-2 visa, investors are also more likely to be interested in their potential business partners and long term business plans.

Developers can make their projects attractive to these alternative sources of investors by ensuring the required job creation, and should seek guidance from experts who can help them understand the developer’s role and importance in creating EB-5 and E-2 friendly projects.