SBA Loans Combined with EB-5
In light of government-sponsored loan programs being built around job
creation, they offer a beneficial fit for EB-5.
By John Shen and Justin B. Blackhall
T SBA 504 LOAN PROGRAM AND ITS
PROCESS
However, as the result of restrictions placed upon bank capital as
well as the scarcity and high cost of other forms of private capital
in recent years, EB-5 dollars have become a primary source of
capital for commercial real estate developers, including those
to build towering skyscrapers and residential condominiums in
large metropolitan areas throughout the U.S. The SBA 504 loan program is designed to create jobs and
provide financing to small businesses (such as limited service
hotels) for the purchase and/or construction of fixed assets
consisting of owner-occupied commercial real estate. Typically,
the borrower in a SBA 504 loan transaction must contribute at
least 10 percent, more often 20 percent, of the total project cost
in the form of equity funding.
he EB-5 immigrant investor visa program was created by
Congress for the purpose of creating jobs in underserved
areas of the U.S. economy.
This development, together with sporadic high-profile cases of
improper uses of EB-5 funds and an injection of partisan politics
related to immigration issues, have negatively impacted the
public’s perception of the EB-5 program.
Some criticism of the EB-5 program is
valid — particularly how an unfortunate
amount of EB-5 capital designated for
underserved areas has been funneled to
large luxury projects in big cities — but
EB-5 can still be a force for economic
good.
"The funds for the SBA
504 subordinated loan
are raised through a
monthly auction of
bonds, which is 100
percent guaranteed by
the U.S. government."
What the industry needs is to ask itself
the basic question: Which investment
vehicle best fits the EB-5 program, not
only at the micro level of sufficient
job creation for each EB-5 investor,
but also at the macro level, boosting
underserved sectors of the U.S. economy in general?
With respect to the macro question, government-sponsored
loan programs fit the bill. Federal, state and local governments
introduce and maintain targeted lending programs for the
purpose of encouraging positive economic behavior, not
purely for economic gain, as is the case with private financial
institutions.
Many of these government-sponsored loan programs have
close to, if not identical, goals as those of the EB-5 program
— job creation. This synergy offers some unique benefits that
government-sponsored loan programs bring to the EB-5 industry.
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EB5 INVESTORS M AGAZINE
A private lender typically lends 50 percent of the total project
cost through a permanent loan that’s generally secured by a SBA
504 senior loan, which is a first lien on the borrower’s assets,
and the SBA lends the remaining 40 percent through a SBA
504 subordinated loan, which is a loan
secured by a subordinated second lien
on the borrower’s assets.
The funds for the SBA 504 subordinated
loan are raised through a monthly
auction of bonds, which is 100 percent
guaranteed by the U.S. government.
By providing the SBA 504 subordinated
loan, the SBA encourages private
lenders to offer SBA 504 senior loans to
small businesses in a first lien position
at a palatable 50 percent loan to cost
position, while providing the small
business borrower with the total 80 to
90 percent financing needed to complete the project.
EB-5 funds may be used to fund capital other than the SBA 504
subordinated loan needed for the project, including all or some of
the SBA 504 senior loan.
Without the SBA 504 subordinated loan, private lenders would
have difficulty closing these types of small business deals due to
the significantly higher risk.
With this special co-financing SBA 504 loan structure, the
true winners are the qualified small business owners and the
employees whose jobs would not have been created without the
availability of the program.