What is the current status of the EB-5 program?

The EB-5 Visa program has 2 routes of investment, First is the Direct EB-5 investment program and the other is the EB-5 Regional Center Investment program. Most of the EB-5 investments till date have been through the Regional Center program. Almost 95% of EB-5 visas issued till date are through the Regional center program. Why is that? Mostly, it is because of the 10 jobs per investment criteria applicable to both Direct EB-5 & Regional Center EB-5. But Regional Center projects have an advantage of skipping the 10 direct jobs criteria, if they can show 10 indirectly created jobs, which is much easier to do, I will explain in-depth below.

So what is the current status of the program? After the expiry of Regional Center program on June 30 2021, The USCIS is is not accepting new EB-5 petitions for the Regional center program. They continue to accept EB-5 petitions on behalf of the Direct investment program. The Direct investment limit is currently $500,000 USD for an investment into a TEA area and $1 Million USD into a non-TEA area.

When will the Regional Center program restart again?

There is no official restart date. The Regional center program has to be re-authorized by the US Congress. This means that the US Senate and Congress members have to approve the re-authorization of the EB-5 Regional center program. Senator Chuck Grassley introduced a bill in May 2021 to reform the EB-5 program and extend the program for 5 years. Unfortunately, the bill didn’t pass as some stakeholders in the EB-5 program felt it would be detrimental for the program. Instead they gambled on letting the program expire and try to negotiate for favorable terms in the program.

As things currently stand, the consensus is that, there is simply not enough support or interest in Congress to reauthorize the program as part of a standalone bill. Which means, the reauthorization of the program will have to be attached to another bigger bill (something which is very commonly done in Congress). There was some hope that it would be included in the bipartisan Infrastructure bill, but that seems unlikely now. The draft version of the bill released August 1st didn’t have anything related to the EB-5 program. So the next option is the annual spending bill. Every year, Congress has to approve the Spending bill in September. Many smaller bills are attached to the annual spending bill every year and this year is no exception.

If EB-5 is able to be attached to the annual spending bill, we should see reauthorization of the program by September 30 2021. This is the best case scenario currently.

Will the Investment limit increase again?

Yes, the investment limits will most likely increase. Currently, after the June 22 2021 Federal court judgement in the Behring lawsuit, EB-5 investments were reduced from $900,000 USD (TEA) to $500,000 USD and $1.8 Million (Non-TEA) to $1 Million USD. The current DHS Chief, Alejandro Mayorkas has already signaled his intent to agree with the Trump administration investment limit increases in the above mentioned lawsuit. He issued a ratification approving the $900,000 increased limits, but because the Judge issued the ruling against the Government, the ratification became moot. But this doesn’t preclude Mayorkas from promulgating the new rules again which include investment increases, the only question is, when will he do it.

The government can also appeal the June 22nd judgement in a higher court. If they prevail, the investment limits will be increased back to $900,000 minimum for both Direct and Regional Center programs.

Direct EB-5 investment projects, how are they different from Regional center projects?

Keeping all the above in mind, there has been a considerable increase in demand for Direct EB-5 projects at the $500,000 investment level. Investors want to lock in their EB-5 petition before any investment limit increases are announced. Below are a few key differences between the Direct and Regional center programs.

Direct Jobs creation

Each EB-5 investment has to create 10 jobs over a minimum period of 2 years. This is a particularly tough condition to satisfy. Let’s look into the economics of sustaining 10 jobs over a period 2 years. The average minimum wage is $10/hour in a majority of the states. Most skilled jobs are paid much higher than that. But for the purpose of this exercise we will consider $10/hour as the salary of each employee. The 10 employees have to be employed for a minimum of 35 hours per week for 2 years. That works out to 35 hours x $10/hr x 52 weeks x 2 years = $36,400 per employee. Add in the employer taxes and additional payroll expenses, we are looking at $40,000 per employee. Multiply this by 10 employees, that’s a payroll of $400,000 for the 2 year period.

As anyone would understand, most new businesses will not be able to generate any profits in the initial 2 years of operations. Can an investment of $500,000 USD create a new business and also pay it’s employees $400,000 over the course of the 2 years? This is the million dollar question. Is there a business out there takes $500,000 USD to start and has $400,000 to pay the employees?

Indirect jobs creation

Regional center projects do not have the same criteria when it comes to job creation. The regional center projects do have to create 10 direct jobs like Direct jobs. In regional center projects, the 10 jobs can be created by the concept of Indirect jobs. How are indirect jobs created? It is a complicated calculation, but in layman’s terms, the investment amount and the revenues generated by the new business counts as jobs created. So a Regional center project doesn’t have to hire 10 workers to satisfy the job creation requirement, they can make do with 1 or 2 direct jobs and the remaining jobs can be indirectly calculated from the investment into the project. This is a big game changer in the EB-5 industry and in fact one of the primary reasons why 95% of EB-5 projects are Regional center projects.

In the above example, I considered $10/hour as the wages for all 10 employees. In a real world scenario, the employees would be paid more than $10/hour considering the wages paid to a Supervisor and other skilled workers. Employees are also prone to switching jobs, especially at these income levels. The attrition rate (job switching) is high for minimum and low wage jobs. The USCIS conditions state that 2 years continuous employment has to be documented via the filing of W-2s and appropriate documents like timesheets. Any gap in the employment period can create adverse effects for the EB-5 petition. There is an additional level of scrutiny by USCIS when it comes to adjudicating Direct EB-5 petitions. The paperwork requirement is very stringent and Investors should be prepared to provide additional documents when requested by USCIS.

Equity Vs Loan Model Investment

Another big difference between Direct Vs Regional Center model is the type of investment being made. In the Regional Center model, Investments are generally made as a loan (debt) to the Project being built with a finite loan term (for eg., 5 years). In Direct projects, Investors cannot give a loan to the project. Instead their investment will be made as an equity investment. The returns might be higher compared tot the loan model, but so are the risks. More importantly, there is no set period for equity to be returned unlike the loan model. So a Direct project does not have the obligation to pay back the investment in a set period of time.

The workaround applied by some direct projects is to accept the investment via “Preferred equity” routes. Preferred equity, similar to debt, guarantees an interest rate and a set period for return of investment. But that’s where the similarities end. Preferred equity has significant disadvantages compared to debt holders if the project becomes insolvent. Unlike a debt holder, A preferred equity holder, enforcing its remedy may gain control of, but will not obtain full ownership of, the property owning entity and must continue to interact with the common equity holder(s) until a final disposition of the project.