The United States is often referred to as the “Land of Opportunity” and its history is rife with examples of foreign-born innovators arriving on U.S. shores and establishing some of America’s best known businesses. That tradition continues today. Foreign-born investors continue to start and provide capital to new businesses operating in a diverse array of industries. In fact, according to a 2012 report by the Small Business Administration, immigrant entrepreneurs started seventeen percent (17%) of all new U.S. businesses in 2005 — and generated $52 billion in sales and hired 450,000 workers in the process. This growth has been partially fueled by the creation of the EB-5 visa classification. Through the EB-5 programs, immigrant investors are permitted to make qualifying investments in the U.S. and receive permanent residence in return. The decision to participate in these programs, however, should be carefully evaluated by both the investor and U.S. businesses. The program carries unique requirements that are not suitable to all industries or for all projects.
Congress created the EB-5 visa classification in 1990. In 1992, Congress supplemented the basic EB-5 program with the Regional Center pilot program. EB-5 stands for “employment-based, fifth preference.” Unlike other employment-based paths to permanent residence, the EB-5 is an employment-creation visa based solely on the applicant’s qualifying investment into the United States. U.S. Citizenship and Immigration Services (USCIS) currently administers two versions of this program – the basic EB-5 program and a Regional Center program. The basic EB-5 program requires direct investment in a U.S. business. The Regional Center program permits applicant investment in pre-approved investment centers. Under both versions, a successful EB-5 application requires (1) a qualifying investment in a U.S. commercial enterprise; (2) at least limited participation in the management of the company; and, of course, (3) employment creation. All these requirements are discussed, in turn, below.
As for the first component, an investment qualifies for EB-5 purposes if it exceeds the statutory dollar threshold, is directed at a new commercial enterprise, and is placed “at risk.” EB-5 investors must invest or be actively in the process of investing at least $1,000,000 in a new commercial enterprise. A new commercial enterprise is any U.S. business established after 1990 or a business established before 1990 which has been restructured/reorganized or expanded. This threshold is reduced to $500,000 in “targeted employment areas” – or rural areas of less than 20,000 people with high unemployment of at least 150% of the national average. An investment can be cash, equipment, inventory, cash equivalents, or a promissory note secured by the investor’s personal assets.
A frequent source of confusion for many entrepreneurs and their advisors is how to place an investment “at risk.” As defined under the statute, the investment must be contributed to the commercial enterprise “for the purpose of generating a return on the capital placed at risk.” Of course, this definition includes assets contributed directly to U.S. corporations, limited liability companies, and partnerships. It can also include promissory notes secured by the investor’s personal assets and covered by security agreements enforceable in the jurisdiction where the assets are located. In these instances, the fair market value of the security – not the face value of the promissory note – controls the amount of the investment. Moreover, the repayment schedule on the promissory note must conclude within the two year conditional residency period – discussed below.
(Limited) Management and Control
The investor must have at least some participation in the management of the enterprise. An investor may be a manager, a corporate officer or director, an LLC member, or a general partner in a partnership. An investor may also be limited partner with rights, powers, and duties normally granted to a limited partners under the Uniform Limited Partnership Act. See 8 C.F.R. § 204.6(j)(5). This means that a Regional Center investor need not take part in the day-to-day operations of the commercial enterprise; he or she must only possess voting rights over matter such as expulsion and admission of new partners and amendments to the partnership agreement. For example, an investor may be one of hundreds of limited partners in the enterprise and still qualify under the management and control requirements of the EB-5 programs.
The last, and perhaps most important, requirement is employment creation. Under the basic EB-5 program, the new commercial enterprise must ordinarily create at least ten (10) full-time jobs for U.S. citizens and employment-authorized immigrants within two and a half years of the EB-5 application’s adjudication. These employees must work directly for the commercial entity for at least 35 hours per week and cannot be independent contractors. Seasonal jobs do not qualify, unless they are expected to last at least two years (for instance, two consecutive ski seasons). The employment creation requirements are relaxed for “troubled businesses” – or businesses losing 20% of net worth for 1 or 2 years. For investors participating in the Regional Center program, employment creation can be indirect, meaning that the jobs created can be either at the commercial enterprise or in the community serving the commercial enterprise. For example, it may include construction jobs and servicers of equipment used at the commercial enterprise. It may also include “induced jobs” or job predicted to result through economic modeling from the purchase of goods and services by direct and indirect employees of the commercial entity.
After approval of the EB-5 application, successful investors and entrepreneurs are granted two years of conditional permanent residence. Employment creation is measured from the day the visa is issued through the end of the two year conditional permanent residence period. Between issuance and expiration day, EB-5 investors, Regional Centers, and managers must work to employ the requisite number of individuals. In the ninety (90) days before the EB-5 visa expires, visa recipients are required to submit proof of their continuing qualifying investment and sufficient job creation.
Targets for EB-5 Investment
Given that job creation is a key component of the EB-5 programs, real estate projects with resorts or hotels are a common investment. The redevelopment of Jay Peak Resort in Vermont is a notable example, financed by over 550 foreign investors. Unlike an office building, a resort or hotel is an operating business that requires a significant amount of employees. By its nature, developing a hotel will create jobs and those jobs will be in place as soon as the hotel opens. An office building requires few employees to manage it, and while new businesses may lease space in the office building, the employees of tenants may not be counted toward the job creation requirement. With that said, virtually every significant real estate project carries numerous risks that could cause a project to be cancelled or delayed. There are permitting risks, subsurface condition risks (both environmental and geotechnical), and market risks. For example, hotels typically perform poorly during a recession as customers are typically short-term guests and a drop in occupancy can be dramatic and quick to occur. Investors and Regional Centers have to select seasoned developers who can deliver. Otherwise, they risk losing their investment or not meeting the employment creation deadlines mentioned above.
Real estate developers also benefit from the EB-5 programs. EB-5 investors are unlike traditional equity sources for real estate transactions. Traditional equity sources look for control over many decisions and typically condition their investments on high return requirements. Many EB-5 investors are less interested in control and have modest return requirements. For many, the primary goal is permanent residence and anything beyond a return of principal is icing on the cake; permanent residence may be worth $500,000 to a wealthy investor.
Participation in an EB-5 investment may bring benefits to both foreign born investors and U.S. businesses seeking capital for construction, expansion, or continued operation. The EB-5 programs, however, bundles business and legal concepts together in a manner unfamiliar to most businesspeople and their advisors. The key to success for participation in this program is careful planning, realistic assessments, and attention to applicable programs’ requirements. As with any application for immigration benefits, the EB-5 application will be heavily scrutinized by U.S. immigration authorities. Failure to meet these requirements could spell disaster for both the foreign investor and the businesses relying on their capital.