Why Behring Does Not Offer Direct EB-5 Investments
Since the EB-5 regional center program lapsed on June 30, 2021, many EB-5 investors, attracted by Behring’s reputation as an innovative leader in the EB-5 industry, have inquired if Behring offers direct EB-5 investments. We do not for several reasons. Fundamentally, we view that direct EB-5 investments have both immigration and commercial risks that are substantially higher than an EB-5 investment through a qualified regional center. For example, direct EB-5 investments lack many of the valuable protections and guarantees we target for our regional center-sponsored projects.
What is a Direct EB-5 Investment?
The EB-5 program offers two approaches for EB-5 investors to qualify for a U.S. green card: direct and indirect (i.e., through a regional center-sponsored project). A direct EB-5 investment typically entails investing directly into the job-creating entity. In contrast, when investing in a regional center project, the investor invests in a new commercial enterprise that makes a loan to the project that creates the full-time jobs.
Historically, only 6.6% of all EB-5 petitions filed with USCIS are direct EB-5 investments.
Indirect Jobs Are Much Easier to Create Than Direct Jobs
One of the key differences between direct and regional center EB-5 investments is how the job creation requirement is satisfied. Both approaches must create a minimum of 10 full-time jobs per EB-5 investor. Regional centers can count more jobs: direct, indirect and induced jobs. Direct EB-5 may only count direct jobs.
To prove job creation, regional centers use an economic model using the construction budget as input. For real estate projects, job creation is created through the general contractor, subcontractor, suppliers, logistics, etc. instead of directly within the NCE. Induced jobs are new jobs created by the increased spending of workers involved in the EB-5 project in the community. Jobs created through a regional center project do not have a 2-year requirement, but the longer the construction timeline, the higher the job creation multiple used to estimate the number of full-time jobs created. Large construction budgets can generate thousands of jobs which provides a buffer for EB-5 applicants. Construction jobs from residential developments are highly reliable and simple to calculate based on models approved by USCIS. See our 1900 Broadway project to learn more.
Moreover, because of this increased flexibility on indirect job creation, regional centers are essentially able to bank jobs for future EB-5 investors, whereas direct EB-5 projects should create direct full-time jobs during the EB-5 investor’s sustainment period, which processing times and potential backlogs (retrogression) can extend that further and further away making it substantially harder to satisfy and maintain the job creation requirement. Learn more about regional center job creation here. Watch a video.
On the other hand, direct EB-5 investments allow only direct jobs created by the NCE or a directly controlled subsidiary. These jobs need to be created by the end of the conditional residency period and may not include the investor or family members. This is proven through payroll records, tax forms, etc. These jobs need to be ”permanent,” i.e. expected to last at least 2 years. (Note: if the business fails, the petitioner will have the burden to show they had a reasonable expectation the jobs were permanent and there was reasonable support to create them in the first place.)
Because direct EB-5 investments tend to target businesses that are traditionally more sensitive to market changes, such as retail and restaurant businesses, job creation can be harder to sustain to get the green card. Hard data is difficult to find, but depending on the source, approximately 30-60% of restaurants fail during the first year of operations. Bloomberg reported that over 100,000 restaurants closed during the COVID-19 pandemic.
According to a study cited by Restaurantowner.com, approximately 27% restaurant startups failed in the first year; after 3 years, 50% of those restaurants were no longer in business, and 60% closed after 5 years. Another study concluded that over 81% of all small business failures result from forces within the control of the owners or managers. According to the Bureau of Labor Statistics, approximately 20% of new businesses fail during the first 2 years of being open and 45% during the first 5 years.
As a result, EB-5 investors must consider additional due diligence matters when considering direct EB-5 investments.
USCIS Exemplar Pre-Approval and Institutional Buy-In with Regional Center Projects
Many EB-5 regional center projects have obtained I-924 exemplar approval, which means that USCIS not only has concluded the NCE’s business plan and economic analysis (i.e. job creation report) comply with EB-5 requirements. It also means that USCIS has reviewed a sample I-526 petition with complete project documents. In other words, in future I-526 petitions filed by the investor, provided there have been no material changes to the project, USCIS will defer to its prior exemplar approval and focus its review on the investor’s source of funds requirements. Direct EB-5 projects do not have this feature, and investors usually make their investment before any other investors have had their I-526 petition approved.
Regional center projects are usually much larger than direct investment projects. Many of these projects have construction budgets in the hundreds of millions of dollars. One advantage that real estate development has over retail business is that institutional investors love real estate. Institutional banks, pension funds, private equity funds, etc. traditionally favor real estate investment seeking lower-risk investments and stable cash flows. With institutional investors come teams of lawyers during the underwriting process. While it is no substitute for an EB-5 investor’s own due diligence, institutional buy-in in a real estate project can provide the EB-5 investor some level of comfort about the viability of project. Importantly, institutional investors often provide construction completion guarantee (which indirectly guarantees job creation), interest carry guarantee (which prevents bank foreclosure on default of loan), and other types of guarantees to the project.
Regional Center Projects Can Structure Lower-Risk Investment Options (i.e. Loan-Style) Investments
Regional center projects typically structure the EB-5 investment using a loan-style approach. The EB-5 investor’s NCE typically extends a low-cost mezzanine loan to the project. These loans have a fixed maturity date. Frequently, the developer or project owner’s equity is pledged as security for the repayment of the loan.
On the other hand, direct EB-5 investments cannot be in the form of debt. This is because direct projects cannot take advantage of counting indirect job creation. EB-5 rules require a direct nexus between the EB-5 investor funds and direct job creation by the NCE. This leaves only the option of preferred and common equity. Pre-packaged direct EB-5 deals are often marketed as equity, but typically only offer preferred equity.
Preferred equity might offer the direct EB5 investor a higher return than they might receive in a regional center loan-style approach. However, such returns are usually deferred and subject to cash flow. If the direct project’s operations are not performing, no distribution will be made. Aside from a distribution, the direct EB-5 investor cannot hope for more than the return of his or her invested capital while assuming more risk than a fixed, loan-style investment. All of the upside, i.e. value in the business’s growth, goes to the equity holders.
It is a truism that the overwhelming majority of businesses fail within the first 5 years. If a direct EB-5 project is failing, cash flow problems directly impact sustaining the required job creation. This, in turn, impacts not only the direct EB-5 investor’s eligibility for a green card, but also the return of the EB-5 capital. In this scenario, will the direct EB-5 investors be willing to answer capital calls and invest additional funds to sustain the business? This is likelier when the business is the investor’s own business. This is very unlikely when it is a pooled investment in a struggling restaurant that is trying to reopen after closing as a result of the COVID-19 pandemic. In superior real estate development projects, contingency funds are reserved for construction budget overruns, and the sponsors can seek additional capital from institutional investors.
Regional Center Projects Have More Liquidity for Easier Exits
Institutional grade, large-scale real estate projects can provide more liquidity to enable an eligible EB-5 investor to exit, whether through a refinance or recapitalization of the project or through cash flow. Moreover, the buyer pool for residential real estate projects is very deep, comprising of institutional investors, pension funds, and private equity interested in reliable cash flows. On the other hand, in smaller direct EB-5 projects, such as a restaurant venture, tend to be more fragile and have less liquidity, particularly if market changes reduce cash flows to cover payroll, loan repayments, and other expenses. Half of U.S. small businesses only sufficient cash buffers to last 27 days. The pool for institutional buy-outs for direct projects are sparse.
Retrogression Will Return After Regional Center Program is Reauthorized
Several regional centers attempting to pivot by marketing pre-packaged direct EB-5 projects are touting how there are no visa backlogs for EB-5 investors, particularly those from China and Vietnam, who invest in direct EB-5 projects. Their marketing fails to point out that once the EB-5 regional center program is reauthorized, retrogression will be reinstated, and they will be in the back of the line.
Do Your Due Diligence, Understand the Risks, Be Successful.
To help answer whether you are prepared to take on a direct EB-5 investment, ask yourself the following:
- Are you ready for entrepreneurship? Direct investment means direct responsibility. Without the protections and guarantees of a quality regional center project, the only person who can save your investment is you. If you choose a pre-packaged direct deal, then you need to engage in another level of due diligence. What is their motivation? What are the fees? Are you investing as preferred or common equity? What are the sponsor’s contingency plans if the project flounders?
- Am I an expert in the field in which I am about to invest? If you are directly responsible, are you well-equipped to take on that responsibility? Have you previously invested in or managed a restaurant, gas station, day care facility, private school? What steps will you take if the business faces adversity and you are unable to create 10 full-time jobs?
- Are you ready for capital calls? Can you guarantee the financial success of the business or to sustain qualified EB-5 employment until the completion of your EB-5 sustainment period (which could be 5, 7 or even 15 years away depending on your country of birth)? A minimum $500,000 investment could turn into a multi-million dollar venture if you need to sustain long-term full-time employment (e.g. average salary of a full-time employee in the Bay Area is more than $72,000 per year) for an unprofitable enterprise.
Do Your Due Diligence, Understand the Risks, Be Successful.
Not all deals are created equal. This applies to both direct and regional center investments. Nevertheless, direct EB-5 often requires an extra level of scrutiny if they are pre-packaged deals. And an extra level of preparation if they are the EB-5 investor’s own business. If you are considering a direct EB-5 investment, consult this due diligence guide co-created by immigration attorney Phuong Le of KLD LP.
Behring continues its work to obtain long-term reauthorization of the EB-5 Regional Center Program. We remain optimistic that Congress will pass a reauthorization bill that not only grandfathers existing and future EB-5 investors. And one that establishes a sustainable, reliable and more transparent program to welcome future EB-5 investment.
If you would like to learn more about Behring’s efforts and what may be in the reauthorization bill, schedule a free EB-5 consultation call with a Behring team member.