With new regulations, EB-5 program said to be "hit with a stun gun"; increased minimum has ripple effects

Somehow EB-5 can turn up some juicy quotes. Remember the guy who called it "legalized crack cocaine"? 

Well, Bisnow, in a 1/22/20 article headlined EB-5 In 2020: Managing The 'Stun Gun' That Just Hit The Investment Program, quotes a real estate attorney as saying "The program's been hit with a stun gun."

Why? Because the minimum investment has gone from $500,000 to $900,000 in a Targeted Employment Area (TEA), which is an area of high unemployment or a rural area, and from $1 million to $1.8 million elsewhere.

Of course, until recently, every project was located in a TEA-- but new rules also restrict the long-practiced gerrymandering of such areas, as with Atlantic Yards.

While investor interest has waned, experts say, it also offers a potential advantage: loan packagers now have to recruit fewer investors to reach a requisite sum. That is, unless a pending bill to essentially nullify the changes passes, making it far easier to recruit investors for non-TEA locations.

The higher minimums also pose a challenger for investors who've typically pooled funds from family and friends to get their money out of China. 

Ripple effects

Given the lower number of investors, they'll likely "demand a higher rate of return on their investment than the one-half of 1% rate accepted by many investors under the old rules," NYU's Gary Friedland told Bisnow.

Note: the developers pay more, say 5%, while the regional center, the middleman, keeps the spread. Even so, that 5% is way less than a loan on the open market.

Bisnow quotes Mark Migdal & Hayden attorney Isaac Marcushamer as saying investors will look more closely:

Even so, the new regulations do nothing about potential conflict of interest arising from attorneys representing both sides of the deal, and cultural differences mean that non-U.S. investors might not be aware of the problem, Marcushamer said.
"In the U.S., a lawyer can't serve two masters," Marcushamer said. "That concept isn't universal."

That's what happened with Atlantic Yards, as I reported, though presumably the investors signed a legal document waiving the conflict.