Created by the United States Congress in 1990, the immigrant investor program allows foreign citizens to obtain green cards for themselves and their immediate families when they invest a minimum of $500,000 into a project that creates or preserves at least 10 full-time jobs per investor.
By the time Nader Kameli went looking for bank loans to fund his senior living development portfolio, he thought he had everything he needed. He had the business plan, which showed a potentially massive and underserved market for assisted-living and memory-care facilities. And he had the team, including two former bankers he’d hired to help him package and pitch the portfolio.
He took the pitch to 50 Chicago banks, large and small. To his surprise, he got nothing. What he hadn’t anticipated was the timing — this was 2010, the height of the recession.
“They were truly dead, not lending anything,” he recalls. “Every single one of them was afraid of making a mistake in taking any risk.”
Realizing that traditional lenders, busy trying to work out bad loans, simply weren’t going to be an option, Kameli went in search of alternative funding options. That’s when he remembered a development financing program called EB-5 — also known as the Immigrant Investor Program.
Created by the United States Congress in 1990, the program allows foreign citizens to obtain green cards for themselves and their immediate families when they invest a minimum of $500,000 into a project that creates or preserves at least 10 full-time jobs per investor. The projects must be located in a “targeted employment area” — where unemployment rates are 150 percent of the national average.
Kameli had considered using EB-5 before, though he assumed he’d combine those funds with traditional financing from banks. But when the banks turned him away, he was forced to go all-in with EB-5. He and his investors would put in the start-up costs, securing the rest of the outlay from immigrant investors, one project at a time.
That had several ramifications for Kameli’s plan. It meant the traditional origination period of two to four months would now stretch to 15 to 18 months. First, the money had to be secured from the foreign investors and then packaged for each project. Then, once the applications were filed with the federal government, the money would sit in escrow until the investors were fully approved by the United States Citizenship and Immigration Services (USCIS).
“The borrowers need to realize that they’re able to get leverage from EB-5, but they’re not going to be able to get it immediately,” says Adam Greene, president of Live in America Financial Services and a member of the President’s Advisory Council for the Association to Invest in the USA (IIUSA). “But in exchange for the longer origination period, borrowers get significantly lower interest rates.” Greene says the EB-5 program can offer rates well below a traditional subordinated loan for construction. That’s because the primary goal for EB-5 participants isn’t higher yields, it’s U.S. citizenship. And the goal for the U.S government is jobs, plain and simple.
“It works really well for hotel developments because you can create both construction jobs and permanent jobs, but you can also use it to provide a meaningful piece of subordinate or mezzanine financing for residential or office deals.”
Wes Boatwright, Managing Director with JLL’s Capital Markets
The program certainly has its detractors and was recently investigated by Fortune Magazine in an article questioning the “dark, disturbing world of the visa-for-sale program.” The story features a failed hotel developer who tried to use EB-5 financing and was ultimately fined nearly $4 million and required to repay $11.5 million to his would-be foreign investors.
But Greene says that story is the exception, not the rule. He argues that the program’s job creation requirement is unambiguous and that federal USCIS carefully vets every business plan to ensure it is credible, and the job creation is real. Greene also argues that the foreign investors who participate in EB-5 become solid contributors to the American economy.
“They spend a great deal of money, they buy houses,” he says. “They’re not going to end up on government assistance.”
Wes Boatwright, Managing Director with JLL’s financing team, says EB-5 works best in development financing where a large number of jobs can be created over a minimum two-year period. “It works really well for hotel developments because you can create both construction jobs and permanent jobs,” he says. “But you can also use it to provide a meaningful piece of subordinate or mezzanine financing for residential or office deals.”
There are restrictions, and risks. For instance, if something goes wrong (construction delays, cost overruns, etc.), developers can’t go back to their lenders for more money. “You’re targeting a sliver of foreign investors who aren’t going to be called upon for yet another capital call,” Boatwright says.
The lack of available financing during the financial crisis led to a resurgence of interest in EB-5 financing, and the number of EB-5 Regional Centers (entities approved to sponsor job creating projects through the program) in the U.S. has exploded over the last few years along with the increase in projects using the financing. In fact, the 10,000 allocated visas for 2014 have already been claimed. Boatwright, who is based in JLL’s Washington, D.C. office, says everyone wants in on this “panacea,” but the reality is that there are a small number of Regional Centers arranging the majority of the EB-5 financing. And, accessing the capital takes a great deal of work.
“I receive calls on a regular basis from people who claim to be a Regional Center and want our team to use them to help them find projects for EB-5 financing,” he says. “Some are legitimate and some are a person working out of their garage.” He advises would-be borrowers to interview multiple Regional Centers to ensure they are getting the expertise they need and aren’t being overcharged.
Kameli’s group eventually borrowed more than $150 million in EB-5 financing for their senior living portfolio. They currently have 11 properties in various stages of development in Florida and suburban Chicago, including Bright Oaks of Aurora, in Aurora, Ill., scheduled to open in January 2015 (pictured above). Kameli says between construction, development, financing and eventually, operations, his facilities will have a regional economic impact of more than 2,500 jobs.
Four years after he began, Kameli says banks are no longer ignoring him. Instead, they’re fighting for the chance to finance future projects. But Kameli says he’d use EB-5 again, without hesitation.
“When you go after financing, typically, the focus of lenders is on ROI,” he says. “When you are in the business of caring for people, you cannot be looking at squeezing profits. I love this mechanism because investors can’t demand I squeeze another two percent of interest. I am forced to create jobs and preserve them, and that translates to ease of mind and security for my employees and higher quality of care for our residents.”