Author: Julia Yong-hee Park
Using EB-5 funds to replace bridge financing or any other short-term equity or debt financing is a relatively new usage in the evolution of EB-5. The need for bridge financing in EB-5 deals arose due to the lengthy delays in processing times which started a few years ago. When developers first started to use bridge financing, there was a lot of confusion surrounding whether or not the USCIS would allow the use of EB-5 investments to replace bridge financing.
Prior to the release of the May 30, 2013 EB-5 Adjudications Policy Memo by USCIS, the only place where “bridge financing” for EB-5 projects had been acknowledged in writing was in the EB-5 Q&A distributed in preparation of the May 2012 Stakeholder’s Meeting. There, in response to a question, the USCIS stated:
“[I]t is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation under the regulations.”
The May 30 Policy Memo takes the above language verbatim and adds, “Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing” which is a reflection of the bridge loan policy that practitioners figured out by piecing together language in individual RFEs (Request for Evidence) prior to the release of the May 30 Policy Memo.
The idea behind this requirement was that the USCIS does not want EB-5 funds to be used merely to replace existing debt or equity that has already been put into the deal. Rather, they wanted something like a “but-for” relationship – called a “nexus” in USCIS-speak. In other words, they wanted the developer to show that “but-for” the EB-5 financing, this particular project would not have been completed thereby creating a “nexus” between the infusion of EB-5 capital and the creation of jobs.
However the May 30 Policy Memo expanded the ways that EB-5 funding could be utilized in a project by saying the following:
“However, even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as long as the financing to be replaced was contemplated as short-term temporary financing which would be subsequently replaced, the infusion of EB-5 financing could still result in the creation of, and credit for, new jobs. For example, the non EB-5 financing originally contemplated to replace the temporary financing may no longer be available to the commercial enterprise as a result of changes in availability of traditional financing. Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.” (Emphasis added.)
In other words, the USCIS is saying if a project had temporary financing (a bridge loan of some sort) as part of its capital stack, even if the original bridge loan was not taken out specifically for the purpose of being replaced by EB-5 funds, developers can after the fact decide to use EB-5 funds.
This new language provided a lot of breathing room in structuring projects using EB-5 funding. (It is also a reflection of how the USCIS is responding to market realities – that the inherent difficulty of timing the release of EB-5 was dissuading more projects from utilizing EB-5 financing.) Prior to the 2013 May 30 memo, if EB-5 was not preconceived from the very beginning and memorialized as such so that the USCIS could validate that this fact, many projects risked I-526 denial for their investors. (And in fact there was a huge deal that had many I-526s denied in 2011 in a now defunct Regional Center because the USCIS found a weak “nexus” between the job creation and the EB-5 capital. Under today’s rules the investors’ I-526s would probably have been approved.)
The “Bridge Loan Debate” is a great example of how EB-5 financing as a financing vehicle has dramatically changed in the past 5 years as the program has grown in leaps and bounds.
All this said, most projects today are releasing funds from the escrow pretty much immediately without waiting for I-526 approval. While investors would obviously prefer that their funds be held in escrow until I-526 approval, many well-structured projects are coming up with different ways to reduce investor exposure while enabling the projects to proceed and be completed without undue delay which in the longer perspective of job creation would be beneficial to the investors as well.