Proposed EB-5 Rule Clamping Down On Bridge Financing Rattles Sector

For the first time in four years, the EB‑5 industry has an up-to-date draft rulebook. The recently released policy document provides long-awaited guardrails but has also touched off a wave of anxiety, as it proposes a rule change that could threaten many projects in the works under the program.

Among the changes are restrictions on the use of bridge financing, a shift that could clamp down on the flow of investment dollars to the program.

Many investors in the program have historically placed a portion of their capital into bridge debt to qualify for an EB-5 visa, but under the new rules, they will face stricter job creation standards to use this strategy, possibly jeopardizing projects.

The updated rules have “the potential to disqualify the majority of EB-5 offerings that are getting ready to come to market today,” Jill Jones, an attorney and program specialist at JTC Group, said in an email.

The EB-5 program allows foreign nationals to eventually secure permanent residency status in the U.S. by investing $800K to $1.1M into a development, typically through entities known as regional centers.

The stricter standards are “about making sure that there's a lot more jobs still to be created in the whole scheme of the development,” Jones said. 

The majority of EB-5 investment goes to real estate development, and a complicated formula is used to calculate the exact number of jobs directly and indirectly created. 

Under the new rules, investors will face stricter job creation standards that make bridge financing, far and away the most popular source of EB-5 capital today, much more difficult to qualify under the program. 

In the early phases, capital is used to get permits and pay architects, which doesn’t create as many jobs as the construction and delivery portion of a development. Under the new standards, a bridge loan to pay down debt that may have previously qualified may no longer fit, Jones said.  

EB-5 money was used for the early stages of the Gateway at Millbrae Station mixed-use project in San Francisco, which underwent a nine-year entitlement process.

But Jones is optimistic that U.S. Citizenship and Immigration Services will be receptive to adjusting the rules, especially around bridge financing, to avoid any disruption to the program. This is the first time in her memory that the agency has asked for public comment before issuing rules. 

“They're not saying this is what we're intending to do, take it or leave it. They're saying we want to tighten up certain areas,” she said.

The new regulations were published July 2 for a 60-day public comment period.

Investors have contributed just under $60B since the program began in 1990, according to Invest in the USA, a trade group that lobbies for users of the EB-5 program.  

Attorneys in the space have flagged a host of other issues with the proposed rules, most of which center on short timelines, definitions and the strictness of the oversight regime. 

Investors will also now be required to have all of their capital deployed before they begin the application process, whereas an EB-5 visa applicant could previously have only laid out a fraction of the funds. It is a stricter reading of the law than what is currently enforced that would effectively force regional centers and investors to shift how they operate.

The new rules include “laudable proposals,” Ron Klasko, a Philadelphia-based immigration attorney, wrote in an explainer last week. But he added that “unfortunately, the list of positives is dwarfed by the list of concerns,” laying out 10 problem areas in the regulations. 

The rules prohibit some longstanding practices that have been widely accepted on a case-by-case basis by USCIS, in part because the agency is looking to standardize the process, Jones said. 

They require redevelopment projects to be completed in three months as opposed to the “commercially reasonable amount of time” that is currently enforced and generally accepted to be one year. 

The online portal with the proposed rules had around 30 public comments this week, most of which are from individual investors who said they will hurt the program. Invest in the USA is planning its own submission, a spokesperson said. Jones is working with a handful of industry players to draft productive comments to submit.

The EB-5 program has given out permanent resident status to 144,408 foreign nationals since 2000, with 92% of those visas coming from investors who put capital into a regional center. More than 27,000 visas have been issued in the last two years, during which there has been a significant pickup in investor interest, according to data from Invest in the USA. 

If the rules are adopted without any changes, Jones said they will likely lead to a burst of projects being rolled out by regional centers to try to get ahead of their effective implementation. Over time, however, the stricter standards have the potential to cut the options available to investors.

“The whole goal of having these rules is to increase the sophistication and the integrity of the program,” Jones said. “Anytime we get rules around integrity, it's going to make it more difficult, and it's going to weed out the people that aren't necessarily serious about doing it.”