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Investing Cash from Loan Proceeds: Problems and Solutions for EB-5 Investors

 By Nicolai Hinrichsen and Stephen Yale-Loehr                               

 

            In 2015, the U.S. Citizenship and Immigration Services abruptly changed its policy and adjudication standards regarding the approvability of EB-5 I-526 petitions. This change in policy focused on the source of the immigrant investor’s qualifying investment derived from a loan not secured by the investor’s personally-owned assets. Due to the fact that USCIS applied this change retroactively, the policy change has hurt thousands of EB-5 investors and their dependents. This article describes the history of such loans in EB-5 immigrant investor cases, the 2015 change in USCIS policy, and how EB-5 investors can fix or avoid the problem.

 

General Source of Funds Requirements

 

            Every EB-5 investor must invest “capital” in a new commercial enterprise in the United States. The USCIS’ EB-5 regulations define “capital” as “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.” 8 C.F.R. § 204.6(e).

 

            Sometimes an EB-5 investor may borrow cash from a third party (e.g., a bank, company, friend, or family member) and invest that cash in an EB-5 qualifying new commercial enterprise. Until 2015, the USCIS and its predecessor, the Immigration and Naturalization Service, generally treated cash obtained through the proceeds of a loan no differently than cash obtained through any other lawful means.

 

            Regardless of whether the petitioner obtained the cash as a gift, through wage earnings, or as the proceeds of a loan, cash invested into a new commercial enterprise was treated as “cash.” The immigration agency historically approved petitions based on investments of cash the petitioner obtained through a loan, even if the loan was unsecured or not collateralized by the petitioner’s personal assets, as long as the job-creation and related EB-5 eligibility criteria were satisfied.

 

            Over the years, the USCIS sometimes issued requests for evidence (RFEs) in loan-based EB-5 cases. The USCIS cited 8 C.F.R. § 204.6(j)(2)(v) for the proposition that “if the invested capital is a loan, the petitioner must submit evidence of the loan agreement or other evidence of borrowing which is secured by assets of the petitioner and for which the petitioner is personally and primarily liable.” USCIS eventually approved such cases, based on arguments that the investment proceeds were “cash” and not “indebtedness” (i.e., a promissory note).

 

USCIS Change in Policy Regarding Loans

 

            Until 2015, EB-5 cases involving unsecured or third party loans were routinely approved.

 

That changed in early 2015, when USCIS began issuing RFEs and NOIDs on essentially all I-526 petitions involving third party and unsecured loans. In April 2015, the USCIS announced publicly for the first time during an EB-5 stakeholder’s call that it would no longer allow the cash proceeds of an unsecured loan or a loan obtained in which the EB-5 petitioner did not own the collateral securing the loan. Under the new policy, the USCIS claims that an EB-5 investor cannot use loan proceeds as a source of investment capital unless the investor shows that the promise to repay the loan has been secured by assets the investor owns. The USCIS now considers such proceeds “indebtedness” rather than “cash.”

 

            The USCIS is applying its new policy retroactively to EB-5 cases that were already pending. That has hurt many investors with pending petitions, particularly where refiling would cause age-out issues or subject the petitioner to the EB-5 visa backlog. A class action lawsuit is pending in federal court challenging the USCIS’ change in policy. Zhang v. USCIS, 15-cv-995 (EGS) (D.D.C. filed June 23, 2015).

 

How to Avoid Potential Loan Problems in EB-5 Petitions

 

            While a successful outcome to the class action lawsuit may be the only way to help most pending cases, some strategies can be used to save existing cases in which USCIS has issued an RFE or a NOID. For example, presenting evidence regarding Chinese property and contract law can help in certain cases involving joint ownership of property by petitioners and their parents, children, and other relatives. Nevertheless, given the USCIS’ inconsistent record on this issue, new EB-5 petitioners might consider one of the following steps to avoid an RFE or denial:

 

  • Have the third party gift loan proceeds to the EB-5 investor. The USCIS has accepted such gifts as valid sources of funds, even though the underlying basis of the gift is a loan. For example, if a relative owns an apartment and obtains a mortgage loan on that apartment, have the relative gift the loan proceeds to the EB-5 investor. The USCIS’s Administrative Appeals Office specifically approved this kind of transaction in a recent non-precedent decision. Matter of Y-Z-, ID# 18021 (AAO Aug. 25, 2016), available at https://www.uscis.gov/sites/default/files/err/B7%20-%20Immigrant%20Petition%20by%20Alien%20Entrepreneur%2C%20Sec.%20203%28b%29%285%29%20of%20the%20INA/Decisions_Issued_in_2016/AUG252016_01B7203.pdf. If the relative owns only a percentage of the property and the EB-5 investor owns the remainder, structure the loan such that each pro rata percentage is paid out to the relative and the EB-5 investor, respectively. The relative can then gift his or her portion directly to the EB-5 investor, essentially avoiding the indebtedness issue.

 

  • See if the investor’s share of a jointly owned property suffices for EB-5 purposes. Sometimes a parent and relative jointly own a property. Assume, for example, that a son and his mother each own 50 percent of an apartment worth $1.2 million. The mother wants to become an EB-5 investor. If they jointly obtain a mortgage loan for that amount on the apartment, the mother’s 50 percent share is worth $600,000, enough to fund her EB-5 investment. Because the mother’s money is collateralized by her share of the apartment, the USCIS should approve this case, even though it involves a loan. (Note that so far the USCIS has not raised this issue where spouses jointly own the property.)

 

  • Transfer property ownership to the EB-5 investor. An EB-5 investor could choose to transfer ownership from a relative such that the EB-5 investor owns all or a percentage of the asset sufficient to cover the loan. While this is an effective way to overcome any USCIS concerns, such a strategy may result in significant tax liabilities that the EB-5 investor may wish to avoid. In addition, the time necessary to transfer property may significantly delay the EB-5 process.

 

  • Consider other sources of the EB-5 investment. Many ways exist to prove an investor’s lawful source of funds in an EB-5 case. For example, an investor may use his or her earned income, a gift, or sale of a property. None of these involves a loan. If an investor has more than one lawful source of funds, and does not own property sufficient to secure a loan, choose the source that doesn’t involve a loan.

 

Conclusion

 

            The USCIS’ new policy interpretation barring loan proceeds as EB-5 investments unless the investor has secured the underlying assets is subject to attack. In the meantime, new EB-5 investors can avoid any problems concerning the use of loan proceeds as their EB-5 investment as long as they structure the transaction in one of the ways outlined above.

 

Stephen Yale-Loehr

Stephen Yale-Loehr

Stephen Yale-Loehr is co-author of Immigration Law and Procedure, teaches immigration law at Cornell Law School, and is of counsel at Miller Mayer in Ithaca, New York. He has been chair, co-chair, or a member of the EB-5 Investors Committee of AILA for over 10 years. He also founded and was the first president of the Association to Invest in USA (IIUSA).

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