Proposed changes to the EB-5 Immigrant Investor Program could create funding shortfalls in the commercial real estate finance market. An EB-5 legislative update currently moving through Congress would reauthorize the program, which expires September 30, 2015.
Should the new legislation become law, it could redefine Targeted Employment Areas, which are areas that are disadvantaged, rural or subject to high rates of unemployment. Some states have loosely interpreted the criteria for designating an area as a TEA, allowing EB-5 funding to go to projects in areas that are not disadvantaged or blighted, notes National Real Estate Investor.
EB-5 legislative update addresses TEA definition
The expansive definition of TEAs has elicited criticism from legislators and administrators of the EB-5 program. The new legislation would more narrowly define TEAs as individual census tracts, with unemployment rates at 150 percent above the national rate.
Current law does not include a formula for defining TEAs on a national level. Instead, state programs may define their own TEAs, and sometimes do so by grouping multiple census tracts.
Although Manhattan doesn’t have high unemployment, for example, many EB-5 projects are built there because the borough is bundled with census tracts from Queens and Brooklyn to define a TEA. Under the proposed rules, projects in areas like Manhattan wouldn’t qualify for EB-5 investment, which some observers say could stymie development and decrease job creation.
A boon to hotels, other construction
Since the economic downturn in 2008, EB-5 financing has provided a boost to the real estate market, serving as a vital funding source for new hotels, affordable housing, and other projects. Although capital is more widely available now, EB-5 has continued to serve as an important source of mezzanine debt for major construction projects.
EB-5 legislative update: Additional changes
The proposed legislation would also increase the minimum investment required of visa applicants. Currently, the minimum investment needed to qualify for the EB-5 program is $1,000,000 per immigrant investor (that amount is reduced to $500,000 if the investment will be going to a TEA). Under the proposed legislation, the new minimum investment needed would be increased to $1.2 million, $800,000 for TEA projects. Industry observers note that the investment increase is unlikely to deter demand from foreign residents to enter the program.
Understanding the repercussions
The pending EB-5 legislative update may result in both positive and negative outcomes for current and future development projects. For more information, consult an experienced EB-5 attorney at the Law Offices of David Hirson & Partners, LLP by calling (949) 383-5358.