Direct investment and the loan model
It is commonplace to hear that direct investment projects require an equity investment, while regional center sponsored projects may operate under the loan model. Investors typically shy away from equity investments, as those projects may not provide security against project failure, while developers shy away because they are looking for capital, not equity partners. Below are the typical business structures for both direct investment and regional center sponsored projects:
Table 1:
EB-5 Limited Partner Investors
( LPs)
Direct Investment Model
General Partner( GPs) LLC / Inc 1
Commercial Enterprise Limited Partnership 1
100 % Ownership Required
Loan With Promissory Note OR Equity Interest
Job Creating Enterprise LLC / Inc 1
EB-5 Limited Partner Investors
( LPs)
Regional Investment Model
General Partner( GPs) LLC / Inc 1
Commercial Enterprise Limited Partnership 1
Loan With Promissory Note OR Equity Interest
Job Creating Enterprise LLC / Inc 1
If these two structures look identical, it is because they are. In both charts, a new commercial enterprise( NCE) is formed for the purpose of accepting equity investments from potential EB-5 investors. Once the NCE is fully subscribed, it will make a loan to the job creating enterprise( JCE) or the project entity. In turn, the JCE will provide a promissory note back to the NCE, securing the funds. The only difference between the direct and regional center“ loan” model is that, for there to be a sufficient nexus between job creation and the EB-5 investor funds, the NCE must wholly own the JCE in the direct model. That is it; there is no catch, or any other hoops. Same model, same results. Well, there may be one catch: direct investment projects have a possible investment structure that regional centers are less likely to offer.
The regulations Direct investments Though regional center projects are more popular in the EB-5 space, and the belief stands that multi-investor structures are in their purview, there is no legal reason that direct structures cannot enjoy the same opportunities. The regulations governing pooled investments in non-regional center cases( direct investments) allow for direct investment projects to subscribe multiple investors. Specifically, direct investment funds“ may be deployed into a portfolio of wholly-owned businesses, so long as all capital is deployed through a single commercial enterprise and all jobs are created directly within that commercial enterprise or through the portfolio of businesses that received the EB-5 capital through that commercial enterprise”( see table 2). All investments must, of course, meet the requirements of the EB-5 program, but in plain English, the regulations state that( 1) direct investment projects can subscribe multiple EB-5 investors;( 2) direct projects can loan the EB-5 funds to several wholly owned project subsidiaries; and( 3) the required jobs can be created by the project subsidiaries. www. EB5Investors. com
Further extrapolating the regulations, a project developer can accept and place EB-5 investment from multiple investors into multiple job-creating wholly owned subsidiaries, as long as the job creation is pro rata to each investor, i. e. one investor to 10 jobs; two investors to 20 jobs; three investors to 30 jobs; etc.
“ The model does not have to be as simple as one investor to one finite project.”
Looking at the regulations, the direct investment model is much more flexible than it is typically thought to be, allowing for multiple EB-5 investments into a single project and for the spreading of capital over multiple businesses. The model does not have to be as simple as one investor to one finite project.
Regional centers
The regulations concerning the regional center model continue, and address the key difference between the direct and regional center models— job creation. The regional center definition is inclusive of the above, but goes further, eliminating the wholly owned subsidiary requirement, and allowing for indirect job creation as demonstrated by reasonable methodologies.
Tracing the myth
So what is the main difference between direct investment and regional center sponsored projects, and what has led to the myth? It is as simple as job creation. The recent economic downturn has created a difficult traditional lending market for large-scale construction projects. Hotel and mixed-use developers have seen their ability to raise low cost traditional financing disappear. This inability to develop has led to the rise of the EB-5 program. Where the banks have failed, foreign investors have prevailed.
“ Developers are able to raise large pools of low cost, low interest capital through the EB-5 program. The only issue: buying and developing land does not necessarily create jobs.”
Developers are able to raise large pools of low cost, low interest capital through the EB-5 program. The only issue: buying and developing land does not necessarily create jobs. Because regional center projects can count indirect jobs, they are typically able to accept more investors and comfortably attribute 10 jobs to each. It is for this reason that the regional center model has become so popular, and perhaps the reason why many see it as the only way to raise EB-5 capital through multiple investors.
Do the math; say a developer wants to build a mixed-use residential and retail building. Construction will last one year, and the cost will be $ 25 million. Dividing the total cost by the minimum required $ 500,000 investment means that 50 investors are required to fully fund the project. Each of those investors must then claim 10 jobs, meaning that the project must create at least 500 full-time payroll jobs. That is likely a non-starter,
as a traditional construction project is unlikely to create that
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