Here’s what the EB-5 rule changes mean for real estate

New federal regulations take effect today, and will double the minimum dollar amount that all foreign visa-seekers

National /
Nov.November 21, 2019 01:00 PM
(Credit: iStock)

(Photo illustration by Alexis Manrodt for The Real Deal; iStock)

The EB-5 program’s new federal regulations take effect today, and will double the minimum dollar amount that all foreign visa-seekers must plow into development projects.

The rules are designed to clamp down on abuse, to modernize the 30-year-old federal program and to keep up with inflation. EB-5 allows foreign investors get U.S. green cards in exchange for investing in American businesses and creating at least 10 jobs.

While it was intended to spur development in distressed and rural areas across the U.S., it has come under criticism for serving as a tax break for the wealthy real estate developers.

Industry experts say the new rules will make it more difficult for developers to secure financing for projects. While scores of EB-5 projects across the country have been completed, many have faced litigation and complaints from investors.

Under the new regulations, investors must contribute $900,000 from the previous $500,000 for a project in a low employment zone — known as a targeted employment area. The investment amount will also climb to $1.8 million in all other areas, from the previous $1 million.

The new rules also prohibit developers from tacking a sliver of a targeted employment area on to a project in a wealthier area in order to qualify for the lower investment amount.

The investment generally goes into a project as a loan that offers developers rates significantly lower rates than traditional financing.

More than $1.2 billion of EB-5 money went to Related Companies’ Hudson Yards megaproject in Manhattan, considered the largest private real estate development project in U.S. history.

Recently, investors have been less reliant on EB-5 for their projects because of weakened demand from Chinese investors who have to wait years for their green cards.

In one notable example of EB-5 abuse could be seen in the Palm House Hotel, a condo-hotel project in Palm Beach, Florida. The developer assured roughly 90 investors that their $500,000 stakes would go to building the last 5-star hotel in the area. Instead, the developer used the money to pay off his personal debts, and buy a 151-foot yacht named “Alibi.”

 

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