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EB-5 Marketplace Measurement – China and Beyond

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

I just returned from a week in China. Along with speaking at the EB-5 Investors Magazine’s 2017 EB-5 & Investment Immigration Expo, I had the opportunity to visit with many migration agents, as well as other professionals in the EB-5 industry. My impressions of the marketplace, particularly China, are as follows:

1. Many large agents are still on the sidelines waiting for new legislation to pass in order to have more certainty as to proceeding with the EB-5 Program. These agents may still be involved in meeting funding obligations on projects in process, but they are not necessarily undertaking new projects.

2. Agents are very selective in the project choice, and it is clear that the quality of the projects available in the marketplace has elevated substantially over the past few years, thus increasing the competition to gain marketing agent support to undertake a project.

3. Individual agents seem to have their own criteria as to what type of projects they will underwrite. The following factors seem to be most important:

  1. Project Location. There is clearly a preference for certain major metropolitan areas such as New York, Los Angeles, and San Francisco and, to a lesser degree, Seattle, Dallas, Houston, Miami, Chicago, Philadelphia and Boston.
  2. The nature of the project is still relevant. There seems to be a very strong preference for multi-family developments, more in the rental framework since condominium projects have timing issues as to repayment and a market perception of uncertainty. Multi-family projects during the last recession seemed to maintain market value better than other asset classes.
  3. Continuous focus on background of the Developer and equity contribution of Developer, although agents seem to be satisfied with the 20% capital contribution.
  4. EB-5 capital accounting for no more than 30% to 35% of the total capital stack.
  5. Having the senior loan in place is an advantage, since it validates underwriting criteria satisfied by the senior lender.
  6. Capital stack can be funded independent of EB-5 funding.

4. Many agents will not undertake a project until it is under pre-development or development activities – in order to be sure that the project will be completed.

5. The most successful projects are the ones that probably do not need EB-5 capital. Since the capital stack is completed, and no matter how much EB-5 funds are raised, the project will proceed accordingly. That again is the advantage for projects that are already under development.

6. A common model includes today, since to be the Developer obtaining bridge mezzanine financing that is taken out by EB-5 capital in order to avoid a delay in the commencement of the development. In this manner, it is very simple to substitute debt for debt, and since the bridge funding is of a short term nature, the job creation component should still be applicable with respect to the entire project.

7. The market is becoming more sensitized to the concept of redeployment, given the time table for final I-829 adjudication for Chinese nationals. Accordingly, agents are becoming much more familiar with redeployment options and are learning to adjust to that situation. I believe it is somewhat of a windfall for agents since they continue to receive compensation after the initial five year loan term – based upon the fact that loans are being extended for up to eight years in total and/or funds are being redeployed into another project developed by the same Developer or another Developer.

8. The biggest immigration issue in the market place is retrogression and the need for increase in the visa cap. Many agents say that the dollar amount of the investment is not the major issue as long as there is not a significant difference between the TEA amount and a non-TEA amount. Rather, the retrogression is estimated to be up to nine to ten years, and many Chinese investors just do not want to wait that long to gain access to U.S. residency.

9. Agents are clearly pursuing other jurisdictions, such as Portugal, Greece, Ireland and certain countries that, in effect, enable an applicant to obtain residency and citizenship status very quickly (e.g., Malta and Grenada). In some of these jurisdictions, it is the back door into the European Union which is somewhat advantageous. Clearly, Chinese nationals are looking at other options, since the U.S. market, although favored, is arduous to undertake at this time.

10. There may be another concern about the Chinese investor transfer of funds and the increase currency restrictions scheduled to take place on July 1st, 2017.

All and all, one can see that there are continuous complications in the EB-5 Program that are reducing the marketing potential of all projects. I will continue to update you on the EB-5 Program – the complications, challenges, changes, and beyond