Caution advised – How to select EB-5 projects under new USCIS’s two-year investment period guidance
Earlier in October, the United States Citizenship and Immigration Services (USCIS) issued new guidance indicating that maintaining an investment for a minimum of two years is now deemed sufficient. This directive supersedes the established practice of adhering to a consistent investment cycle lasting a minimum of five years, with the possibility of one-to-two-year extensions.
The issuance of this guidance by the USCIS has elicited surprise among industry insiders, constituting a significant challenge for the EB-5 industry. Effectively responding to the introduction of short-cycle projects, which must also meet safety and security criteria, appears crucial for gaining a competitive edge in the future EB-5 market. Consequently, immediately following the release of this guidance, Henry Fan directed the Project Development Department to swiftly initiate development initiatives in collaboration with leaders in the EB-5 industry programs.
From a business standpoint, completing the construction of an EB-5 project within a two-year cycle and subsequently operating it until sufficient capital accumulation ensures the secure withdrawal of EB-5 investors’ funds is practically unattainable. This challenge is particularly pronounced for straightforward and secure real estate projects familiar to EB-5 investors. Additionally, shortening the investment period is complicated by the fact that the construction of a project alone requires approximately two years.
It is crucial to note that the USCIS guidance pertains to a two-year investment period commencing when the funds of the EB-5 investor enter a New Commercial Entity (NCE). However, on a practical level, for the funds to be considered part of the start cycle, they must enter a job-creating entity (JCE).
Furthermore, clients choosing the EB-5 program are primarily motivated by the goal of immigrating to the United States rather than seeking profit from a business investment. To obtain a U.S. green card successfully, the EB-5 program must ensure the completion of legally required employment during the investment period, with employment calculated based on the construction cycle.
Considering the entire process from greenfield to completion, a realistic expectation for a real estate project is at least two years for construction, with additional time required for land acquisition, design, permit applications, and various construction stages. After completion, an operational period is necessary to ensure project profitability and the safe withdrawal of EB-5 funds, necessitating a minimum of three to four years.
The timeline of our sold-out project, Wohali Utah, featuring 125 single-family estate lots, 303 townhouse-style residences, an 18-hole championship golf course, and various amenities, spans seven years from land construction in 2020 to anticipated completion in 2027. Projects with a successful track record of obtaining U.S. green cards for numerous investors often require even more extended timelines.
Considering the developer’s perspective, if a sum of money is borrowed from EB-5 investors to complete project development within a two-year borrowing cycle, it essentially functions as a bridge loan. In such cases, there is no necessity for the developer to utilize EB-5 funds, as obtaining funds through a short-term loan from a financial institution is a viable alternative. However, the actual availability of EB-5 funds typically takes four to five months, along with additional time for fundraising and addressing legal documentation requirements.
The new USCIS guidance raises concerns about the reasonableness of using one short-term loan to replace another, rendering it unnecessary for developers to utilize EB-5 funds. Consequently, finding projects capable of promptly responding to the shortened investment cycle becomes challenging.
While certain oil and trucking businesses have set a precedent by shortening their investment cycles, the focus should be on the EB-5 investor’s perspective, seeking a safe return on their $800,000 investment rather than merely a shorter capital tie-up period. Despite the seemingly positive news for investors, judging project risk solely based on the investment period is insufficient. The primary criteria for selecting U.S. EB-5 projects should consistently be “Green Card Security + Capital Security.” This principle guides our project development team, and it is anticipated that in the first quarter of the upcoming year, projects with shortened investment periods of 3+1+1 or 4+1 may emerge.
However, caution is advised in selecting among projects rapidly responding to the USCIS’s two-year investment period guidance at this juncture.