Why do some EB-5 investors prefer direct investments? - EB5Investors.com

Why do some EB-5 investors prefer direct investments?

EB5Investors.com Staff

By Marta Lillo

Foreign investors interested in the EB-5 visa program to obtain permanent residency in the United States have two options: invest as a direct or standalone investor or through an authorized regional center.

The key difference between the two is control. Standalone investors invest directly in the business, find their own projects, and take a managerial role. EB-5 regional center investors take a more passive approach and entrust the management of the investment to a USCIS-designated regional center. They all must meet the minimum investment requirement of $800,000 if they invest in a Targeted Employment Area (TEA) and $1.05 million if it’s anywhere else in the country, and create 10 full-time U.S. jobs for at least a two-year period through an approved business entity.

Samuel Newbold, an EB-5 attorney and chair of the Immigration Law Group at CSG Law, explains that direct investment applicants are much more entrepreneurial in nature in that sense. “That doesn’t mean there aren’t entrepreneurial investors in regional center projects. But, by and large, the direct investor is someone who prefers the operational control over the business. They don’t want to give their money and control to some other third party. They want to be the ones in the driver’s seat, and they’re okay with that risk.”

Types of direct EB-5 investments and how they are financed

Tom Martin, managing director at Baker Tilly, adds that another common feature direct investors have is that they normally have a relationship with the U.S. “They have a relative in the United States that is setting up a business, and they are going to invest in that business to immigrate to the United States. They have a close relationship with the developer(s) and feel comfortable with the project and the people they are investing with.”

Newbold adds that these entrepreneur investors “generally have either business experience or a familiarity with the U.S. market where they feel comfortable knowing what they’re doing.”

It is commonly agreed that the hospitality, food and beverage, and entertainment sectors are the most attractive to this type of EB-5 investor. “We are seeing a lot of direct EB-5 going into hotels, restaurants, and gas stations. That being said, we have also assisted clients that have worked in coal mines, daycare centers, technology companies, entertainment centers, and grocery stores. As long as 10 jobs are created, it really doesn’t matter what business is being started,” Martin says.

Newbold adds that EB-5 direct investments tend to cost more than the minimum requirement of $800,000. “I think everybody wants to pay the cheapest ticket, so everybody wants to do it for $800,000. But for direct investments, it usually costs more than that. You may try to do it for $800,000, but it’s hard to start a business on $800,000 and hire that many workers and keep them employed and have the business be successful,” he states.

Consulting is a sector that typically attracts direct EB-5 investments, but it’s not a cheap option, according to Newbold. “Consulting employees are expensive, especially if you’re in technology or professional services. You can’t employ ten people on $800,000 for any substantial period of time in professional services or any kind of tech consulting or something like that,” the attorney says.

Newbold has also had clients who started a property management company to manage their assets in the U.S. In other cases, they bought existing and operating businesses to expand and redevelop.

It is typically a combination of EB-5 and non-EB-5 capital how these investors finance these projects, according to the attorney. “We oftentimes see non-EB-5 investment in the capital stack combined with EB-5 investment,” he says. “It’s actually more normal to either have the EB-5 investor invest substantially more than $800,000 or to have a partner or partners that are contributing capital.”

Why there are fewer direct EB-5 investors than regional center investors

Direct investments are rare in the EB-5 ecosystem, with only 1-2% of investors choosing to pursue them, Newbold affirms. Normally, most applicants would either opt for the regional center option or abandon their application.

An EB-5 regional center investment carries more advantages, including more flexibility in job creation and pooling lower investment amounts due to multiple investors contributing to the same project. Regional centers also must adhere actively to USCIS regulations, reducing the strain on investors who are otherwise solely responsible for meeting all guidelines.

“Once they figure out it’s going to be tough and it’s going to cost more than they think, they just convert to a regional center investment because it’s turnkey,” Newbold adds.

Concurrent filing is becoming a popular option for EB-5 investors who already live in the U.S. and want to adjust their immigration status (AOS) while remaining in the country and being able to work. This trend is also encouraging applicants to choose regional centers over direct investment, Newbold notes.

“There are so many factors that can impact their decision to do it or not. One of those factors is always immigration. If they’re already in the United States with immigration status, doing something that’s usually a factor is the timing in which they do a direct investment. I’d say that, on average, it takes direct investors a really long time to figure it out. Much more so than regional center investors,” he says.

Although direct EB-5 applicants come from everywhere globally, some nationalities have been dominating this trend lately. “Indian investors probably make up the majority of our direct EB-5 projects, but we are also seeing investors from Russia, China, and South America,” Martin says.

In addition, these EB-5 investors also tend to come from Western Europe, Newbold adds.

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