by H. Ronald Klasko
When I first started representing real estate developers and other businesses seeking EB-5 capital, I viewed my role as limited to preparing USCIS petitions that were approvable under prevailing EB-5 law and policy. I had nothing to do with the marketing of the project because, after all, I am a lawyer and not a marketer. It was only after gaining experience working with many clients that I realized that a legally approvable project template does no good if investors will not be interested in investing. Clients, with good reason, look to EB-5 attorneys not just for legal advice, but also for advice on structuring a project that will both comply with EB-5 policy and attract investors.
Now I find myself regularly advising clients that even though a project is perfectly legal and approvable, it can be difficult or impossible to market. Advice on the investor marketplace is a necessary adjunct of the legal advice that I provide. This article will explore issues that I discuss with my clients when providing legal services, and might be considered value-added marketing services. My comments are based mostly on the China market, where 81 percent of all EB-5 investors originate.
Let’s start with some of the basics. It is usually very difficult to find investors interested in $1 million investments, therefore, ensuring that the project is in a targeted employment area (TEA) is often step one of the analysis. Equally obvious is that an approved exemplar petition is a huge marketing advantage, though it must be discussed in detail whether the marketing advantage is worth the long wait for exemplar approval. As a practical matter, most successfully marketed projects do not have an approved exemplar, so this step is not necessarily required.
The next key marketing consideration is location; projects in certain cities are likely to be more marketable than others. New York, Los Angeles and San Francisco are at the head of the list; however, good projects in areas such as Florida, Texas, Philadelphia, Washington, D.C., Seattle, Phoenix and Vermont can also be highly marketable. Likewise, industry is a determining factor; projects in the hotel, health care, mixed-use commercial/residential and other real estate based industries have typically been favored. Beyond the concrete facts, the reputations and past histories of the parties involved – the regional center, the developer, the lawyers, the economist – are important to the receptivity of the project, especially in the Chinese market.
Structuring the Project
Before a project goes to market, its structure must be decided upon—direct investment or regional center project? Where there are sufficient direct jobs, developers have the choice to structure the project as a pooled direct EB-5 or as a regional center project. Direct EB-5 projects have certain advantages, including fewer complex issues, no need to seek regional center sponsorship and prompter processing times, leading to quicker availability of the EB-5 capital. However, direct EB-5 projects have traditionally had more difficulty finding investors because exit strategy has typically been uncertain. Recently though, at least in part because of much quicker processing times, pooled direct EB 5s have become far more marketable. Prime examples are franchises, the leading group of which is restaurants. As with regional center projects, direct EB-5s with a real estate component may be favored, especially among the Chinese investors.
Among regional centers, the loan model has proven to be far more marketable than the equity model. A major reason for structuring an EB-5 project in this manner is that most EB-5 investors are concerned about exit strategy, which is far clearer with a loan model than an equity model. Assuming no default on the loan, at the end of the loan period, investors have a reasonable expectation of a return of the principal amount of their investment with at least a small rate of return.
Exit strategy and likelihood of return of the principal investment are generally of far more importance than the rate of return on the investment. Investors tend to be interested in collateral (with real estate being a strong preference) and the loan term (with a maximum of five to six years being a strong preference). Interest rate or other percentage return to the investor is rarely a determinative factor in the marketability of a project.
The composition of the project’s capital stack is of critical importance. Although capital stack issues are generally of minimal importance to the approvability of a project, they are of critical importance to the ability of the project to find interested investors. The percentage of developer equity (the higher, the better), the percentage of EB-5 money (the lower, the better) and the position of EB-5 money in the capital stack (the higher, the better), if structured improperly, can render a project completely unmarketable. Counsel can be proactive in recommending the optimal presentation of land contribution, tax credits and loan-to-value ratios to maximize the marketability of a project. Escrow considerations Another key issue relates to when the investment money actually flows to the project. The developer generally prefers to have access to the investment money immediately, while the investor generally would prefer to have the money sit in escrow until the approval of his or her I-526 petition. The latter arrangement was the norm in the marketplace when the processing time of I-526 petitions was approximately six months. With processing times increasing to 12 or 18 months, that type of escrow arrangement has often become impractical to developers who simply cannot wait that long for capital. Marketing agents have come to realize this and have become more flexible in agreeing to hybrid escrow terms on behalf of the investors whom they represent.
Various escrow options – no escrow, straight escrow, hybrid escrow – are perfectly legal (assuming they are structured correctly). The details of escrow structuring are critical to acceptance by USCIS, acceptance by the bank or escrow agent, and acceptance by investors and their agents.
EB-5, at its root, is a job-creation program, and job creation is of paramount importance in both the legal approvability and marketability of a project. Beyond the minimum 10 jobs per investor required, the investors look for a job cushion (usually at least 20 percent) to be better assured of the project’s ability to cover all of the investors’ condition removal petitions.
In addition to the number of jobs, investors look at the type of jobs, and are often more comfortable with construction jobs than with operations jobs. When it comes to operations jobs, projects with jobs based on tenant occupancy may have difficulty, or find it near impossible, to attract investors (with the possible exception of projects with exemplar approvals), and jobs based on guest expenditures can also meet challenges in the marketplace because of varying USCIS policies. Indirect operations jobs based on direct employees in loan model projects can also be problematic, both legally and for marketing purposes, because of issues relating to whether such employees meet the definition of full time “qualifying employees.” Investors are acutely aware of the importance of documenting job creation as a critical component of removing conditions on their residence.
Technically, a client who retains me as immigration counsel to provide EB-5 immigration legal services is not contracting for marketing advice. However, in my experience, the two are so interrelated that, by necessity and as a matter of client service, sharing my accumulated knowledge of the EB-5 investor marketplace becomes a critical part of my legal advice to clients.