EB-5 Capital for the Franchise Industry
The EB-5 Immigrant Investor Program (the “EB-5 Program”) has become one of the most popular forms of alternative financing.
Under the EB-5 Program, each investor invests $500,000 (in rural areas or areas with higher than average unemployment) or one million dollars (everywhere else) into a project. The principal criteria are that the investor’s capital infusion must create at least 10 jobs for U.S. workers, and maintain those jobs for two years or more. If these criteria are met, the investor and his or her immediate family receive permanent residence (a green card), allowing them to live in the United States (and incorporating their worldwide income into the U.S. tax system).
There are two types of EB-5 structures:
Direct (or individual) projects, in which the investment must create at least 10 jobs itself, and regional center-based projects, in which several investors combine their investments into much larger projects with significant direct and indirect job-creation benefits.
Given the popularity of the EB-5 Program among Chinese citizens (same accounted for approximately 80 percent of EB-5 capital raised for fiscal year 2013), U.S. developers have largely focused their marketing efforts in China. The success of EB-5 in China largely relates to the sophisticated network of migration agents and their connections to the wealthy Chinese class. Yet, a looming and rather complicated visa quota may take effect in the next fiscal year, possibly causing the Chinese investment market to begin losing some of its appeal.
The required investment level is one million dollars unless the investment is made into a business located in a “targeted employment area” (unemployment rate that is 150 percent or more of national coverage), a rural region (population less than 20,000) or a “troubled business enterprise” (at least 20 percent decline in value over the past 12 to 24 months), at which time a reduced investment of $500,000 is required.
To meet the competitive demand for investor capital, four main factors in the evaluation process include:
1. The amount of money being invested by the developer/sponsor in the project or the applicable business, with typically a minimum equity investment of 25 percent of the total project cost.
2. The quality of the sponsor group and its prior track record in similar types of operations.
3. The quality of the business itself and whether it includes identifiable brand names or special situations, such as nationally branded hotel chains, restaurant or retail operators.
4. The safety of the job creation of the 10 jobs per investor.
Regional Center and Direct Program
Investing in a regional center additionally provides flexibility through the acceptance of indirect job creation as part of the job requirements. As of February 1, 2013, there are 251 approved regional centers, operating in 45 states, including the District of Columbia and Guam.
Approximately 92 percent of the individual Form I-526 petitions filed each year are filed by foreign investors who are investing in regional center-affiliated commercial enterprises.
With respect to the franchise industry, franchisors and franchisees alike can pursue the direct investment program whereby EB-5 investors invest directly in the franchise enterprise rather than having to go through a regional center. If a regional center is not being utilized, only direct employment jobs will be included in determining whether the 10-job per investor test has been satisfied. The structure for a chain retail establishment would include the following:
1. Formation of holding company that would have subsidiary entities that would own the retail facilities.
2. The EB-5 investors would invest preferred equity in the holding company and receive a fixed-dividend return. The franchisor or franchisee would also invest in the holding company and own the common-equity interests.
3. Since the holding company will own a 100 percent interest in all of the subsidiary entities, under USCIS guidelines, all jobs created by the subsidiary entities would otherwise count toward the 10-job requirement for each investor. The subsidiary entities could also not only include the operating entities, but separate entities that may own real estate interests as well.
4. When the investors finally receive their I-829 approval after the minimum time period for investment of two years has been satisfied and proof of job creation has been provided, then the holding company could redeem the investors’ interest for the fair-market value, which should be the capital account plus any accrued preferred returns.
The EB-5 investors would, therefore, have an exit strategy to receive a return of their capital investment. The significant advantages to the direct program include the following:
1. Ease of execution since there is no need to go through a regional center.
2. No need for an economic study since the reliance is totally on direct job creation and, therefore, the holding company/ employment company would just need to provide W-2 employee information.
When the necessary two-year investment condition has been met and the proof of employment has been provided, an I-829 petition is filed that will enable the lifting of the temporary green card restrictions and cause the green card to become permanent in nature.
The regional center or direct investment program offers a unique opportunity to enable the franchise system to raise debt or equity capital at very reasonable rates to enable the development of additional corporate or franchise units.
Ronald R. Fieldstone is a Partner at Arnstein & Lehr LLP Miami office who specializes in EB 5 corporate, real estate and taxation.
Since 2009 Mr. Fieldstone has actively been involved in serving as corporate, securities counsel for multifaceted industries, involving real estate funds and specializing more recently on EB-5 immigrant visa investor offerings (“EB-5”). Mr. Fieldstone represents a vast number of Regional Centers in EB-5 offerings.
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