Mark Green: Bluegrass International Fund, founded in late 2013, invests in economic development projects on behalf of overseas investors who seek permanent green-card status under the Department of Homeland Security’s EB-5 Regional Center Program. Investors must put a minimum $1 million into a project creating at least 10 jobs, or $500,000 if the project is in a rural area or an area where the unemployment rate is designated at least 150 percent of the U.S. average. What portion of BiF’s participants are EB-5 investors?
Lynn Allen: 100 percent. All of the investments that we attract to economic development projects in Kentucky under the EB-5 Regional Center Program have to come from foreign investors.
MG: No local participants are investing money into these projects? What about BiF’s executives or or administrators?
LA: Well, let’s look at that two ways. First, there’s a group of individuals from Louisville and Lexington, business leaders from both communities, who founded the Bluegrass International Fund. We are investors in launching and operating the overall fund. But when BiF finances a project, when our foreign investors invest, they only make up 25-30 percent of the capital stack of that project. Other sources, including senior lenders, taxable or tax-exempt bonds, private equity, finance the rest.
When the EB-5 program exploded in 2008-2009, when bank credit got tight, a lot of EB-5 capital took senior positions at that time, because the banks were out of the market. But today where you usually find EB-5 capital is in the subordinate position. We’re usually coming in in lieu of private equity or in lieu of mezzanine capital or behind a tax-exempt or taxable bond issue.
MG: How much loan participation does BiF have currently, and what is the total value of those projects?
LA: We have a very robust pipeline, but we are just getting ready to go to market with our first project in a targeted employment area. The total value of the project is about $38 million, and our loan participation will be just about $10 million. That’s the minimum size loan that we do.
MG: How does BiF fund and assess projects to bring to EB-5 investors?
LA: We look at two things. One is the purpose of the program, and the second thing is what the investors want. Those two considerations align. So first we want to invest in targeted employment areas. That’s because 98.8 percent of investors invest in targeted employment areas. Why? Because they can invest at the minimum, $500,000 amount and still create 10 jobs and get their green card. They’re making the investment to secure a green card for themselves, their spouse and their children and not to get a return necessarily. Their primary concern is, “How many jobs am I going to create?”
In an overseas conference center, often the first question you’ll get from prospective investors is, “How did you calculate your job projections?” That’s because if they don’t create the 10 new jobs, they don’t get the green card. Their second priority is security: They want to make sure they’re going to get their money, their principal, returned in five to seven years. Their third concern is the return on their money, and they’re not looking at that as a priority; we loan their investment to project sponsors and developers at a competitive rate.
MG: What is the significance of BiF being a certified EB-5 Regional Center?
LA: A regional center may pool a large number of investor commitments into a fund and loan to large-scale economic development projects, thereby creating a large number of jobs. After the EB-5 program was established in 1990, Congress authorized regional centers in 1992. Before that, the investor had to invest directly in a project; they had to be part of the management of the commercial enterprise, monitor the job creation themselves. A regional center can do all that for the investor.
The program hummed along, essentially, until 2007-2008, and at that time it exploded in growth. When I first started consulting to the EB-5 market, before we founded Bluegrass, there were about 150 regional centers across the United States. Most were concentrated on the East and West Coasts. Today there are nearly 700 regional centers across the country.
We operate a lot like a private equity fund. We manage the investment, report back to the investors, monitor the job creation, do all the due diligence. The difference is, instead of raising the money per an investment strategy, we source projects that we think will appeal to investors, and then we go raise the money overseas. We go market the project overseas. It’s a lot like a private equity fund, except we market the projects individually and we raise money for the projects individually.
MG: What is BiF’s geographic area of operation?
LA: In applying for U.S. Citizenship and Immigration Services (USCIS) authorization to operate as a regional center, you apply for certain geography. Our geography aligns with the 22 counties of the Bluegrass Economic Advancement Movement (BEAM): Jefferson, Fayette, all the counties around Jefferson and Fayette; it follows the I-64 corridor and then jumps over the Ohio River to Floyd and Clark in Indiana. We’re really committed to Kentucky and Southern Indiana. Having said that, we will expand our territory throughout Kentucky when projects are identified. For example, if there was a project at Bowling Green or Northern Kentucky, if that expansion is project-driven, the USCIS will generally approve.
We have every intention of working hand-in-hand with the folks that represent BEAM. This is just one piece of that puzzle, to generate increased investment from overseas in Kentucky, but it’s an important piece. Not only are we creating a significant number of new full-time jobs, we’re also attracting talented and value-added investments into the regions. It’s really a win-win for our region and for the foreign investor.
MG: How is the participation of out-of-state, or in this case foreign investors, important to Kentucky’s business community?
LA: It’s extremely important in that to be a city or an area that competes globally today to a large extent depends on whether you can attract outside investment, whether that’s domestic or international. We play a critical role in attracting foreign direct investment into Kentucky. Through that, we develop relationships with foreign nationals who are the creative class of their countries. They’re wealthy; they have built their own businesses. Their primary reason for obtaining a green card, the No. 1 reason cited by these investors, is they want to send their children to U.S. universities. These children are very creative and ambitious, too. So it’s good in the short term to attract foreign investment to Kentucky, but it’s also good in the long term because it diversifies our population and includes many well-educated foreign nationals.
MG: So there’s anticipation that this would create ongoing, long-lasting relationships locally with this foreign investor business class?
LA: Yes. In the BEAM report that just came out, the Brookings Institution talks about how important these foreign investors are if you want to become a global city, if you want to attract foreign investment. Cities that are growing the most are cities that can attract foreign interests. A lot of growth and wealth is happening in other parts of the world now. However, who would not want to bet on the United States? If you were a wealthy Chinese or a wealthy Mexican and you were concerned about local politics, why wouldn’t you want to bet on the United States? Right now, the demand in China for EB-5 visas exceeds the supply, and that’s a challenge our federal legislature will have to deal with.
MG: The EB-5 program has a cap of 10,000 annually, but the demand exceeds that?
MG: Is this demand primarily from China?
LA: Yes. About 85 percent of investors come from China, Taiwan and South Korea. Brazil and Mexico are also producers of EB-5 capital.
MG: What is a typical timeframe for an EB-5 project and investment? You mentioned that investors hope to get their principal back within five or six years.
LA: The investment is at risk for the investor. It’s an equity investment. The program requires that it be an at-risk investment, so you cannot guarantee a return of the investment and you cannot guarantee a return on the investment. We pool those investments into a fund and loan it to the project sponsor or the developer. When we loan it to them, they pay us interest only for five to six or seven years. The reason that loan term is at least five years is, that’s generally how long it takes, from start to finish, to process the investors and have them screened by the Department of Homeland Security, to illustrate that permanent jobs have been created, and then to secure the permanent green card. The investor doesn’t receive the permanent green card until they’ve illustrated that they’ve created at least 10 new full-time, permanent jobs that lasted at least two years.
MG: Do EB-5 investors participate in specific projects, rather than investing in BiF in general?
LA: That’s exactly right. They are a limited partner. We have this loan fund; they’re the limited partners, and we’re the managing partner.
MG: Who performs and certifies the compliance? Is that something BiF does or the federal government?
LA: With each project we file an application for approval with USCIS. Once participants make their investment, it sits in escrow until USCIS screens them – the money cannot have been loaned to them; it cannot be terrorist money. It takes USCIS from six months to a year or more to screen investors. To make sure at closing that we have money available even though we may still be raising money for the project, we leverage a bridge lender. The bridge loan comes in lieu of our loan at closing, and when all of our investors are approved, then the bridge lender is paid off. There are a lot of regional centers, and there’s an established set of bridge lenders – in places like New York and so forth – that EB-5 regional centers use. They’re expensive. For a best-effort approach to fundraising, we piggybacked onto Cleveland (Ohio) International Fund, and a track record that shows they’ve always raised all their money all the time and all their investors have been approved. Still, a lot of bridge lenders are hesitant. We have brought in a local bridge lender because when we founded Bluegrass International Fund, we made a commitment that not only were we going to invest in large, job-generating projects but we were going to cycle our capital and our opportunities back into the Kentucky economy. One of the first significant ways we’ve done that is working with a local syndicate to secure bridge lending for our projects, which is big, because it’s putting money back into the economy. Bridge financing that might just last a year or a year and a half, lowers the overall costs. But by sourcing this local bridge lender, we’re pumping that capital back into the local economy.
MG: How did the partnership between BiF and Cleveland International Fund come about? What are the key aspects of this partnership?
LA: When Mike Mountjoy and Barrett Nichols came to me and said they wanted to do this, I had had experience in EB-5 regional centers; not a lot, but enough to know it was going to be a big challenge for Kentucky and Southern Indiana to market themselves among all the regional centers that already had a brand-name, already had access to the best immigration attorneys, the best economists – many of whom were not taking any new clients because of this explosive growth. We also wanted to make sure we were going to do things right. Out of 700 regional centers, about 15 percent have been very successful, have deployed millions of dollars in their local economies. We wanted to make sure we were one of those.
On the local front, we recruited a group of individuals from Louisville and Lexington who each had expertise and had networks and relationships that would be important. One piece of EB-5, to be successful, is having access to quality projects locally. The other piece that’s really important is to have access to the overseas broker networks, to be able to sell your product to them. These broker networks, this infrastructure in China where most of the money comes from, is very sophisticated – think of maybe the Hilliard Lyons of Shanghai. They have relationships with wealthy people; they help them immigrate through the process. And they are the ones who sell your product, your project. Many regional centers already had an established track record with them. If we were going to start fresh, we knew we needed to plug into one of those quality regional centers, such as Cleveland International Fund, piggyback on their track record – which demonstrates that 100 percent of their investors have been approved and they’ve raised $250 million in the Cleveland economy alone – and be able to access their broker networks overseas.
MG: Did you have an existing relationship with some of the individuals with the Cleveland International Fund? You were able to talk with them, and they agreed to provide expertise?
LA: Yes. I had worked with a couple of regional centers, and I learned pretty quickly the ones that were doing things right and the ones that were doing things wrong. I wanted to make sure that if I was going to stay in this industry, I was working with folks who did things right.
MG: How formally established is the referral network by which foreign investors find out about EB-5 projects to participate in?
LA: It’s different in each country. China produces a lot of investors because of the enormous wealth, because of the political situation, but also because they have a built-in infrastructure of these broker networks that are approved by their government to do this. But if you go to Central or South America, many of the investors are referred by immigration attorneys. It varies by country how the investors are recruited or secured. The market is still changing, but for now China is the only one that has a very well-heeled or well-greased infrastructure. A lot of investors come from the United Kingdom; Vietnam is increasingly a producer of EB-5 investors, but a lot of those come through immigration attorneys and family offices.
We’ve leveraged the Cleveland International Fund’s networks. We distribute our projects through their distribution networks, through their broker networks. Having said that, we also have our own relationships that we leverage to sell our product, and we intend to build on those networks that we currently use with Cleveland to expand out to other networks through our own relationships.
MG: Will EB-5 investors in BiF projects become residents of Kentucky when they get a green card?
LA: Even though they invest in a Kentucky project, they can live anywhere in the United States. Having said that, sometimes the investors will come over and want to see the project themselves, or they’ll develop an interest in the area in which they’ve invested. So there is this ancillary or secondary benefit of attracting interest in our region and securing further investment after their green card. If they’re pleased with their investment through the regional center program, there’s always good opportunity to attract additional investment from them.
MG: Would projects such as the foreign owned auto-supplier developments in Kentucky the past few years be candidates for BiF financing?
LA: Absolutely. One of the segments in which we’re focused is manufacturing. We have four primary market segments in which we’re investing. The first is healthcare: hospitals, large clinics, senior living facilities. The second segment is university research and education: That includes technology centers, healthcare facilities on campus, campus development generally. The third is advanced manufacturing. And the fourth one is mixed-use development.
There is sweeping legislation in Congress right now – we were working with our leadership in the Senate and in Congress – to add three new categories for the $500,000 minimum EB-5 investment. Right now it’s a “targeted employment area” that has an unemployment rate of 150 percent of the national average. This legislation says the investor could invest in any manufacturing facility anywhere. Not only in that, but also in public infrastructure – roads, bridges, that sort of thing. And the third one is closed military bases.
MG: Does BiF have any such new category projects on its radar?
LA: We’re also enthusiastically interested in financing projects in rural Kentucky. Vermont has leveraged EB-5 to create significant jobs in rural areas by building year-round ski and golf resorts – and an airport to shuttle people to and from the resorts. Kentucky has beautiful state parks but is losing a lot of money on them every year. We could play a role in turning some of those parks around, working with private developers, working with the commonwealth to privatize those parks, and follow in the footsteps of Vermont to generate new jobs that have been lost in coal country, for example. We had discussions with the prior administration, and expect to have discussions with the new administration soon.
MG: Are there other important issues for foreign nationals looking to participate in an EB-5 program?
LA: I didn’t fully answer earlier, and I’d like to. First they look for security. The second thing is, they want to know that the project has community support. They like to see either federal, state or local participation. That can be in the form of a historic tax credit or a new market tax credit or a local loan fund or a TIF district. When they see that, they know the community supports the project. Third, they want to see experience – developer experience – and they want to see that the developer has some skin in the game. And finally, they want to make sure there are plenty of jobs. We build in a cushion of between 13 and 15 jobs, generally, just to overcompensate and raise their comfort level that they’re going to create at least the 10 jobs. n