The EB-5 program has a growing problem. A new fund seeks to tackle it

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Greystone, investment advisor Capital United and fintech firm NES Financial on Thursday launched what they claim is the first specialized EB-5 redeployment fund. The firms hope to tackle a growing and underreported problem faced by developers who tap into the popular cash-for-visa program: what to do when a project is finished but the foreign investors who paid for it are still waiting for a green card?

The EB-5 program allows foreigners who invest in qualifying real estate projects to earn green cards. Its rules stipulate that investors’ money needs to be “at risk” — or tied up in U.S. projects — until the investors have received their green cards and spent two years living in the U.S. If investors get their money back before then, they lose their right to a visa.

In the past this wasn’t really an issue. Most EB-5 investments were structured as five-year mezzanine loans, and that’s about as long as it took to get the visa application sorted out, experts said. But as more and more Chinese nationals applied for the program, hitting against an annual visa cap, a backlog of applications has built up and it now generally takes far longer to process applications and establish residency (up to 12 years according to one estimate). This puts investors at risk of not getting their visa, which in turn puts developers at risk of losing a cheap source of funding.

On June 14, the U.S. Citizenship and Immigration Services agency issued a guidance stating that the entities using EB-5 funds can redeploy the money elsewhere without it losing its “at-risk” status as long as the new venture is still somewhat related to the original investment. This opened the door for Greystone, Capital United and NES’ fund.

Developers and EB-5 regional centers can place EB-5 money into the fund once the original project is completed and sold off or refinanced. The fund will then invest the money in low-risk bridge loans for multifamily and healthcare properties with a target return of 4 percent after fees. Once the EB-5 investors have their green card and established residency, they can get their money back two years after they start their conditional residency, according to Allison Berman, head of Greystone’s EB-5 program.

Greystone is already in talks with interested developers and regional centers and hopes to raise $100 million for the fund by the end of 2018 and $200 million by the end of 2019, Berman said.

As an alternative, developers could simply reinvest EB-5 funds into other projects. This may not be appealing to investors, Berman argued.

“The last thing an EB-5 investor wants is the money to be rolled over into another project they haven’t vetted,” she said.

Meanwhile, EB-5 rules prevent “the redeployment of invested funds into any investment vehicle that provides guaranteed returns and no chance for gain or loss, including accounts or securities with federal government guarantees,” according to a recent white paper by law firms Klasko Immigration Law Partners, Arnstein & Lehr, and Jeffer Mangels Butler & Mitchell.

The EB-5 program is a popular financing option for U.S. developers, particularly in major markets such as New York, Los Angeles and Miami. Related Companies and Oxford Properties Group, for example, have raised $600 million in EB-5 funds for their Hudson Yards project and are looking to raise another $380 million.

Carolyn Lee, an attorney at Miller Mayer, said she is getting more inquiries from developers about how to redeploy funds, and that the problem is only going to get worse as more EB-5 loans mature.

“No borrower is going to agree to an open-ended loan term,” she said, meaning solutions need to be found for when the loan matures. “That’s sort of the $500,000 question right now,” she added

Attorneys say that USCIS’ June 14 guidance is still vague on what exactly would be an appropriate redeployment and how related it needs to be to the original project, which could create challenges for developers looking to redeploy on their own.

“Right now there’s no adequate guidance, no oversight, and we’re talking about millions of dollars,” said Mona Shah, an attorney who specializes in the EB-5 program. “It’s very worrying.”