Earlier this year, USCIS released a new adjudication standard that precludes an EB-5 investor’s use of loan proceeds as a source of investment capital unless the investor shows that the loan has been secured by assets the investor owns. USCIS states that if an investor can prove that he or she (1) is personally and primarily liable for the loan, and (2) owns the collateralized asset that meets or exceeds the value of the loan, the loan proceeds are an appropriate source of investment capital.[1] This change in policy has a big impact in practice, because if an investor’s source of funds comes from a loan that is not secured by his or her wholly owned property, his or her I-526 Petition runs into a risk of receiving a Request for Evidence (RFE), Notice of Intent to Deny (NOID) or outright denial from USCIS.
This newly issued interpretation standard certainly places a heavier burden on investors who use loan proceeds to fund EB-5, as they are required to provide sufficient evidence to show that the loans are secured by their own assets for which they are primarily and personally liable for. While there are many legal arguments to challenge USCIS interpretation and the definition of “capital” under the regulations, we should not focus too much on USCIS interpretation. In practice, we should focus on devising analytical steps based on sound legal arguments and case facts to solve the problems that may occur in indebtedness cases.
First, we need to understand if the source of fund falls into the category of “indebtedness” cases. USCIS has taken a broad approach, which is to include any source of funds that is from a loan that the investor is taking out. For instance, if an investor signs a loan agreement, his or her case will be considered as an “indebtedness case” in USCIS perspective.
If the source of fund is an indebtedness case, we then need to identify who is making the loan agreement. The common scenario is that the investor signs the loan agreement with a bank, and the loan needs to be secured, usually by real estate property; this specific arrangement of loan is called a mortgage. What makes a difference in our analysis is that in a lot of cases, the investor may not be the sole owner to the real property on the mortgage agreement, which will trigger the indebtedness problem outlined above. This problem is not detrimental, because the percentage of ownership will be taken into consideration to determine whether an indebtedness case can be filed with USCIS. We summarize the four possible scenarios following from the investor’s ownership in the real property, and analyze each of the scenarios in detail:
Scenario 1: Investor signs the loan agreement, and owns 100 percent of the real estate property.
This case will meet the two requirements in USCIS adjudication standards: sole ownership and personal and primary liability. Therefore, the case will likely not encounter issues of indebtedness with USCIS.
Scenario 2: Investor signs the loan agreement, and jointly owns the property with his or her spouse.
In general, joint ownership created by a marriage gives each spouse a half-interest in the property, and each spouse would have equal right to dispose the property. This would satisfy the two requirements by USCIS, and cases under this scenario will likely not encounter issues of indebtedness with USCIS.
Scenario 3: Investor signs the loan agreement, but investor owns the property with a third party other than their spouse.
This is a common scenario, where the investor, his or her child, or his or her parent, have their names on the title of the property. However, we need to draw specific attention to the percentage of ownership in this scenario, by comparing the investor’s percentage of ownership to the property to the value of collateral in total.
The Property Law and Marriage Law of China illustrate the potential problem and solution in this scenario, which we have been able to analyze and apply to our cases, successfully obtaining approvals from USCIS. The Property Law of China allows parties to devise their percentage of ownership to the property, which can be stipulated in contracts and certificates of ownership. If the contract or certificate of ownership is silent or ambiguous on the percentage of ownership, then the property will be devised in accordance to the amount of their initial capital contribution.[2] Applying this principle to cases in this scenario, if the property is worth RMB 5,000,000 and the investor owns 90 percent according to the ownership certificate, then the portion of the property owned by the investor is worth RMB 4,500,000. If we assume that the loan amount is approximately RMB 3,500,000, this case will likely not encounter issues of indebtedness with USCIS because the investor’s percentage of value in the property is greater than the value of the loan amount.
If however, the certificate of ownership does not specify the percentage, or if the investor only owns a very low percentage to the property (an example would be an ownership of 20 percent of the collateral, using the above value, the investor’s collateral is only worth RMB 1,000,000), the I-526 Petition will likely encounter issues with USCIS because the portion of the property owned by the investor does not exceed the loan amount; therefore it will not meet the second requirement under USCIS interpretation standard.
Scenario 4: Another scenario is when a third party signs the loan agreement, and the third party either wholly or jointly owns the collateralized property. In either way, this will likely not encounter issues of indebtedness with USCIS if the third party passes the loan in the form of a gift or transfer of cash to the investor.
In summary, using loans as source of funds for EB-5 is still very common in practice. However, with the USCIS new standard, an investor may need to provide additional evidence to overcome the burden of proving that the loan is secured by his or her own assets by demonstrating that the value of asset resulting from the percentage of ownership is greater than the value of the loan.
[1] See IPO Deputy Chief Julia Harrison’s Remarks, EB-5 Immigrant Investor Program: Stakeholder Engagement, April 22, 2015, available at: http://www.uscis.gov/outreach/notes-previous-engagements/notes-previous-engagements-topic/eb-5-immigrant-investor-program-stakeholder-engagement-0.
[2] Property Law of the People’s Republic of China, Chapter VIII, Article 103 and 104, available at: http://www.china.org.cn/china/LegislationsForm2001-2010/2011-02/11/content_21897791.htm.
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