24 Oct Update: Bridge Financing and EB-5
Many EB-5 projects make use of a variety of different sources of funds, of which EB-5 investments are only one part. However, for many projects, the process of raising investments from EB-5 investors often takes many months, causing uncertainty for project developers about the timing of EB-5 capital to be raised and the total amount of EB-5 funding. In order to alleviate such uncertainty, many EB-5 capital investment projects turn to bridge financing to initiate construction ahead of the availability of EB-5 investments.
What is Bridge Financing?
Bridge financing is a temporary financing arrangement used by businesses to “bridge” a short- term gap before the infusion of stable long-term funds into the financing structure of a project. Bridge financing arrangements can be either via debt structures or equity-based, and usually involve somewhat higher interest rates – 8% or higher is common. Bridge financing can also make the project more attractive to prospective investors, who face reduced risk of a shortfall of funds in the event that the EB-5 numbers fall short of estimates.
Bridge Financing and the 2013 EB-5 Policy Memo
The USCIS first began indicating the potential acceptability of bridge financing arrangements in May 2012 in response to a Stakeholder Meeting, and formalized its acceptance of bridge financing in the May 30, 2013 EB-5 Policy Memorandum (PM-602-0083) (“2013 EB-5 Policy Memo”). In the 2013 EB-5 Policy Memo, the USCIS confirmed that the new commercial enterprise or the job creating entity could commence development a project based upon interim or bridge financing (whether debt or equity) prior to the receipt of EB-5 capital and later on replace such temporary or bridge financing with EB-5 capital. Job creation from the use of temporary or bridge financing could still be counted towards the job creation of EB-5 investors in the new commercial enterprise. The EB-5 Policy Memo created two (2) key procedural and substantive requirements for proper use of EB-5 financing to replace temporary or bridge financing: (1) generally, the replacement of temporary or bridge financing with EB-5 capital should have been contemplated prior to acquiring the original non-EB-5 financing, or (2) so 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. The 2013 EB-5 Policy Memo also made explicit that the structure of the capital investment project’s financing must still ensure that the full amount of each EB-5 investor’s capital must be made available to the business or businesses most closely responsible for creating the jobs upon which eligibility is based (in conformity with the binding decision of Matter of Izummi, 22 I&N Dec. at 179). Thus, in the EB-5 regional center context, if the new commercial enterprise is not the job- creating entity, then the full amount of the capital must be invested first in the new commercial enterprise and then made available to the job-creating entity or entities
USCIS EB-5 Policy Manual
The USCIS updated its policy guidance on the EB-5 program in the November 2016 USCIS Policy Manual, as updated in July 2017, at Volume 6, Part G, Chapter 2.D (“EB-5 Policy Manual”). The EB-5 Policy Manual did not introduce changes to the USCIS guidance on bridge financing in EB-5 projects. The EB-5 Policy Manual again expressly allows a new commercial enterprise or job creating entity to commence a capital investment project by using bridge financing which is later replaced with EB-5 funding, and receive credit for job creation from the use of bridge financing funds.
Thus, at present, the EB-5 Policy Manual continues to permit EB-5 capital to replace temporary or bridge financing, and simply requires documentation that (1) the temporary financing was either contemplated to be replaced by EB-5 capital from inception, or (2) the financing being replaced was temporary in nature. Typically, either the first test or second test of the USCIS bridge financing guidance was satisfied by such key project documents as the business plan, the securities offering materials, and the government petition exhibits such as Form I-924 exemplar filings.
Recent USCIS Decisions on Bridge Financing
The landscape of bridge financing in EB-5 projects received a recent jolt in March 2017, when USCIS released to the public a decision from its Administrative Appeals Office denying an I-924 exemplar application, in part, because of the use of temporary or bridge financing in the design of an EB-5 capital investment project. See Matter of A-F-R-C, Administrative Appeals Office, non-binding decision, March 24, 2017. An I-924 exemplar is used by a regional center or new commercial enterprise to obtain USCIS pre-approval of a capital investment project. The Administrative Appeals Office of the USCIS decided to affirm the denial of an I-924 exemplar application because the new commercial enterprise did not provide any evidence that the bridge financing to be replaced by EB-5 capital was either contemplated to be temporary since inception, or was temporary in nature. This simple lack of evidence was sufficient to deal a fatal blow to the use of bridge financing in this project.
While it is novel that USCIS denies an I-924 exemplar application due to weaknesses in its description of bridge financing for an EB-5 project, the legal standard applied is entirely consistence with USCIS policy guidance on bridge financing. The only new concept introduced in this non-binding decision by the Administrative Appeals Office is the substantive expectation by USCIS that applicants must submit evidence to support one of the two tests for bridge financing set out in the EB-5 Policy Manual.
A project must carefully structure its financing agreements and documentation so that any EB-5 investment funds that are used to replace temporary or bridge financing comply with USCIS policy guidance and controlling regulations. Early planning and clear disclosure of bridge financing arrangements will remain crucial to successful EB-5 project development.