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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