There are many similarities between the EB-5 program and the Opportunity Zone program that lead to significant opportunities for undertaking both programs at the same time. These similarities include the following components:
1.Both programs involve the raising of capital from investors.
2.Both programs involve government sponsored programs. The EB-5 program is geared towards an immigration-based achievement whereby investors can receive U.S. residency and ultimate citizenship by investing a certain amount of capital in a job creating project. The OZ program is motivated by tax incentives based upon legislation and regulations proposed by the Department of Treasury. Similar to the EB-5 program, the benefits to be received involve tax and centers for deferral and/or elimination of capital gains taxation if certain standards are met.
3.Both programs involve the geographic limitations that are similar in nature. For purposes of example, in the EB-5 program, there is a significant incentive to have a project located either in a rural area or in an area that qualifies as a targeted employment area (TEA) in order to receive the lower level of investment. This lower level is currently $500,000 and is slated to increase to $900,000. Likewise, the OZ program is based upon the project being located in a designated OZ area, the classification of which is somewhat similar to the TEA under the EB-5 program.
4.Both programs are highly regulated by different agencies of the federal government in order to receive the intended benefits.
5.Each program has specific performance standards that need to be adhere to over and above the overall economics of the specific project that generate an economically viable transaction. Accordingly, both programs involve the satisfaction of specific either job or expenditure requirements in order to satisfy the rules and regulations of the specific program.
6.Both programs primarily involved in real estate development opportunities that either create jobs and/or require a certain amount of expenditures in order to meet the regulatory requirements of the specific program. Likewise, both programs allow for the development of businesses within the applicable areas and/or zones in question, although it is anticipated that just like the EB-5 program, the primary deployment of OZ capital will be for the benefit of developing real estate projects.
7.At the end of the day, it is apparent that the main beneficiaries in addition to the investors of the two programs or real estate developers are neighborhoods who will receive affordable and targeted capital to encourage the development of real estate projects and/or businesses in particular areas, which generally have a more impoverished and higher unemployment rates compared to the national average.
THE MAIN DIFFERENCES BETWEEN THE TWO PROGRAMS INCLUDE THE FOLLOWING:
1.The EB-5 program is only directed towards foreign investors and not domestic investors. The OZ program is directed primarily to domestic investors seeking to shelter and/or defer current and future capital gains.
2.The EB-5 program is based upon both job creation and maintaining the investment “at risk”, which components include both expenditures towards development as well as job creation based upon operations. The OZ incentive does not involve a job creation component as a primary purpose but is more oriented towards an expenditure model in order to meet the substantial improvement standards, although as a result thereof, the capital expenditures will create additional jobs, especially if local or state governments provide additional incentives.
3.The EB-5 program has a set dollar amount of investment. Currently this is $900,000 for a TEA designated project and $1,8 million for non-TEA areas. The OZ program does not have any minimum or maximum investment amount for participating investors.
4.The timing of the offerings is very different. EB-5 offering documentation requires far more due diligence and information, including a required economic report and business plan to support the project feasibility as well as the job creation component of the EB-5 project. Accordingly, there are far more professionals involved in the EB-5 program compared to the OZ program. The OZ program does not require any third-party independent reports to support the offering. Rather, the OZ program involves the designation of the specific project within an OZ and the general economics supporting the program. There are specific complexities that are unique to an OZ project, such as a prior use limitations whereby substantial improvements must be made to a specific project that contains buildings that have a pre-existing use, as well as pre-ownership limitations to the extent that the project was acquired prior to 2018 by a developer who then wants to participate in the ongoing project. These limitations do not apply to the EB-5 program. 5.There are significant procedural differences between the two programs. The EB-5 program involves the filing of documents with the applicable agency of the federal government, USCIS, for approval, whereby the OZ program has no requirement of filing documents with any federal agency but only the filing of the specific tax elections both on an individual tax return for investors as well as the filing of the tax return for the OZ Fund on an annual basis.
6.There are different economic incentives with respect to both of the programs. The OZ program involves tax benefits to those investors that want to shelter capital gains treatment. The incentive for investors in the EB-5 program is gaining access to U.S. residency and citizenship and less of a concern about the actual economics. One exception that EB-5 investors do expect is to receive some return on their investment as well as a return of capital when the regulatory requirements have been satisfied.
7.The nature of the investor is quite different. EB-5 investors tend to be represented by agents and/or representatives who receive commissions and additional compensation in order to place investors in the appropriate project. OZ investors tend to be more economically and financially sophisticated and have advisers such as accountants, lawyers, wealth managers or investment advisors who provide guidance on the appropriate project to select.
8.There are significant differences in the marketing approach with respect to each of the programs. EB-5 investors are generally marketed through offshore agents who receive commissions and placing investors in a particular project. Securities law regulations impose severe limitations on the payment of commissions for any offering that is conducted in the U.S. With respect to OZ offerings, many of the offerings are directed to the investors themselves or their wealth planners pursuant to a Regulation D exemption under the Act. Domestic agents can receive an investment advisory fee providing they are properly licensed, as well since these activities broker dealer commissions if they are likewise licensed are primarily conducted in the U.S. and not abroad.
TAKING ADVANTAGE OF BOTH PROGRAMS
EB-5 capital can either be mezzanine debt, senior debt or preferred equity or common equity. OZ investment can only include equity, either preferred or common. By combining both programs, a developer sponsor can take advantage of the different capital investments made by each of the different investors. It is noteworthy that domestic investors in an OZ program do not need any job allocation, and the tax benefits related to capital contributions do not generally benefit foreign investors. Accordingly, the needs of each investor group are complimentary and not competitive. From a timing standpoint, an EB-5 offering generally involves an investment of somewhere between 5 to 7 years in, and can be even longer. By definition, in order to take full advantage of the capital gains elimination under the OZ program, the investment must be held for at least 10 years.
The exit strategies with respect to both programs are very similar. This would involve a sale and/or refinancing with respect to EB-5 investors. receiving a return of their capital. With respect to the OZ program, a refinancing can return capital without triggering a sale until such time as the property is held 10 years, in which event the property can be sold on a tax efficient basis. Based upon the increase in the capital contribution amount due to the new regulations that became effective on Nov. 21, 2019, investors in the EB-5 program may require a higher rate of return on capital to offset the longer time period that the investment will need to be maintained. OZ investors desire both a fixed preferred return on outstanding invested capital, as well as sharing in the project appreciation that will be tax-free if the requirements of the OZ program are satisfied.
Many developers in the EB-5 program are likewise participating in the OZ program for all of the reasons set forth above with respect to the similarities of the two programs. In addition, EB-5 regulators may look more favorably on a project that otherwise is located in an OZ since that type of location has already been designated by the federal government as in need for capital infusion and job creation. From a marketing standpoint, it is also beneficial if there are government subsidies or other tax in centers that apply with respect to the development of the project to add credibility and viability of the project as a result of same.
It will remain to be seen to what extent both programs are utilized together in a project. However, many developers are now trying to combine the fundraising benefits of both programs with respect to particular projects.
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