With the right strategy, it’s possible for OZ and EB-5 capital to be deployed as part of the same capital stack.
We at JTC are experts in fund administration for the Opportunity Zones Initiative and the EB-5 Immigrant Investor program. While these two programs might seem completely different, their benefits line up in key ways that can allow developers, fund managers, Regional Centers, and investors to benefit by employing both government programs for the same commercial real estate projects. Let’s take a look at what EB-5 and OZ have in common and how they can go hand-in-hand.
What are the similarities between Opportunity Zones and EB-5?
EB-5 and Opportunity Zones are both impact investment initiatives formed through acts of Congress that created incentives meant to encourage investment in the economic development of underserved communities. In the case of EB-5, this is done by incentivizing investment from foreign nationals looking to immigrate and pursue the American Dream, while with OZ, the incentive offered is in the form of tax benefits to those with capital gains.
Both programs involve investments at risk. They’re also both long-term investments, which is necessary to have a sustained effect on communities in need. This also affects the types of projects best suited for them. OZ investments are exempt from taxes on realized gains upon exit if held for more than 10 years, and EB-5 investments must remain at-risk while the I-829 application is in process, which can be five years or more from initial investment. Because of this, both programs lend themselves to real estate investments, which typically have a longer lifespan than other operating businesses.
Another similarity is in the areas where these investments are typically made. EB-5 investments can be made anywhere in the country, so long as a minimum of $1,050,000 is put at risk. However, that minimum drops to $800,000 if the investment is in a Targeted Employment Area. Opportunity Zones and Targeted Employment Areas have different definitions, but because both are focused on underserved areas, in many cases, they’ll overlap, enabling project sponsors to structure their investments to appeal to both types of investors.
What is the differences between EB-5 and Opportunity Zones?
The main differences between the two programs have to do with who is investing and why. Aside from a desire for impact, the EB-5 and OZ offer specific benefits to their investors. With OZ, these benefits include tax incentives and capital gains deferral. For EB-5, the investments help with the investors’ visa applications. Each investor is different, but in general, an OZ investor is likely to be more concerned with returns than an EB-5 investor, whose main concern is the return of capital and the success of the visa application.
The way investments are incorporated into the capital stack is also different. Opportunity Zones incentives only apply to the equity portion of the capital stack, meaning OZ investments must be deployed as equity. EB-5 capital is more flexible, but is often used as mezzanine debt. This means capital from the two programs can make up different parts of the same capital stack.
For example, mezzanine debt capital is generally paid back before equity. This aligns well with the fact that Opportunity Zones investments often must be held longer than EB-5 investments to receive the full benefit. The EB-5 capital can be used as mezzanine debt and paid back in accordance with that program’s timeline, while OZ investors can hold their equity for longer.
Other differences include how impact is tracked (EB-5 uses job creation as a metric, while Opportunity Zones currently lack impact measurement requirements of any kind) and differences in how a TEA is defined versus an OZ. Not every OZ project will be right for EB-5 investors and vice versa, but it’s worth investigating because of the many potential advantages.
What are the benefits of combining Opportunity Zone and EB-5 capital?
For developers, fund managers, and Regional Centers, there is an obvious benefit to incorporating both programs: more capital from more diverse sources that can be used to fund projects. But both EB-5 investors and OZ investors can also benefit from investing in projects that incorporate both types of capital.
For Opportunity Zone investors: because EB-5 capital is taken on as debt, those investors don’t have an ownership stake in the property itself. This means greater equity for OZ investors because it isn’t diluted by additional stakeholders.
Additionally, EB-5 capital is repaid without the property needing to be sold, allowing OZ investors to hold onto their investments for as long as they need to in order to qualify for the OZ tax incentives. And all depreciation tax benefits are allocated to equity investors, so EB-5 debt capital will not affect depreciation calculations.
For EB-5 investors: Since the Opportunity Zones initiative doesn’t have a job creation requirement, including OZ as a capital source won’t increase the number of jobs that have to be created. Because fewer jobs need to be created, there is more flexibility in the types of properties and developments that can be used, and less concern about falling short of job creation estimations.
How to incorporate both EB-5 and OZ capital in the same capital stack
If you’re going to accept both EB-5 and OZ capital, you’ll need to meet the requirements of both programs in order to ensure compliance for your investors. The project will have to be within a Qualified Opportunity Zone, but does not necessarily need to be in a Targeted Employment Area, though being in a TEA will make it more attractive to EB-5 investors wanting to qualify for the lower minimums.
The requirements for OZ and EB-5 are quite different. Opportunity Zones are more about the length of time the investment is held and where it is made, while EB-5 is about the funds being at risk and the creation of jobs. This job creation requirement does limit your possibilities, as many multifamily apartment projects won’t create enough direct jobs to qualify, making EB-5 better for hotels and mixed-used developments.
Your capital will be coming from different individuals with specific needs. OZ investors have capital gains that they want to reinvest in order to take advantage of the OZ incentives. EB-5 investors are immigrants whose main concern is their visa applications. In order to connect to both types of investors, you’ll need to understand what each looks for in an investment and an investment partner, including what types of information they want communicated with them on a regular basis.
One commonality is that these two specialized impact investments both have complex fund administration needs. JTC has been a leader in Opportunity Zones fund administration since the program’s inception, and has a comprehensive suite of solutions for Regional Centers looking to comply with the EB-5 Reform and Integrity Act of 2022. While some fund administrators may be experienced in one of these sectors, JTC can provide best-in-class service for both.
