How RIA impacts direct EB-5 investments in franchises
By Anayat Durrani
Papa John’s. Dunkin Donuts. Subway. Holiday Inn. For foreign investors weighing their options, one possible route to consider is a direct EB-5 investment in a franchise. A direct EB-5 investment in a franchise, such as in the fast food or hospitality industry, can prove a successful investment and help create jobs and boost local economies.
A direct investment in a franchise can be an option for investors who may lack the entrepreneurial background to launch a business. A franchise has an established business model which can lessen the risk that may come with starting a new business from scratch. Franchises usually offer support and training to franchisees, such as help with marketing, training programs and operational support.
There are approximately 800,000 franchised businesses nationwide that support more than 8.4 million direct jobs and generate more than $800 billion in economic output for the U.S. economy, according to the International Franchise Association.
Franchises can also provide more predictable revenue since they tend to have an already established customer base and revenue streams that are more predictable, providing for a more stable investment.
“Traditionally, standalone direct EB-5 opportunities, as they are now known since the passage of the 2022 EB-5 Reform and Integrity Act, were usually focused and continue to still be focused on franchises that primarily operate in the fast casual/food space,” says Rohit Kapuria, partner at Saul Ewing LLP.
He says there have also been several smaller hospitality hotel products, set up by franchisees of large hotel chains, focused on hospitality products within the $5 million to $10 million range.
“I have worked on a number of standalone direct EB-5 offerings such as Burger King, Twin Peaks, Hampton Inn, etc., over the years,” says Kapuria.
Franchise options for EB-5 direct investors
For example, DMD Ventures has exclusive rights to partner with EB-5 investors in Big Chicken TEA locations nationwide set to open in 2023. The fast casual chicken restaurant franchise was founded by basketball Hall of Famer Shaquille “Shaq” O’Neal.
Fast food chains and hotels are not the only options.
Another current franchise opportunity is French American Academy school. Since 2019, the FAA has offered a direct EB-5 equity project, which are structured for one EB-5 investor per one school location.
“Since the required minimum investment has been increased, the profile of investors has changed with investors looking for investment opportunities with an impact,” says Jean-Francois Gueguen, founder and CEO, French American Academy Franchise.
Gueguen says there are an increasing number of EB-5 projects that are different from the traditional real-estate projects.
“Specifically, early education franchises are becoming popular, both for their ROI but also because they allow EB-5 investors the opportunity to make a positive impact in the United States. Nothing says “I’m here to make a difference and have a positive effect on my community” like opening your own school,” says Gueguen.
Future of EB-5 franchise investments
While franchises can be a possible route for an EB-5 investor, Kapuria says there has been some reduction in interest within the franchisee market.
The new rules under the 2022 EB-5 Reform and Integrity Act, he says, preclude a franchisee, who is raising EB-5 capital, from pooling more than one EB-5 investor into a standalone direct EB-5 offering.
“For example, the amount of work necessary to put together an offering for one single investor is somewhat similar to that for five investors,” says Kapuria. “As such, the franchisee, who is offering the opportunity to an EB-5 investor should consider the cost of such an opportunity.”
He says the same applies to the EB-5 investor.
“While the investor will secure an equity participation, it will come with a price tag,” says Kapuria.
He says investors should also carefully consider the job creation risk. In the standalone EB-5 case, he says the new commercial enterprise has to create 10 full-time W-2 jobs.
“Failure to create and, as USCIS has traditionally interpreted, maintain such positions could result in denial of the EB-5 investor’s petition,” says Kapuria.
Experts recommend immigrant investors consider different franchise options and weigh all pros and cons before pursuing this route. Choosing a well-known and established franchise brand in a TEA that can produce the required number of jobs, can make the EB-5 process go smoother.