Prior to the EB-5 Reform and Integrity Act of 2022, investors had to keep their investment at risk until they completed the I-829 process. Initially, this worked well as the journey from filing an I-526 petition to getting through the I-829 stage took approximately five years, which lined up with typical real estate construction loans and the time frame in which developers seek to refinance or sell their projects.
However, as retrogression set in and countries such as China and India started to experience significant backlogs, things got a bit messy. Many investors found themselves nowhere near the I-829 stage after five years while some developers were ready to repay their EB-5 loan. This led to the need to redeploy some of the EB-5 capital to keep investments at risk to maintain the immigration status of many investors.
Post RIA, EB-5 investments only must be at risk for two years after the investment is made. This is obviously a much better scenario than having to redeploy EB-5 capital, but it has created a new issue in that some investors are seeking projects with the shortest possible loan repayment terms.
The fastest repayment term might look good on paper, but it may instead increase the chances that the developer is not able to repay the EB-5 loan. There are several key reasons why construction loans, whether EB-5 or non-EB-5, typically range from five to seven years.
1. Construction and Lease-Up Period
- Construction Timeframe: Building commercial real estate takes a few years depending on the size and complexity of the project. A typical commercial construction loan may be structured to cover the time it takes to complete the construction and begin leasing or selling the property.
- Lease-Up or Occupancy Period: Once construction is completed, there is typically a “lease-up” period where the property is marketed to tenants. In the case of a hotel, time is often needed to build up a strong occupancy rate. The stabilization phase (when the property reaches a level of occupancy that generates sufficient income) usually takes time, depending on the demand for the space. Lenders understand that a project may not generate full income from rents immediately after construction.
2. Stabilization of the Property
- Project Stabilization refers to the period when the property is fully operational and consistently producing rental or other income. This typically occurs when the property is at or near full occupancy with tenants paying rents on time.
- Impact on Loan Term: Stabilization is a key factor in determining the loan’s term because lenders want assurance that the property will eventually generate enough cash flow to service the debt. A five to seven-year term allows the borrower sufficient time to complete the construction, lease up the space, and stabilize the property to meet the cash flow requirements necessary for refinancing the construction loan into a permanent loan or for selling the property.
In simple terms, developers often need time to ensure that their project reach the value needed to effectuate a successful refinance or sale to pay back the EB-5 loan. By squeezing that timeline, investors may work against their own interests by not allowing the developer to achieve the maximum value of the project, potentially impacting the ability to repay the EB-5 investor.
