The United States is one of the largest recipients of foreign direct investment from the Middle East, particularly from Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates. Despite the economic recession, investors from these countries continue to diversify within the U.S. financial and real estate markets.
Unbeknownst to many foreign investors, however, is that a collateral, or perhaps primary, benefit of investing in the United States may be the ability to obtain permanent residency and eventual citizenship. A foreign investor who makes a qualifying investment can apply to obtain a green card (permanent resident card) and, eventually, United States citizenship if they meet all the criteria of the EB-5 immigrant visa program.
However, a challenge for many Middle Eastern investors is the ability to procure an EB-5 qualifying investment that will also adhere to the principles of Islamic Finance. There are several methods to structure an EB-5 investment to be Islamic-finance compliant, one of which is discussed in this post.
The EB-5 Program
The United States Congress created the employment-based EB-5 immigrant visa category in 1990 for immigrants who invest in and manage U.S. commercial enterprises that benefit the economy. To qualify, investments must create at least 10 full time jobs for U.S. workers. The minimum investment required is $1 million, although that amount is reduced to $500,000 if the investment is made in a high unemployment area or a qualifying rural area. Immigrant investors who successfully qualify would obtain a permanent resident card with the opportunity to apply for citizenship after 2 years.
In 1992, to stimulate interest, Congress enacted the EB-5 Regional Center Pilot Program. The program allowed public and private entities to apply to the United States Citizenship and Immigration Services (“USCIS”) to be designated as a regional center. The regional center would, in turn, develop qualifying investments for foreign investors under the EB-5 program. Regional centers provide a structure for focusing foreign investment in a specific U.S. geographic area and for promoting economic growth in such area through increased export sales, creation of new jobs, and increased domestic capital investment. For an immigrant investor, the benefits of investing through a regional center are numerous. Typically, a regional center investment has already been evaluated for feasibility. Similarly to a real estate developer who is raising capital, a regional center would already have prepared business plans, private placement memorandums, feasibility studies, and other offering documents. In the case of an EB-5 investment, the regional center would have also completed economic impact studies to demonstrate to USCIS that it meets the job-creation criterion. In addition, most regional centers hold an immigrant investor’s funds in an escrow account pending USCIS approval of the investor’s EB-5 application. Therefore, if the application is denied for any reason, the investor recovers his or her principal investment.
Most Regional Center investments are in large real estate development projects. For example, a recent example of a regional center I have advised was structured as a partnership to invest in the expansion of an established ski resort in the state of New Hampshire. The partnership was structured as a limited partnership, with the foreign investors designated as the limited partners and the real estate developer as the general partner. Such a partnership can also comply with Islamic finance principles, subject to the requirements discussed below.
Structuring the Investment to be Islamic Finance (Shari’a) Compliant
Islamic Finance products and instruments set out to achieve the same business goals as conventional finance products and instruments, but within the constraints of Islamic rulings. Islamic-compliant financial solutions range from profit-and-loss sharing mechanisms, consumer finance, trade finance, working capital finance, and project finance. Broadly speaking, Islamic finance prohibits excessive risk or speculative investments and the payment or receipt of interest. In addition, risks in any transaction must be shared between the parties, so that the provider of capital (investor) and the entrepreneur share the business risk in return for a share in the profits.
A Regional Center may qualify as an Islamic-finance compliant investment by structuring the entity as a partnership. A permissible method of Islamic financing is a musharaka, which, in Arabic, literally means “sharing.” A musharaka is a joint enterprise formed for a business purpose in which all partners share profits according to a predetermined ratio. However, the key difference is that losses must be divided exactly in accordance with the pro rata share of capital invested by each partner. In the context of real estate and project financing, the foreign investor, as a limited partner, would contribute capital while the real estate developer, as the general partner, would contribute either real estate assets or additional capital.
To ensure compliance with Islamic finance principles, the agreement between the partners would need to describe the capital contributions and the allocation of profits and losses, as well as the management responsibilities (which would normally be undertaken by the real estate developer as general partner). The real estate developer would then undertake the project using the capital and other contributed assets in the construction and operation of the project.
Disclaimer: This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended. This article does not constitute investment advice or counsel or solicitation for investment in any security. These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.