Given the increasing pressure on various gap financing tools such as the federal HOME program as well as state and local programs, affordable housing developers should be exploring innovative sources of funding.
One program which has been used by some of the most successful conventional real estate developers is the federal EB-5 Visa program. The program sets aside 10,000 visas for investors that are willing to each invest $500,000 in capital in American projects that create jobs. Chinese investors are particularly enthusiastic and they now account for 82% of the allocation for the program. India is a distant second place. Real Estate projects tend to qualify because the labor employed in the construction or rehabilitation of a property meets the statutory requirement of job creation in the United States. Though the EB-5 money can be used for debt or equity, it is best used to swap out mezzanine debt for EB-5 funds. The cost of the EB-5 money can be extremely competitive with conventional sources of mezzanine debt. This alternative can be a reasonably patient source of gap financing. The statue says that the developer must hold the money until all the EB-5 donors in that particular project have had their visas processed. Historically, that equates to about 7 years. The money is often not collateralized, which can also be a significant benefit. Investors prefer that no more than 30% of the financing comes from EB-5 sources. Ideally, developers should have equity in place for at least a third of the deal. EB-5 investors are attracted to opportunities with experienced developers where completion bonds are in place. As of this writing, Congress is debating the renewal of this successful program. For those who wish to explore this option further with an eye to projects two or three years out, now is the time to become familiar with the advantages and requirements of this effective program.