Business

New EB-5 Rules to Benefit Construction

Here’s what contractors need to know about the recently passed EB-5 Reform and Integrity Act.
By Reid Thomas
October 18, 2022
Topics
Business

The EB-5 Regional Center Program is back as of this March and, especially in today’s economy, that’s good news for the construction industry.

Why? The majority of EB-5 funds go toward real estate construction. As interest rates rise, traditional financing for such projects becomes increasingly challenging and expensive. EB-5 can therefore help fill gaps in the capital stack. More construction projects should come as a result.

But navigating new rules under the recently passed EB-5 Reform and Integrity Act poses its own set of challenges. Here’s what executives need to know.

A NEW EB-5 LANDSCAPE

Established by Congress in 1990, the EB-5 Immigrant Investor Program was enacted to create jobs in target employment areas by attracting foreign direct investment in exchange for permanent residency for foreign nationals. Two years later, Congress simplified the investment process with the EB-5 Regional Center Pilot Program, in which multiple foreign investors can pool their capital to invest in a single project managed by a U.S. Center for Immigrant Services (USCIS)-approved the EB-5 Regional Center Program.

In June 2021, however, Congress failed to reach unanimous consent on the reauthorization of the program, effectively suspending it—that is, until the Reform and Integrity Act revitalized the program this past March.

The new version of the program has stricter compliance requirements, including new rules around reporting, audits and oversight on the tracking and releasing of funds. If these new rules are violated, Regional Centers face stiff penalties, which can include fines, debarment or termination of the center. The hope, however, is that these increased integrity measures will provide additional protections for investors against fraud.

BEST PRACTICES FOR CONSTRUCTION EXECUTIVES

Given new EB-5 requirements and the current economic climate, construction executives looking to take advantage of the program should keep the following top of mind.

Don’t rely on EB-5 funding alone.
Though rising interest rates make EB-5 funding increasingly attractive—and while Regional Center activity is ramping up—the return to EB-5 is still new. It’s therefore uncertain as to how quickly EB-5 capital will be able to be raised compared with years past. Since construction timelines don’t typically want to wait for EB-5 capital, it’s important to ensure that there are alternative sources of gap financing that can help smooth over delays in EB-5 capital raising.

Understand EB-5 jobs requirements’ impact on construction.
EB-5 investors are required to create 10 new full-time jobs for U.S. workers. Through the Regional Center Program, investors can take credit for direct jobs (i.e., where the new commercial enterprise (NCE) directly employs the employee) as well as indirect (e.g., construction jobs, hired through a contractor to the NCE) and induced ones (i.e., jobs created as a result of the NCE, like workers at a newly built hotel).

Under previous rules, direct and indirect construction jobs could be counted, but only if the construction lasted at least two years. If construction lasted less than two years, no direct construction jobs could be counted and, instead, only indirect jobs could be used. The new provisions allow for more—a boon for construction executives. They simply stipulate that indirect jobs can now count for no more than 90% of all jobs and that only 75% can be from construction lasting less than two years. In the event the construction lasts less than two years, direct construction jobs can be counted to the extent of the fraction of a two-year period. Obviously, this will lead to a better jobs count for these projects.

Provide timely and accurate reporting.
The Reform and Integrity Act places significant compliance requirements on EB-5 Regional Centers, and they must now undergo USCIS audits every five years. These burdens will filter down to the Regional Center’s project partners, who will need to follow stricter administrative policies and procedures.

Construction executives that can provide timely reporting and information in formats that the Regional Center requires can better attract EB-5 funding. This might entail, for instance, a detailed budget that accurately assesses job creation opportunities and sources materials and labor locally to benefit the region where the project is located.

A SPECIALTY FUND ADMINISTRATOR CAN HELP

The Reform and Integrity Act states that for all NCEs, a third-party fund administrator must be retained unless waived under certain circumstances (including an annual independent financial audit). The NCE must deposit and maintain the capital investments of all foreign investors in separate accounts, including amounts held in escrow.

Given new compliance requirements and current economic volatility, it’s crucial to look for a fund administrator with specific EB-5 experience. A specialty fund administrator can offer an approach that covers the entire EB-5 life cycle, from escrow and depository requirements to streamlining multi-level fund administration and providing audit trails for issuers, investors and regulators. This partner should also have a web-based portal to enhance reporting and transparency, provide real-time updates and facilitate better communication among relevant stakeholders. Finally, such an administrator should be able to diligently track necessary documentation and help prepare for audit readiness.

EB-5 is back in action—providing exciting opportunities for construction executives. With these best practices and help from an experienced fund administrator, they’ll be poised to seize them.

by Reid Thomas

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