The renovation and restoration of the Sahara Casino in Las Vegas, the construction of a new Marriott Courtyard Hotel in downtown Seattle, and the redevelopment of the Knickerbocker Hotel in Times Square in New York City involve hospitality properties and projects in different locations, but they have a common financing source – the EB-5 Program. The EB-5 Program was originally created in 1990, but it is starting to gain attention from many international investors.
The EB-5 Program, better known as the U.S. Citizenship and Immigration Services' ("USCIS") EB-5 Program, allows immigrants who make qualifying investments in the United States to obtain green cards for themselves and their immediate families. In order for an individual to qualify under the EB-5 Program, he or she must (1) make a true investment of $1,000,000 (or $500,000 in certain areas); (2) in a new enterprise; (3) that has created or will create at least ten full-time jobs in the United States within a two-year period. With such a showing, the individual (and certain of his or her qualified family members) can be approved for conditional residency in the United States for two years, pending the full satisfaction of the EB-5 Program requirements. At the end of that two-year period, if all of the EB-5 Program requirements have been satisfied, the individual can apply to have the conditional status removed and become a permanent resident of the United States.
(1) Investment of Capital
The first requirement is that the individual must place at least $1,000,000 (or $500,000 in targeted employment areas) of his or her own capital “at risk.” Targeted employment areas include both rural areas (those areas outside of a metropolitan statistical area or outside of a city or town with a population of at least 20,000) and areas of high unemployment (at least 150 percent of the national average). Such capital can include cash, cash equivalents, equipment, inventory, other tangible property and indebtedness (such as a promissory note) secured by assets that are owned by the individual investor and that, in each case, have been obtained through legal means. This invested capital must be placed at risk, i.e.: (a) it is actually invested (a mere intention to invest is insufficient); (b) there can be no guaranteed return on the investment independent of the financial success of the enterprise; and (c) the individual cannot have the right to require the enterprise to buy back his or her investment (although certain redemption agreements are acceptable).
The EB-5 Program also places limits on the use of such capital by the qualifying enterprise – requiring that it be used for items that are directly related to job creation. For example, the capital can be used by the qualifying enterprise (such as a hotel developer) to fund the development costs of the hotel, including certain soft costs associated with the project development. Capital cannot be used by such qualifying enterprise to fund the acquisition of assets (such as an adjacent lot to the hotel for future development) if the assets are for investment purposes not related to the creation of jobs.
(2) In a New Enterprise
The second requirement is that the qualifying investment must be made in an enterprise that is either a new commercial enterprise or one that has been in existence for at least two years and which, after incurring a net loss of at least 20 percent of the initial net worth of the enterprise, is restructured so that its net worth or number of employees is increased by 40 percent. Any business that was established after November 29, 1990, and engages in commercial activity is considered a new commercial enterprise. In addition, each individual is required to retain some control and/or management responsibilities over the enterprise and the business it conducts. This is accomplished by active day-to-day involvement or setting policy, although a limited partner can qualify. Therefore, it is possible to have a larger number of individual investors set policy (or be limited partners), which will facilitate effective management of the enterprise while complying with the requirements of the EB-5 Program.
(3) Resulting in Job Creation
The third requirement is that each qualifying investment in a qualifying enterprise must result in the creation of at least ten full-time jobs in the United States. In the case of a troubled business, the job creation requirement includes preserving existing jobs or creating new jobs or any combination of the two. The analysis of job creation includes: (a) the meaning of a full-time job; (b) the type of jobs that must be created; and (c) the time period within which such jobs must be created.
In order for a job to be full-time, the employee must work for the enterprise or its wholly owned subsidiary for at least 35 hours a week, regardless of who fills the position. This means that such jobs can be shared among two or more workers, provided that full-time benefits are available to all such workers. Jobs that are "intermittent, temporary, seasonal or transient in nature" do not qualify as full-time (although construction jobs expected to last at least two years count towards the full-time job requirement if the other requirements are satisfied). These jobs must also be direct (except in the case of the Immigrant Investor Program discussed below), meaning that the individuals are employed directly by the qualifying enterprise in which the investment is made, such as in the case of a hotel or resort property, desk people, housekeepers and managers. All jobs must be created within the two-year period of conditional residency beginning six months after the approval of the initial filing by the investor.
The EB-5 Program was expanded in 1992 to include the Immigrant Investor Program (formerly known as the Immigrant Investor Pilot Program), which allows qualifying investments through a regional center, i.e., "any economic unit, public or private, which is involved with the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment." In order to achieve one of the goals of this expansion, which was to increase the utilization of the EB-5 Program, the expansion also loosened the job creation requirements. As noted above, the Immigrant Investor Program allows indirect jobs to count towards the job creation requirement if they are attributable to a qualifying enterprise through reasonable economic methodologies, thereby making it relatively easy for multiple investors to satisfy that requirement. For example, the employment of an individual by a company providing towels to a hotel satisfies the job creation requirement under the Immigrant Investor Program.
Another distinct feature of the Immigrant Investor Program is the focus on promoting economic growth within a contiguous region (containing the regional center). To determine such growth, USCIS considers factors such as increased export sales (if any), improved regional productivity, job creation, and increased domestic capital investment. This works well in the real estate context, as developments are contained within a particular geographic area. As of July 2012, over 90 percent of qualified investments were made through regional centers as part of the Immigrant Investor Program.
The EB-5 Program is significantly underutilized. Although the use of the EB-5 Program has increased significantly since the financial crisis in 2008, only 3,340 of the 10,000 visas set aside for the EB-5 Program in 2011 were used. USCIS is currently attempting to encourage further use of this Program through, among other things, revising internal guidance to attempt to simplify and streamline the process. The latest version of the guidance was posted on February 14, 2013, and is up for public comment until April 1, 2013. This guidance, available on its website, cannot be relied on as a law or regulation, but is helpful in seeing how USCIS administers the EB-5 Program. The USCIS also has a blog, "The Beacon," where it posts more informal information and answers questions in an attempt for more transparency.
The sponsors of real estate projects that by their nature create or preserve jobs, such as hotels, casinos, resorts and other tourist attractions (such as theme parks), should give the EB-5 Program serious consideration. There is no limitation on the number of individuals who can participate in an otherwise qualifying enterprise so long as each qualified investment creates ten full-time jobs, so a significant amount of financing can be raised as illustrated by the FelCor Lodging Trust's plan to raise $45 million through EB-5 financing for the redevelopment of the Knickerbocker Hotel. The EB-5 Program and the Immigrant Investor Program present a unique opportunity to draw foreign capital into the United States while at the same time providing a source of funding outside of traditional financing sources, which may be limited or not available at all. The individuals who provide the qualified investment not only have an opportunity to earn a return on their investment, but they can pursue the many other opportunities that are available to those living in the United States.
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Douglas Wisner is a Partner at Clifford Chance and the leader of its U.S. Real Estate practice. Jeanne Roig-Irwin is an Associate in the firm's U.S. Real Estate practice.