By Robert W. Kraft
The explosion of both Chinese EB-5 migration agents and U.S.-based regional center operators has created a significant challenge for all participants in the industry. Unfortunately, some providers on both sides of the equation are more concerned with short-term economic gain rather than long-term growth. Service providers on both sides, many new to the industry, simply do not understand the business and its many challenges. Either scenario is dangerous for those dedicated to running a long-lasting business.
In my opinion, the best migration agents and regional centers have their clients’ best interests at heart. In a market so crowded and cluttered on both sides, how do good providers find good partners? Ask the following simple questions when considering a partnership with a U.S.-based EB-5 Regional Center project manager:
Questions to Ask Regional Center Project Managers
Background Check: What is the track record of the regional center/fund manager?
Conduct background checks to verify the resumes and resources of individuals within the organizational structure and ask for evidence of the organization’s track record. It is prudent to verify successful results, resumes and present commitments with independent third parties.
Related Parties: How close are the parties involved?
When the Job-Creating Entity (JCE) and New Commercial Enterprise (NCE) are related parties there is one less party checking the accuracy of the representations. This structure is very common and does not necessarily mean that there are issues, but does make it easier for inexperience and/or fraud to go unnoticed. If the JCE and NCE are related parties, confirm that other organizations, such as a banks, broker dealers or government entities are monitoring transactions and claims.
I-829 Approval: What is the history of the regional center operator?
Within 90 days prior to the second anniversary of admission to conditional permanent residence status, an immigrant investor must file Form I-829 (Petition by Entrepreneur to Remove Conditions) to remove conditions on conditional permanent residence. An approved Form I-829 is evidence of regulatory compliance and past proper use of funds in the scope of the EB-5 requirements.
On Form I-829, the petitioner must evidence expenditure of the EB-5 funds, tracing each transaction from escrow to expenditure by the JCE. Objective evidence may include bank statements, invoices, subcontractor receipts, payroll records, bank draws, title company disbursements, final lien waivers, and wire receipts. If the NCE Fund Manager misappropriated funds, the petition will most likely be denied on the basis that the full amount of capital was not made available to the business most closely related to job creation. In a model where the NCE is not the JCE, it is vital that none of the $500,000 or $1 million capital contribution is expended at the NCE level.
While the approval of form I-526 is evidence that USCIS has deemed the economic model a “reasonable methodology,” Form I-829 provides evidence that the petitioner and the JCE have satisfied the job creation requirement. Methodologies typically prove job creation through JCE expenditure or generation of revenues. An approved Form I-829 means that the project has met or exceeded the minimum job creation threshold.
Capital Returned: Has the group successfully returned capital to investors?
Investors are promised an “at risk” investment that if successful includes the return of capital. The regional center does not take investors full circle by simply attaining all levels of USCIS approval (I-924, I-526, I-829). At present, USCIS plays no role in the final step of the process-redemption. An exit strategy is just a plan until it can be set in practice. The exit strategy is typicality not as simple as just selling a unit. There are millions of dollars to be repaid and typically the market is limited for these types of units. The prospectus may even limit or ban the transfer of such units.
The new issue in return of capital is “sustainment.” Throughout the period of conditional residence, the investor must sustain the investment and is not able to withdraw any portion of the $500,000 investment. With the rise of retrogression, there is uncertainty in the period of conditional residence and the JCE must now be flexible in their timeline for capital contribution repayment. Industry leaders are forecasting the need for funds to be held in the project longer to fulfill the sustainment provision.
Recently, we have begun seeing cases where clients filed form I-526 but the developer later decided to opt for cheaper or timelier financing outside of EB-5. Subsequently, funds were returned to the investor, thus wasting valuable time and losing the investor’s Priority Date.
In terms of funds release and repayment, agents in today’s landscape need to worry about:
- The project holding the funds for too long;
- as well as the project not holding the funds long enough for the clients to obtain removal of conditions at the I-829 petition stage.
This non-finite timetable requires either the loan agreement to define the term with regards to the conditional residence period or for the agent to have a certain level of trust or aligned interest with the NCE Fund Manager. Some operators do not make returning the investor’s funds a priority and will do so when it is best or convenient for the project, as opposed to best interests of the collective investors. Look for a group with a demonstrated track record of capital repayment.
Third Party Advisor References
Once satisfied with your own research, confirm the results with the third parties listed in the offering documents.
Associations: Place a call to any associations the regional center claims to be a member of to ensure the member is in good standing and has not been issued any best practices’ sanctions.
Media: Contact or search trade publications and other media for articles about the involved parties. You will be surprised how much collaborative information you can obtain by making a simple call.
Economist: Examine the track record of the economist who completed the economic impact report for the regional center operator. Look at education, experience and position in the industry. EB-5 is a complex area where not all methodologies or application thereof are deemed reasonable. Look for a regional center operator who hires an independent economist with specialized experience in EB-5. Ask the economist if they have approved cases with the regional center using this application of the methodology.
Attorney: Select a Regional Center Fund Manager who uses an experienced EB-5 attorney to create the I-829 petition template. If the NCE Fund Manager is using the cheapest option or hasn’t given any thought to counsel, they likely have given limited consideration to immigration compliance beyond the release of funds. Due diligence should include a close examination of the attorney’s track record. A good attorney will not knowingly take on a bad project.
Ask attorneys who you have worked with, or those who you know are strong in the industry, if the attorney has worked with the regional center operator in the past. Does the attorney produce a complete template? Is the regional center responsive? Does the regional center care about their investor’s green cards or is their effort limited to furthering their own self-interests?
There is an old axiom that states, “History repeats itself.” It is as true with regional center operators as it is in life. Don’t be afraid to ask. Trust me, the good regional center operators are asking the same about you, the Chinese EB-5 migration agent.
Pick Your Project
Now that you have narrowed the field to good partners, examine project selection.
Developer: One of the most important partners in the project is the developer. Study the track record of the business people involved in the JCE. Look for a solid, understandable, credible investment supported by prior success and third-party studies.
Escrow: Even though funds tend to be released earlier than in the past, most regional center investments use some form of escrow. Investors and EB-5 practitioners are typically focused on the terms for release, but an equally good question might be, ‘Where do the funds go after release and who is monitoring the movement of funds though the structure?’ One of the benefits of having an institutional lender involved in the process is they will likely want to have oversight of the funds as soon as they are released to the NCE. They may even require that the funds are transferred to an account held by a title company or at their financial institution until the draws are processed and funds are ready to be leant to the JCE.
Disbursement Agreement: Most EB-5 transactions are real estate construction based. Multi-party construction projects have a disbursing agreement in place at closing that documents how each party in the deal must verify, approve, and authorize expenditures before disbursement. This agreement should indicate how loan proceeds, EB-5 funds, and investor equity are disbursed throughout the construction period. Typically, the lender, owner, developer, NCE, general contractor and title company are all parties to the agreement.
Title Company: The title company ensures there are no liens, claims, or ownership disputes on the property other than the liens placed by the first mortgage lender. In order to monitor this, the title company requires all expenditures to be funded through a title company. This third-party procedure carefully documents expenditures and ensures that no funds are misappropriated by the owner, developer, sub-contractor and general contractor during this stage of the process. The title company receives a lien waiver from each contractor, confirming payment for work performed and waiving the right to put a lien on the property.
Construction Review: An institutional lender will often also require a third party review architect to verify the monthly construction draws from commencement through completion. The review architect will audit charges for non-allowable costs and prevent failure to deliver items within the contracted scope. If the review detects possible sources of fraud, the institutional lender should not release funds until they have resolved all material issues.
Government Tax Credits or Grants: If the federal, state or local government has funds in the structure, they are likely conducting an audit to verify expenditures. In addition, most institutional investors in tax credits require audited cost certificates or a third party audit verifying that project funds were spent on qualified project expenditures. In a tax credit investment, the developer typically personally guarantees that the funds were spent on the project, creating tangible accountability.
Visual Confirmation: Visual confirmation is the easiest detection measure. Research local news articles for information about the project. If your client is ready to move forward with a project, it may be worth a site visit. Steer clear of groups that deter stakeholders from site visits. With today’s technology, many groups also provide a live web-cam of the project as it unfolds. This can be a great source of real-time data without the travel expense.
Completion Guarantee: While a project may have started construction, the real issue to examine is if the project is fully capitalized. Any construction project can stop at any time. If there is a slowdown in the EB-5 raise, is the bank willing to take on additional debt or will the developer provide additional equity? Also note that third-party lenders typically require a personal completion guarantee from the developer, ownership group, or general contractor that the project will be completed regardless of final costs. This completion guarantee gives comfort that the project will be completed and the JCE will open for business and create all of the jobs needed to meet the 10-job-per-investor requirement.
Low EB-5 Ratio: Almost every agent that I talk to has a preference for low EB-5 ratio deal structures despite the inherent regulatory/legislative risk on the horizon.[i] What always shocks me is that many don’t understand why they prefer a low EB-5 ratio.
Most EB-5 investors like real estate projects because they have tangible asset security. If there is a low percentage of EB-5 money there is also likely a bank contributing capital. This is a mixed blessing. The bank’s involvement equates to institutional domestic due diligence on the project in many of the ways we discussed above, but it also likely means the bank will be in first position. The more bank money is in the deal the further down EB-5 investors are moved in the repayment order. In the event of a bankruptcy this translates into higher repayment risk.
The real benefit of a low EB-5 ratio is that this allows alien entrepreneurs to rely solely on construction jobs, which in most models are created through expenditures. Therefore, the project doesn’t need to be successful and meet projected revenues to create the requisite jobs. Revenues are, however, required to repay the loan and create permanent jobs.
Prior to 2009, construction jobs were, for the most part, ineligible to be counted. They were found to be transient, seasonal and cyclical in nature—not permanent, full-time employment. USCIS then changed its policy to allow for indirect and induced construction jobs to be counted towards job creation. USCIS then went on to change their definition of “permanent jobs” to two or more years, and thus direct construction jobs were allowed. Given this storied history, you can see why construction jobs were not always so popular. The trouble is few can remember back to, or were around in, the year 2009 when this was an issue.
Don’t be afraid of revenue jobs. These are the long-term jobs that best exemplify congressional intent and are a lower regulatory risk.
In this competitive market, don’t be fooled by the promise of more. Where more is given upfront, someone must pay for it on the back-end, and that someone could be you and your good name. Good Selling!
[i] S.1501 — 114th Congress (2015-2016) sought to limit the number of jobs credited to alien entrepreneurs for non-alien entrepreneur capital contributions.