(Background information for EB-5 beginners: In many EB-5 deals the investors’ funds are placed into an escrow account until the I-526s are approved. With I-526 approvals taking well over a year this is causing a big gap in project financing schedules. As a result, many EB-5 project developers take out interim financing (or bridge loans) so they can continue building while the I-526s are pending. (Other projects try to work around this issue by releasing the escrow immediately without waiting for I-526 approval.) Later, when the I-526s are approved, the EB-5 funds are used to replace (or “take out”) the bridge financing. This is a relatively new usage in the evolution of EB-5 – which was first introduced in 1990 – because the lengthy delays in processing times only started a few years ago. As such, many of the kinks related to bridge loans are still being worked out.)

Prior to the May 30, 2013 EB-5 Adjudications Policy Memo, the only place where “bridge financing” for EB-5 projects had been acknowledged in writing by the USCIS was in the EB-5 Q&A distributed in preparation of the May 2012 Stakeholder’s Meeting. There, in response to a question, the USCIS stated:

[I]t is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation under the regulations.

The May 30 Policy Memo takes the above language verbatim and adds, “Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing.” which is a reflection of the bridge loan policy as is currently accepted by practitioners. The idea behind this requirement is that the USCIS does not want EB-5 funds to be used merely as take-out financing to replace existing debt or equity that has already been put into the deal. Rather, they want something like a “but-for” relationship – called a “nexus” in USCIS-speak. In other words, they want the developer to show that “but-for” the EB-5 financing this particular project would not have been completed thereby creating a nexus between the infusion of EB-5 capital and the creation of jobs.

Interestingly, the May 30 Policy Memo gives our conventional understanding a new twist:

However, even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as 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. For example, the non EB-5 financing originally contemplated to replace the temporary financing may no longer be available to the commercial enterprise as a result of changes in availability of traditional financing. Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.

So… if I am reading this correctly, the USCIS is saying if a project had temporary financing (a bridge loan of some sort) as part of its capital stack and for whatever reason this temporary financing becomes unavailable, even if the original bridge loan was not taken out specifically for the purpose of being replaced by EB-5 funds, developers can after the fact decide to use EB-5 funds.

But… where does this get us? EB-5 funds are taking so long to be released anyways often times requiring bridge financing. So are we supposed to get bridge financing to cover EB-5 financing that is going to be used to replace other financing – provided that the financing the EB-5 is replacing was some sort of temporary financing to begin with? Do you see where I am going with this? Basically, I am not understanding what real-life scenario this language is trying to address.

It seems to me the only practical application is to allow the I-526 applications already pending with bridge loans in them to be approved without too much of a fuss even if the documentation surrounding the original nexus is very weak. Which if you think about it is a pretty big deal, especially given that a big project was denied at the I-526 stage by the USCIS a while back due to a weak nexus. Please send me an email if you have other ideas about this one.