EB-5 Foreign Investment and New Market Tax Credit Financing for Real Estate Development

Posted by    |    July 16th, 2011 at 5:15 am

When financing for commercial real estate development collapsed in 2008, the initial push was for federal, state and local governmental entities to work with developers on public-private partnerships. We have since learned that many governmental entities are also cash-strapped or are unwilling to use public dollars to support what may be seen as private development. Those projects that attempt to secure governmental financial assistance are finding that the timing of the approval process is much longer than anticipated, with many of these projects stretching out 2 to 5 years. Public-private financing may also involve public disclosure, competitive bidding and a request for proposal process, which developers typically want to avoid.

The EB-5 foreign visa investment program and loans subsidized by new market tax credits (NMTC’s) are two viable financing alternatives for developments in economically challenged areas, particularly for real estate projects that create employment opportunities (retail, restaurants, call centers, etc.).  Although both of these financing alternatives are federally created, the benefits have been largely allocated out to the private sector for implementation, drastically reducing the time and bureaucracy in securing this financing.

A brief summary of these two programs:

EB-5 FOREIGN VISA INVESTMENT PROGRAM

The EB-5 program is essentially the “purchase” of visas by a foreign national for his/her entire family (husband/wife and children under 21) in exchange for investing in a job creating business in theUnited States.

EB-5 regional centers exist in most major cities. The regional centers structure the transaction with the real estate developer and create relationships with foreign agents who locate the overseas investors. To secure the visas, the foreign citizen must invest in a business that creates 10 jobs. If the investment is in a lower income area the investment is $500,000; if not, the investment is $1,000,000 (very few EB-5 transactions are done at this elevated investment level). The foreign investors are typically bundled into larger investment pools that are project specific. The investment is normally required to be repaid within 5.5 years with a very low interest rate, with the foreign investors retaining a small back-end interest in the business.

Example: we recently represented the developer in a $15-$20 million EB-5 investment by 30-40 Chinese nationals in a nightclub and restaurant. This investment helped create hundreds of new jobs in a $600 million hotel-nightclub-restaurant-apartment project that is the focal point of community revitalization in a neglected lower income area.

New Market Tax Credit Financing

Most of the major banks have secured allocations of NMTC’s from the federal government. These credits are either sold to investors or used by the banks to offset their federal income taxes, thus allowing the bank to lower their cost of funds and drastically reduce the resulting interest rate charged on new market tax credit loans. Similar to the EB-5 program, these loans are typically made on job creating real estate projects in very low income areas. There are a host of nuances and unusual legal structures involved in these loans due to the need to use other parts of the capital stack to “leverage” the credits, but the banks and legal counsel familiar with NMTC’s can help navigate those complexities. In simplest terms, NMTC loans are just subsidized low interest debt financing.

Example: We are working with a developer on aSouth Dallas transit-oriented mixed-use residential over retail project, with expansion of an adjacent local nonprofit’s headquarters to create a job training center. The non-residential components of the project will be funded in part by a NMTC loan.