The Real Deal New York

EB-5 could be in trouble

Panelists at NYC Real Estate Expo think heavy regulation is coming

November 12, 2015 08:30AM
By Rey Mashayekhi

Jeffrey Moerdler Frederick Cooper

From left: Jeffrey Moerdler and Frederick Cooper

Those hunting for EB-5 funds could be in for a rude awakening.

At the seventh annual NYC Real Estate Expo at the New York Hilton Midtown, Jeffrey Moerdler, head of the New York real estate practice at law firm Mintz Levin cited real concerns with the future of the EB-5 program, which he suspects will be subjected to “a huge amount” of regulation from federal agencies like the Securities and Exchange Commission.

“The problem with doing EB-5 is you need a chain of parties to get a deal done,” he said, while “three-fourths of that chain is outside the U.S.” and exempt from federal rules and regulations. “[EB-5] requires serious due diligence, which a lot of people aren’t doing,” the lawyer said.

“There are investigations underway today” regarding EB-5 deals, Moerdler added, saying that he could see “deals collapsing” as the program faces greater scrutiny regarding disclosures and fees.

“It’s a dirt cheap form of financing,” he said. “The question is how it survives.”

Frederick Cooper, senior vice president of finance and international development at Toll Brothers, told the audience at the expo that he’s “kept [Toll Brothers] away” from the EB-5 program – which, while designed to create “long-term jobs” through foreign investment, more often results in simply “building condos, which don’t create long-term jobs.”

Cooper also tackled the subject of crowdfunding, which he described it as “not designed for development,” but rather better served as a mechanism to “fill gaps” in existing projects and properties. Moerdler said crowdfunding platforms are “doing for real estate what E-Trade did for the stock market,” but said he doesn’t see giant investment firms like Related Cos. “doing crowdfunding” anytime soon.