By Kyle Walker
Once a qualified foreign national has decided to pursue an EB-5 investment as their chosen path for lawful permanent residence in the United States, one of the most critical questions facing investors is, “What EB-5 Project Should I Select?”
The primary concerns for any EB-5 applicant are:
Conditional Permanent Residence - Will the EB-5 project I choose result in the approval of my I-526 application and successful adjustment of status/consular interview processing?
Permanent Residence - Will the EB-5 project create sufficient jobs to prove the creation of at least 10 new full-time US jobs that will result in the successful removal of conditions?
Repayment/Exit - Will the EB-5 project be able to return my full investment in a timely and predictable manner?
The key determinants in deciding on whether a particular EB-5 Project will perform on all three of the above points are People, Place, and Time.
Project Sponsor – developer and/or operator of the project; the party responsible for construction of the project and managing the operations (job creation). Important items to consider when evaluating the Project Sponsor:
Experience – Does the Project Sponsor understand and have experience in both the development and operations of projects in this industry? How many times has the Project Sponsor played a similar role in a project of this type? Is the Project Sponsor also overseeing the EB-5 offering?
Proof of Concept – Is the Project Sponsor replicating prior successes from a past project or testing a new concept?
Sponsor Equity – Is the Project Sponsor putting their own capital at risk or are they using other peoples’ money for the entire capital stack?
Reasonable Assumptions – Have the assumptions and projections of the Project Sponsor been validated by a credible 3rd party Market Study and/or Appraisal?
Regional Center – EB-5 is a complicated process with many diverse stakeholders involved. The Regional Center is the hub in the process, coordinating with a diverse group of project stakeholders and protecting the EB-5 investors’ interest. Important items to consider with the Regional Center:
Experience – How many I-526 and I-829 approvals and denials have been issued to the Regional Center? How many projects have been successfully funded? Does the Regional Center personnel have experience in development and operations?
Staff – Is the Regional Center adequately staffed to administer the complexities of the EB-5 process?
Accessibility – Due to the significant time zone differences between Asia and the US, contacting the staff in a US office can be difficult. Does the Regional Center have a presence in your home country?
Commitment – Is the Regional Center focused on EB-5 as a long-term business or are they looking at EB-5 as a method to fund a single deal?
Reporting – Has the Regional Center filed their annual I-924A with the USCIS? And has the Regional Center filed any Form D with the SEC under the securities laws?
*Note – not all Regional Centers are the same – there are 4 general types of Regional Center business models:
- Self-Funding Regional Centers – The Regional Center funds projects that are owned by principals of the Regional Center.
- Financial Service Regional Center – The Regional Center funds 3rd party projects.
- Rent-A-Center – The Regional Center enters into sponsorship agreements to allow other parties to utilize their Regional Center Designation.
- Hybrid Regional Center – a combination of the above models.
Project Offering Team – The Regional Center and Project Sponsor works with a team of service providers to build the Project Offering Package. The Project Offering Package will be submitted to the USCIS with each EB-5 Investor I-526 application to establish eligibility in accordance with the rules of the EB-5 Regional Center Program.
Immigration Attorney – Investment-based immigration is a unique section of immigration law. It is important that both the investor’s immigration attorney and the immigration attorney representing the project have experience with EB-5 applications.
Securities Attorney – An EB-5 offering is a distinct blend of immigration and securities law. It is important that the securities attorney drafting the project documentation has a strong practical understanding of the complexities of the EB-5 Program so as to draft documents that EB-5 Compliant (Regulations, Statutes, Case Law and Guidance Memorandums).
Economist – Job creation is one of the primary requirements to secure approvals throughout the EB-5 application process. The Economic Analysis, created by the Economist, is a central part of the I-526 application (Forward-looking statements: proving the jobs that will be created) and the inputs to the Economic Analysis must be proven as accurate in the I-829 application (Historical performance: proving the jobs were created). Intimate knowledge of the EB-5 program and recent trends in the adjudication of EB-5 petitions are important factors to consider when evaluating an Economist’s suitability.
3rd Party Reports – Market Studies and Appraisals are standard 3rd Party reports used to substantiate the forward-looking statements included in investor I-526 petitions. The Market Study will validate both the projected development costs and anticipated operating performance through comparisons to industry standard data – these benchmarks serve as critical inputs for the economic analysis and need to be provided by a qualified 3rd party to meet current USCIS adjudication standards.
At the very least a 3rd party market study should:
- Include a survey of the primary competition (location, age of the property, financial performance, vacancy)
- Provide a Supply/Demand Analysis
- Utilize 3rd party data sources to support assumptions
- Evaluate the reasonableness of both the development cost and operating revenue/expenses
- Clearly state the assumptions made and the limiting conditions
The Appraisal is an optional but important document for corroborating the assumptions used for the exit strategy. Project valuation is a complex assessment of many variables in the marketplace and should not be conducted by the Regional Center or General Partner. Appraisers hold a professional license in the US, and the MAI designation ensures accountability to the highest professional standards—these are important items to consider when assessing the legitimacy of an Appraisal.
It is important to check the background and credentials of the 3rd Party Companies completing these reports—are they a reputable national firm? Do they specialize in the project industry type? Did the project sponsor commission the report? When was the report completed? How many similar reports has the company completed? What verifiable data sources were used in the report to substantiate the claims made?
The qualified 3rd Party Companies are likely to have long-standing reputations for high-quality and objective studies, and have internal review processes to protect against favorable manipulation of the reports.
As a prospective investor or investment advisor it would be prudent to reach out to the author of the 3rd party reports and confirm that they in fact completed the report on the date listed.
The location of an EB-5 project is critical in determining the potential success or failure of the project operations and eventual return of investor capital (exit strategy). Factors to consider when vetting the project location vary from industry to industry. A good location to build a 5-star hotel will be very different from a prime location for an industrial manufacturing plant or solar farm.
The majority of Regional Center projects are located in Targeted Employment Areas (TEA) that are either a) Rural or B) have 150% of the national unemployment rate. Most investors choose to invest in projects located in TEAs to benefit from the lower investment amount of $500,000 as opposed to the $1,000,000 minimum investment for projects located in non Targeted Employment Areas. A project can demonstrate TEA eligibility in two ways - by providing a letter from the state designated government body (this may vary from state to state) approved by the governor’s office to designate TEA’s; or providing the most up to date data from the US Census Bureau to the USCIS with the investor I-526 petition. The USCIS has stated that they will provide deference to State Designations of TEAs, and as such, the State designation effectively provides a “pre-approval” of a TEA creating greater certainty for the investor and their advisor. Note that TEAs are only valid for one year from the date of issue, so the TEA Letter must be issued within one year of the filing of the investor’s I-526 petition. If the TEA Letter provided by the Regional Center is close to expiring, ask the Regional Center if they have plans to secure an updated TEA letter prior to the filing of future I-526 petitions with USCIS.
Another way to evaluate the quality of a given project’s location is to familiarize yourself (as your investors’ proxy) with the 3rd party market study commissioned on the project. High quality EB-5 projects utilize 3rd party market studies to validate and support the claims made in the business plan and economic analysis. Professional market studies have robust information on the project location and how it relates to the project industry all the way from the National and State levels down to the local community level – giving EB-5 investors a clear picture of market demand and industry trends. Areas of high demand, low supply, and/or high growth represent ideal locations for a successful EB-5 project.
EB-5, with its many stakeholders and interrelated processes, requires careful planning and execution to deliver the intended results within the timeline stated. Due to the rather short window (5 years) of the EB-5 process, market swings can dramatically affect outcomes. Industry, local, and national trends are of critical importance to the project’s ability to create the jobs and provide timely return of capital.
3rd party Market Studies provide in-depth market research on competitive properties as well as national and local trends that may impact the project. A project can be masterfully put together and have an experienced team but if it does not have the right market timing, it could dramatically underperform in the short term and have disappointing results for EB-5 investors.
First and foremost, experience is required to successfully navigate the deep waters of EB-5. The Regional Center and/or General Partner is the “manager” of the team and is responsible for selecting and managing immigration experts, securities professionals, project sponsors and economic specialists. Without an experienced and professional “manager” the project is at-risk of not achieving the stated objectives.
Reliable 3rd party reports from reputable service providers with industry and market experience are important elements of a project offering package that are used to validate the reasonableness of the assumptions and projections used in the I-526 application. Both the appraisal and market study are important documents when performing due diligence on the project and confirming the strength of the project location and market timing.
Remember - the right People, the right Place, and the right Time are key ingredients for the success of any business venture. Focus your due diligence in these areas to increase your likelihood of guiding your investors through a successful investment and immigration process.