Be Cautious With EB-5 Projects That Don’t Mind USCIS’ New 2-Year Investment Period

Siren Chen
Shenzhen

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Earlier this month, the United States Citizenship and Immigration Services (USCIS) issued new guidance stating that the minimum requirement for clients to maintain their investment for two years is sufficient, overriding the consistent investment cycle of a minimum of five years plus one-to-two-year extensions.

The guidance sent shockwaves through the EB-5 industry, for which it represents a huge challenge. It now seems that whoever can respond quickly to the launch of short-cycle projects, which also need to be secure, will have an advantage in the EB-5 market in the future.

From a business perspective, it is practically impossible to complete the construction of an EB-5 project in a two-year cycle and operate it until there is sufficient capital accumulation to guarantee the safe withdrawal of EB-5 investors’ funds, especially for the simpler and safer real estate projects with which EB-5 investors are familiar. It’s difficult to simply shorten the investment period because it takes about two years just to complete the project.

It is essential to understand that the USCIS guidance refers to a two-year investment period that begins when the EB-5 investor’s funds enter a New Commercial Entity (NCE). On a practical level, the funds must enter a Job-Creating Entity (JCE) to be counted as part of the start cycle.

Keep also in mind that the primary purpose of a client choosing the EB-5 program is not to profit from a business investment but to achieve the goal of immigrating to the United States. To successfully obtain a US green card, the EB-5 project must ensure that the legally required employment is completed during the investment period. The calculation of employment generally comes from the construction cycle. 

From greenfield to completion, it is reasonable to expect a real estate project to take at least two years to build. Completing a project involves, first, acquiring the land, designing it, and applying for various permits, and later starting construction: Grading, building the foundation, building vertically, and finalizing the building. After completion, a certain period of operation is required to ensure that the project is profitable and that the EB-5 funds can be safely withdrawn, which also requires a minimum of three to four years.

Take this real-world example of one particular under-construction and already-sold-out project we’re working with: It will consist of 125 single-family estate lots, 303 townhouse-style village residences, an 18-hole championship golf course, a golf training center, a clubhouse, a lake house, backcountry access for outdoor activities, stocked fishing pond, and many other four-hole golf courses. Do you think you can build this in two years?

The overall construction period for this particular project spans seven years, from land construction in 2020 to anticipated completion in 2027.

And some of the projects that have the best track records of getting US green cards for investors take even longer.

From a financial perspective, if a developer borrows money from EB-5 investors to complete the project development, with a borrowing cycle of only two years, this should properly be considered merely a bridge loan. If this is the case, there is no need for the developer to use EB-5 funds; he can go directly to a financial institution for a short-term loan. The actual availability of EB-5 funds will take at least four to five months from the design and drafting of the legal documents, plus at least half a year more to raise funds and go through the tedious process of explaining their source, etc. 

By the time the funds are available, a year or two may already have passed.

The kind of EB-5 project that is fine with short-term financing

In fact, a developer willing to engage with EB-5 lenders on this two-year basis could itself be a red flag: If the developer uses EB-5 funds in a way that does not result in convenience and profitability, it raises the suspicion of ulterior intentions since he may be aiming at the EB-5 investor’s principal (rather than short-term loans) from the outset.

This is why, in past projects, as we are now seeing more often, EB-5 funds come in to replace short-term bridge loans. It is reasonable for long-term stable loans to replace short-term high-interest loans. 

However, under the new guidance of the USCIS, what is the point of using one short-term loan (from EB-5 investors) to replace another short-term loan? There is absolutely no need for developers to use EB-5 funds. That’s also why it’s so hard to find a project that can respond immediately with a shortened investment cycle.

What we can see in the market now is that there are some oil and trucking businesses, which are light operations, setting a precedent by saying that they have shortened the investment cycle. We’re not going to comment on whether it makes sense for them to do so.

Let’s go back to the EB-5 investor’s point of view. They’re looking for more than just a shorter investment cycle and a shorter period for their capital to be tied up. What they are really looking for is the safe return of their US$800,000 principal.

In my opinion, is digging for oil that simple? Are four trucks enough to pay back your whole $800,000 after two years? I cannot expose my clients to that risk, so, in our case, we decided to go with the more traditional hotel industry. 

Although USCIS seems to have launched good news for investors, the fact is that it is not enough to judge the risk of the project only from the perspective of the investment period.

We should keep our heads up and always adhere to the two main criteria of “Green Card Security + Capital Security” in selecting US EB-5 projects.

Certainly, by the first quarter of next year, we may see some good projects with a shortened investment period of 3+1+1 or 4+1. Right now, however, among the projects that will quickly respond to USCIS’s guidance of a two-year investment period, it is still necessary for investors to choose with caution. 

IMI Pros who can help with EB-5