The Best Locations and Asset Classes for EB-5 Projects
Two High-Risk Asset Classes for EB-5 Projects
Assessing EB-5 Projects is Essential to Immigration Success
The EB-5 Regional Center Program was reauthorized on June 24, 2022, in a landmark ruling by the U.S. District Court for the Northern District of California. Following the ruling, regional centers were allowed to resume operations and accept I-526E visa petition filings from new EB-5 investors. Regional center-sponsored projects in a variety of real estate asset classes and locations across the United States are now available.
Most regional center projects are located in targeted employment areas (TEAs) and therefore qualify for a reduced investment threshold of $800,000.
While there are several regional center-sponsored projects available, it is crucial for EB-5 applicants to carefully evaluate each option: their likelihood of receiving a timely return on their investment and of immigrating to the United States is largely contingent upon the financial success of their projects.
Unfortunately, some EB-5 investors have failed to qualify for U.S. visas because their projects were unable to adapt to the vagaries of the economy or did not have a reliable demand for their products.
Investors can avoid this scenario and safeguard their funds by choosing regional center-sponsored projects in asset classes and locations with proven, long-term demand. The following analysis of current trends in the EB-5 industry demonstrates how investors can diligence an EB5 project and identify the best asset classes and project locations.
The Best Locations and Asset Classes for EB-5 Projects
Residential for-sale real estate developments and assisted living developments in the Midwest and Southeast are currently the best new commercial enterprise types for EB-5 investors.
Proven Long-Term Demand
Both the for-sale and assisted living real estate markets have a consistent, proven demand.
For-sale real estate demand has been bolstered by the COVID-19 pandemic. The National Association of Realtors reports that sales of existing homes shot up nearly 21% in June 2020. Along with a low housing supply, this trend has created what CNBC describes as “one of the most competitive housing markets in history.”
Midwest states such as Colorado and Utah are experiencing especially high demand for residential real estate. Part of the region’s appeal to homebuyers derives from its accessibility for retirees, many of whom become homebuyers and generate a significant amount of housing demand.
Among the many benefits of relocating to Midwest states, including a relatively low cost of living and steady economic growth, pristine natural locations are a major catalyst for homebuyers. These factors have made the Midwest a prime location for residential real estate developments.
Utah is experiencing a particularly fast-growing housing market; recent Census Bureau statistics reflect a sharp statewide increase in housing units. The state’s steadily growing population has evidently created a profitable market for for-sale real estate developers. We expect more residential real estate developments in Utah to succeed as they accommodate this growing demand.
In contrast, the build-to-rent industry has declined somewhat since early 2020; real estate marketplace Zillow found that, because of the advent of remote work, nearly two million renters can now afford homes outside urban areas. Many renters have subsequently become homebuyers. Others experienced financial difficulties during the pandemic and moved back in with family members.
This downturn in the rental market has widened for-sale real estate’s increasingly lucrative niche.
Assisted living facilities also enjoy a stable market. A March 2022 article by the National Investment Center for Seniors and Housing Care (NIC) notes that the last three quarters of 2021 saw “unprecedented demand momentum.” The NIC also praises the “level of agility, preparedness, and responsiveness among senior housing operators,” a key factor in the sector’s rebound.
Indeed, assisted living has achieved one of the fastest post-COVID recoveries in real estate. As high-income individuals continue to retire and move into assisted living facilities, we expect the assisted living sector to grow steadily over the next 10 years.
Mitigated Risks
Real estate developments in the Southeast and Midwest often have access to comparatively less expensive land, which reduces their financial commitment and risk. In addition, for-sale developments frequently pre-sell units and require non-refundable cash deposits from buyers. These arrangements offer a far more dependable source of revenue than rentals.
Moreover, for-sale real estate projects enjoy a convenient degree of operational flexibility. Housing developments, for instance, can build units according to current demand. If demand wanes or if the economy experiences a downturn, the development can adjust the pace of construction accordingly.
Operational flexibility is an important safeguard against unexpected fluctuations in the real estate market.
Two High-Risk Asset Classes for EB-5 Projects
Build-to-Rent Developments in Urban Areas
As mentioned above, rental properties are facing an increasingly volatile market, which has become even more uncertain in urban areas. The work-from-home revolution has led to a widespread exodus away from cities, particularly in the California Bay Area, to rural or suburban communities. These trends make urban apartment building developments a high-risk option for EB-5 investors.
Several rental property developments currently on the market were underwritten before the COVID-19 pandemic, meaning that the risk evaluation used to determine the project’s creditworthiness is now entirely out of date. These developments’ actual risk is likely much higher in today’s market. Given the Bay Area’s highly fluctuating rental prices, apartment developments in this region that began before the COVID-19 pandemic face an increasingly pronounced risk.
A recent real estate market analysis notes that the Bay Area is the only metropolitan area in the United States whose rent prices have not recovered to pre-pandemic levels, describing Oakland’s rental market as “particularly stagnant.”
Similarly, one popular rental site reports that the median rent for a one-bedroom apartment in Oakland has dropped 14% compared to March 2020, while the national median has increased nearly 15%. And according to June 2022 statistics, apartment rent prices continue to decrease in the Bay Area while vacancy rates climb.
The main upshot of these trends is that the projected rental revenues for apartment developments in Oakland and the rest of the Bay Area could be significantly lower than expected. Examples of high-risk developments include West Oakland Mandela BART Station, a large, 760-unit residential real estate project with construction costs estimated at $700 million.
In the case of EB-5 projects, a capital shortfall could be disastrous for EB-5 investors who rely on their projects to remain financially stable and create at least 10 jobs per visa applicant. (Some of these jobs must be sustained for at least two years.) Otherwise, investors will be unable to immigrate to the United States.
Since proximity to urban office space is no longer an important selling point for many young renters in the Bay Area, we can expect Oakland’s rental occupancy to remain below pre-pandemic levels for some time. It will therefore become increasingly difficult for apartment developments to find renters and reach their revenue projections.
The driving force behind the downturn in the Bay Area rental market is the remarkable COVID-induced departure away from the region. In her January 2021 article “They Can’t Leave the Bay Area Fast Enough,” New York Times correspondent Nellie Bowles succinctly notes that workers in the Bay Area’s tech companies “fled. They fled to tropical beach towns. They fled to more affordable places like Georgia. They fled to states without income taxes like Texas and Florida.”
Leading Bay Area tech companies made this exodus possible by quickly adapting to a fully remote work environment. Google, for instance, gave 14,000 of its employees permission to transition to fully remote work or relocate during the height of the pandemic.
The migration statistics for California and the Bay Area unequivocally show that residents are leaving in droves. U.S. Postal Service data indicates that almost 650,000 Californians relocated from the state in 2020.
A December 2021 report by the California Policy Lab states that residents of Alameda County—whose county seat is Oakland—were still exiting at a 6% higher rate than at the start of the pandemic. And recent U.S. census data indicates that, for every 37 people who move to California, 100 move out.
Interestingly, there is a rigid dichotomy between the Bay Area’s and the Southeast’s recent population demographics: Florida alone received 211,305 new residents between July 2020 and July 2021. The state ranked as the highest for net migration during this period and will likely see a growing clientele for residential real estate developments.
Conflicts of Interest Between EB-5 Regional Centers and Project Developers
A conflict of interest between the EB-5 regional center in charge of fund management and the developer of an EB5 project represents yet another liability for investors. The best practice in the EB-5 industry is to avoid projects where the entity in charge of fund administration is affiliated with the project developer. This organizational structure could easily lend itself to a breach of fiduciary duty toward investors.
If a project’s developer and regional center sponsor share the same name, then a conflict of interest is likely present.
Should something go awry during the course of the project—such as a shortfall of rental revenue—priority could be given to the developer instead of the EB-5 investors. Their EB-5 capital, interest payments, and immigration status could be at serious risk.
Investors are encouraged to evaluate projects carefully along with qualified immigration counsel and assess the level of risk involved.
Luxury Hospitality Developments
Similar to large urban apartment projects, luxury hotel developments are at a high risk of experiencing lower revenues than projected. A leading travel industry site argues that the considerable post-lockdown increase in high-end hotel rates could deter customers because these establishments “don’t have the staff or the ability to live up to inflated rates. This presents a long-term danger to carefully cultivated brands.”
This situation is compounded by an imminent economic recession. After J.P. Morgan cut its midyear growth forecasts for the United States in July 2022, the bank’s chief U.S. economist Michael Feroli commented that their projection “comes perilously close to a recession.” In light of inflation and climbing Federal Reserve interest rates, financial analysts have sounded the warning for an economic downturn in the coming months.
Under these circumstances, attracting cash-strapped consumers to luxury hotels will become increasingly difficult. Growing economic constraints will likely countervail the demand for high-end accommodations, and instead of traveling to a luxury hotel, consumers in a recession may favor less expensive options.
Assessing EB-5 Projects is Essential to Immigration Success
This overview of trends in the EB-5 investment market illustrates the wide variety of offerings available to investors, as well as the substantial risks involved from both a financial and immigration perspective. Carefully evaluating regional center projects in their wider economic context will help investors select an EB5 project that will safeguard their funds and increase their chances of successful immigration. EB-5 investors should also examine the project documents, including the loan agreement, to ensure compliance with United States Citizenship and Immigration (USCIS) requirements.
EB5AN is pleased to offer three institutional-quality real estate development projects: Wohali Utah, Saltaire St. Petersburg Luxury Condominiums, and Twin Lakes Georgia Single-Family Housing.
Wohali Utah
Wohali Utah is a 428-unit residential golf community just outside Park City, Utah. With a prime location in the Utah backcountry, rural TEA designation, a strong capital structure that does not rely on EB-5 funding, and a clear capital repayment term, EB-5 investors in the Wohali Utah project will enjoy a level of immigration and financial safety that is unparalleled in the EB-5 industry. EB-5 investors will also receive set-aside visas, priority processing for Form I-526E, and job creation and I-526E approval guaranties.
The project developer is 100% independent of EB5AN.
Saltaire St. Petersburg Luxury Condominiums
Saltaire St. Petersburg is a 35-story luxury condominium project in the heart of downtown St. Petersburg, Florida. 100% of the condominiums have been sold, and all of the jobs required for the project’s EB-5 investors have already been created. These factors greatly increase new EB-5 investors’ chances of immigrating successfully. New investors in this project will also receive I-526E approval refund and loan repayment guaranties, as well as set-aside visas.
Twin Lakes Georgia Single-Family Housing
This 1,300-unit single-family housing community has also created all of the necessary jobs for its EB-5 investors. With 350 homes already sold, a solid business model in the housing sector, and I-526E approval refund guaranties, investors in the Twin Lakes project will also enjoy high chances of financial and immigration success. In addition, the project’s rural TEA designation qualifies its investors for set-aside visas and priority processing of Form I-526E.
Saltaire St. Petersburg and Twin Lakes Georgia are both developed by the Kolter Group, one of the top 25 private home builders in the United States. The Kolter Group is 100% independent of EB5AN, and our 10+ projects have all succeeded financially and received USCIS approval.
For more information on how to find the best EB5 project, please schedule a free consultation with EB5AN.
