When a project “substitutes EB-5 capital for more expensive bank financing or bond funding or even equity,” he said, “that isn’t really creating new economic activity. It’s margin for the developer.”
But Forest City Ratner got away with it.
Now any developer can do it, thanks to new rules by the United States Citizenship and Immigration Services (USCIS), the division of the Department of Homeland Security that oversees EB-5.
The further diminishes the public policy argument for EB-5, which already seems "inefficient and open to corruption," according to Dartmouth adjunct professor John Vogel.
A writer who tracks the industry has a long post analyzing the USCIS's evolving policies. For years, the agency took a conservative approach. In a December 22, 2009 AAO [Administrative Appeals Office] Decision denying a Regional Center proposal, the USCIS stated:
While we do not suggest that this type of financing is automatically disqualifying, the application cannot be approved unless the applicant first establishes that this assumption of existing financing will improve regional productivity.In an April 23, 2010 AAO Decision (Denial of Form I-829 for a Regional Center project in Philadelphia), the USCIS said no at the later stage in the EB-5 process, saying it might have raised "serious concerns" about "how replacing one loan with another loan would create jobs" had it been raised in the investors' initial petition for a green card.
In a conversation with EB5info, Robert Divine, a noted immigration attorney and former Acting Director of USCIS, said the above statement actually "leaves hope" for business plans relying on EB-5 capital to replace a bridge loan. As long as those plans are explicit about their intention to use EB-5 capital--presumably before the actual bridge loan is made --Divine thinks USCIS will count the jobs.
If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation under the regulations.USCIS revises policy, May 2013
Since it is the commercial enterprise that creates the jobs, the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, may utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the interim or bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise may still receive credit for the job creation under the regulations. Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing. However, even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as long as the financing to be replaced was contemplated as short-term temporary financing which would be subsequently replaced, the infusion of EB-5 financing could still result in the creation of, and credit for, new jobs. For example, the non EB-5 financing originally contemplated to replace the temporary financing may no longer be available to the commercial enterprise as a result of changes in availability of traditional financing. Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.
So that leaves the door open to get a business going with any kind of financing, as long as the proponents know they can refinance inexpensively.
However, the policies set forth in the Memorandum are in most cases policies that will enable the EB-5 program – and especially the regional center EB-5 program – to flourish. Regional centers are no longer limited to sponsoring projects in any particular industry and now have a streamlined mechanism of expanding their geographical boundaries. EB-5 money can be used to replace any form of temporary lending even if EB-5 money was not contemplated at the time the temporary lending was initiated.
The USCIS has long been concerned that “bridge financing” might just be an after-the-fact description used by an EB-5 developer for lowering his or her cost of capital by replacing previously arranged financing, with little or no effect on new job creation... The memo thus permits approvable bridge financing in circumstances where it would have previously been unacceptable to the Service when EB-5 refinancing was not anticipated when the bridge financing was secured, and also probably signals a less strict showing of “nexus” in cases where EB-5 refinancing was in fact anticipated.
The aftermath: the use of bridge financing
As such, Bridge or interim financing provides the opportunity for EB-5 project developers to take out short term financing to help construct and develop the project, then EB-5 capital as it is received may replace that short term financing yet still receive credit for creating jobs.The savings
“It’s a very low-cost way to fill out your capital stack,” said Manhattan-based real estate lawyer Joshua Stein.That's potentially hundreds of millions of dollars in savings.
He said while mezzanine capital is risky, and therefore expensive to secure — “you might pay around 12 percent” — the interest rates for EB-5 loans are “in the low single digits.”