By Ron Rohde
As the recent growth in approvals has worked its way through visa processing, many projects are moving into the deployment phase and turning investor funds into full-time jobs. The investor has a strong interest in this process as success at this juncture drives the ultimate success of his or her I-829 petition (removal of conditions).
Typical Investor Pathway
A common route for foreign investors is to meet overseas agent, attend a seminar or program for residency in foreign country, learn of projects, and make an investment into the project they selected. The investor must narrow down the investment choices, evaluate the business and financial risk of each, and eventually place his or her investment. Throughout the entire journey, the agent should be responsible for providing information on the investment and timing of various processes in order to help investors meet their goals.
After filing the appropriate immigration documents included in their I-526 petition, investors will receive approvals and can carry on obtaining their 2-year conditional permanent residency. One of questions that would emerge post I-526 approval is, what should investors do during this 2-year conditional period? This article discusses some of the regional center project monitoring methods to be taken by investors.
If the project involves developing and constructing raw land, there may be a period for design and plans to be drawn. There are a variety of regulatory approvals the developer must obtain prior to moving dirt on the property. For example, a site may fall under the jurisdiction of a historical building and needs the approval from the state’s environmental and water board. These are all local regulatory agencies and do not consider the involvement of any federal or national governing agencies. The agents can help investors familiarize themselves with the general procedures and timelines. For larger projects, the timeline should be completed well in advance of I-829 preparation. The investor will also want to monitor the EB-5 investment and ensure that it is utilized toward job creation in the US pursuant to 8 CFR 204.6(j). Following the funds at this deployment stage will allow time to resolve any potential problems at I-829 stage.
Once a ground breaking occurs, construction happens rapidly, but may be delayed during construction due to any number of factors: supplier delay, labor shortage, environmental issue, work site violations, etc. All of these delays should be accounted for by the developer in the construction timeline. The EB-5 regulation is not precise when it defines the 2 year window for I-829 filing. There is a clause allowing for “reasonable time.” This has been subject to much debate, but conservatively, investors can expect a few month of leeway with longer periods if the project involves long-term stages. If early delays are significant, construction can speed up towards the end by working overtime and multiple shifts. At every substantial milestone, the investor can compare actual photo progress with the previously distributed construction timeline to determine a project's pace. In addition, delays beyond the scheduled construction timeline will also lead to cost increases potentially leaving less money for working capital after opening.
Upon building completion, there will be a local inspection for certificate of occupancy as well as any health, safety or other regulatory bodies that may have jurisdiction over this particular project. The receipt of this final occupancy certificate is a reliable indicator that construction is complete and this period of risk is over. It is important to know what the timeframe is for this milestone because it allows other funding and responsibilities to trigger.
Photos are the most common method of updating the investors. Some project managers will also utilize a written report which details the week's events and accomplishments. The use of real-time web cameras is also becoming more popular to allow others to view construction progress 24 hours a day, 7 days a week. Typically, weekly or bi-weekly photos are taken on site and available for distribution. Investors would obtain photos from the general contractor, developer or some other intermediary. Photos are not commonly mentioned in offering documents, but can be included under notice sections. From these photos, the investor can gauge progress and be aware of what stage development is in. Be aware that weather conditions, labor availability, materials pricing and other concerns may slow down or speed up construction without any predictability. An investor will typically receive his visa prior to construction beginning unless construction began prior to his or her individual I-526 approval. While this type of information is largely outside the purview of the consulate officer interview, there have been cases when an officer requests additional information. Therefore, it is important for the investor to know or at least be aware that photographs are being taken and stored in an easily accessible manner.
After completion, the operation of the project will be an additional source of management concern, but only so far as the note is concerned. The typical Limited Partnership lending structure will only provide information on the operational project as far as the note is permitted. Investors should not expect any detailed operating financials pertaining to daily sales, occupancy figures, expenses, etc. Investors should expect reporting from the Limited Partnership on an annual or quarterly basis updating them on the status of the investment. These reports would include information needed for filing federal tax returns such as profit and loss for the year. Over the life of an average 5-year note, this provides the investor with multiple opportunities to examine and evaluate how the investment is proceeding.
Monitoring Job Creation
The creation of direct jobs should certainly be of concern for the investor if they are required per the approved I-526. Refer to your offering documents to ascertain precisely the scope of what your rights are for monitoring direct job creation. On an annual basis, each salaried employee will receive a federal tax document called a W2. This statement warrants to the United States government that a particular employee was a full-time employee during the previous year.
A similar concern exists for revenue targets as it relates to indirect job creation as well as ability to repay EB-5 holders. A prototypical economic analysis will use revenue targets as the foundation for the projected economic impact in the surrounding community. Taken with the industry-specific multipliers, this produces a numerical estimation of indirect and induced job creation. While a project may be successfully constructed, opened on time, and provide all anticipated services, if the EB-5 investor is relying on revenue targets, he or she may be found wanting at the removal of conditions stage.
The agents should assist investors to carefully read the offering documents and understand what monitoring and recourse is available if a project is failing to meet revenue targets after the first year. Many projects may face increased competition, poor weather, or other extraneous factors that limit growth.
Overall, the marketplace for the EB-5 program continues to remain quite strong and investors should educate themselves on various factors that ultimately affect their final petition.