By Andrew McIntyre

Law360 (October 20, 2020, 5:34 PM EDT) -- While the coronavirus pandemic has sharply curtailed commercial real estate investment and transactional activity, it has also upended the EB-5 foreign investor market, and lawyers say such deals and projects face a complex and unique set of challenges.

Through the EB-5 program, foreigners commit $900,000 or $1.8 million in a U.S. project, depending on where the venture is located. The lower figure is for projects in Targeted Employment Areas, or TEAs. TEAs by definition have unemployment rates at least 150% of the national average, and developers seeking EB-5 funds do nearly all their projects in those areas. Provided the project creates 10 jobs per investor, the investor gets a green card out of the deal, as well as green cards for dependents and a minimal rate of interest on the investment.

Since so much EB-5 money has typically gone into construction projects as opposed to completed buildings, the EB-5 market has been hit hard by the downturn in construction activity due to the pandemic.

But such investments are additionally complex because of their job creation requirements, and the loss of millions of jobs because of the virus is creating chaos for various EB-5 players as parties try to figure out the implications of job losses for investors.

Here, Law360 looks at three ways COVID-19 is reshaping the EB-5 landscape.

Construction Slowdown Curtails New Investment

For the first time in its nearly three-decade history, the EB-5 program in late 2019 saw increases in its investment minimums, which had been $500,000 and $1 million. While the higher minimums posed some degree of challenge to finding new investors, the construction slowdown in 2020 has exacerbated difficulties, lawyers say.

Before the pandemic, the EB-5 program was also struggling with severe wait times — as long as 15 years for some investors to get green cards — as Congress has repeatedly failed to raise the 10,000-per-year cap on the number of EB-5 visas the government can issue.

"The industry was kind of getting its feet back in the early part of 2020, and then COVID hit. And that just really put a near full stop on capital raises across the board," said Carolyn Lee, an attorney specializing in EB-5. "Shortly on the heels of the outbreak, we had political unrest, which was covered internationally. The market did not respond favorably."

While commercial real estate as a whole has been affected by the pandemic, EB-5 financing is often used to fund high-profile hospitality, retail and office projects, and those asset classes have been among the hardest hit by the downturn.

"So much of the EB-5 investment has been concentrated in hospitality and commercial office buildings and large projects which [developers] envisioned that people would be coming [to] in person," said Angelo Paparelli, a partner at Seyfarth Shaw LLP.

Jim Butler, chairman of the global hospitality group at Jeffer Mangels Butler & Mitchell LLP, said the long wait times have also been a challenge, and noted that investors are increasingly requiring more interest to be paid on their investments, which makes the process less attractive for developers. Interest is negotiated on every deal, and historically has often been 1% or less.

Those factors, coupled with the construction slowdown caused by the pandemic, have all but halted large EB-5 projects.

"I don't want to say it has died, but it certainly is in a coma as a source of financing for developers," Butler said. "The pandemic is just one more negative factor … on top of all of the blows that have befallen the EB-5 program."

Smaller Companies and Projects Could Get a Larger Share

While major EB-5 players like Related Cos., which has used the financing for its Hudson Yards project in Manhattan, are not raising EB-5 capital like they did before the pandemic, experts say there is still demand from foreigners to participate in the program, and smaller projects and developers are receiving some investment that might have otherwise gone to the major players.

One issue is that big companies are finding it hard to do deals in TEAs amid changes in 2019 that shifted classification of some areas from TEA to non-TEA. Under the old system, states determined TEA regions, but now the U.S. Department of Homeland Security does that, and the agency can now also include unemployment figures for adjacent areas in determining whether an area gets the TEA classification.

"There has been a significant change in the composition of the project developers," Paparelli said. "What's happened is many of the large players have found it unattractive to be forced into investments in areas under the newly restricted set of Targeted Employment Areas. They've pretty much lost their appetite. They've been replaced by smaller developers who might have a need for only one to five investors."

While EB-5 capital often goes into large real estate projects since those are easier to market to international investors, the capital does not need to be invested in real estate. Startups can also be the recipient, provided they can make good on the 10-new-jobs-per-investor requirement.

"There's a fair amount of activity by securities lawyers on these small deals," Paparelli said. "Some immigration lawyers are getting that work."

Paparelli said investors from countries such as Mexico, Brazil, India and South Africa could make up a larger slice of the EB-5 investment pie because those countries have "established networks for developing small amounts of capital."

Signing investors up for small projects, though, comes with its own set of challenges, since agents traditionally pitch large brand-name ventures. Immigration law attorney David Hirson said many EB-5 agents who had previously pitched large projects are at the moment not pitching any EB-5 projects.

Even so, Lee said, "There are certainly a number of indicators that show that there are players who are looking for opportunities even in this difficult and challenging environment."

Job Creation in Jeopardy for Current Projects

The requirement that each investment create 10 jobs is tricky even in a nonpandemic environment, and the loss of millions of jobs due to COVID-19 is creating headaches for the parties involved in current EB-5 projects.

Some projects have hundreds of EB-5 investors, and Lee said the question of which investors are affected by the jobs factor requires "careful analysis." On the one hand, there's a question of where investors were in the process from U.S. Citizenship and Immigration Services' point of view, and also the question of how far along the project itself was.

"There is a risk that ... the fact that so many of the deals were in hospitality and commercial real estate ... will possibly result in USCIS maintaining that the business failed, jobs were not created, and the investors are out of luck," Paparelli said. "With the move toward remote work, many of the fundamentals that underlie the expectations about job creation or the continued ability to sustain the investment … are in question."

Paparelli said projects generally have some agreement with groups of investors as to how to handle the problem of insufficient job creation. The big sticking point is how to determine which investors are out of luck and which get green cards, and complications could arise if USCIS views that process one way and developers another.

"It's not always clear that USCIS recognizes that sequencing and gives the green card to the right person," Paparelli said. "They may do a first-in, first-out. It all depends on how the allocation is decided."

The loss of jobs in 2020 because of the pandemic and the hit to the hospitality sector could make it more difficult for would-be investors to sign on to new projects, since the law still requires that 10 new jobs be created per investor in order for the investor to receive a green card.

Experts believe "one of three hotels will close and never reopen. … One out of four or one out of three restaurants will never reopen," Butler said. "Some of those projects are EB-5 projects. EB-5 projects aren't immune to the economy, which will raise the very critical point: What happens to the jobs?"

--Editing by Alanna Weissman and Jill Coffey.

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