By Marta Lillo
The EB-5 industry has been evolving since the Reform and Integrity Act (RIA) passed in March 2022. Today, it is reaching a point where stakeholders require services that cater to the intricacies of the EB-5 process.
RIA minimizes the risks of irregularities in EB-5 investments, which were common in the past and often resulted in legal claims. Even with due diligence applied, these failures can significantly impact investors, developers, and regional centers.
After RIA, investment minimums increased, and regulations tightened with enhanced surveillance.
Today, EB-5 stakeholders seek assurances in all process aspects, from project development to funds sourcing and application adjudication. As a result, there is a need for services and products that prevent fraud, increase transparency, and provide reassurance.
Title insurance has always been a risk-management strategy in the U.S. real estate industry, including EB-5 projects. However, this type of indemnity was never customized for the industry, according to Jai Lee, business development officer at Stewart. "Lack of awareness of title insurance’s importance in EB-5 led Stewart to create a process and fill a void," says Lee.
“We're breaking ground in the EB-5 industry. We saw a need for a customized process and that’s why we took this extra step, to ensure our clients get what they require to succeed,” Lee explains. “Stewart has the due diligence to manage EB-5 transactions. We’re committed, we’re safe to do business with, and we practice confident, strong regulatory adherence.”
Stewart plans to debut this new process during the EB-5 & Global Immigration Expo at Newport Beach, California, on Jan. 15 and 16, 2024.
The importance of title insurance for EB-5 real estate investors
Title insurance protects real estate owners and lenders against any property loss or damage they might experience because of liens, encumbrances, or any defects in the title to the property. Each title insurance policy is subject to specific terms, conditions, and exclusions.
“When a developer is getting financing for their projects, many lenders require title insurance and due diligence,” Lee says. “So, this has been a part of the process from day one. Stewart wanted to go a step further and create a better experience for the EB-5 sector.”
Tang Tang, director of KT Capital Group/US Regional Center Group, explains that title insurance is a key part of any real estate transaction. “As a lender in the EB-5 space, we always have title insurance to ensure that the owner is the actual asset holder and that the senior mortgage loan has the high priority it should,” he said.
In case of an unknown mortgage or a second lender claiming a lien against the property, the first lender can request confirmation of its priority from the title insurance provider. “Even if there is a problem, the lender’s position is protected. At a high level, that's the reason we have it,” says Tang.
Title insurance does not add difficulty to the EB-5 process, Tang insists. “On the loan side, there are slight differences because with EB-5 we care about job creation and other things that private equity, debt funds or banks don't. But that shouldn't compromise the integrity, the due diligence, or the professionalism of the actual transaction. Both things can coexist.”
Lee explains that the policy covers the liability of either the lender or the new owner. “Most deals are straightforward, and title and liens are not controversial. Occasionally, you think you're getting the only collateral in a first mortgage. Then, suddenly, something comes up. That's a dramatic and difficult thing to deal with,” she says.
However, EB-5 investors are not exposed to such risk directly. While reviewing real estate project offerings from developers or centers, applicants regard title insurance as part of the project's due diligence or development. During that time, the developer or the lender obtains the policy.
EB-5 lending matters for a successful project selection
Lee emphasizes that EB-5 applicants must investigate the project’s underwriting or due diligence process and pay attention to third-party providers, including those insuring the title. “You want the right partner who can protect your project. It should be a reputable company with adequate experience that has quality service and large liability reserves. If there is a claim, they’ll have adequate resources to cover it,” she adds.
EB-5 investors must also know what lenders and developers look for in EB-5 developments due to their size and characteristics. “These projects are fairly large-scale because you have to pull together investor money and create enough return,” Lee explains. “If you're looking at upwards of $50 million in project size, you want a title insurance company that can cover you in case a claim comes forward.”
From the lender's perspective, obtaining title insurance from a financially strong provider creates peace of mind. “It gives them comfort that, if they had to make a claim, let's say for $100 million, the financial capability to honor it is there,” says Tang.
However, many EB-5 investors are not familiar with the processes and laws involving U.S. real estate investment. “Title insurance isn't necessarily required on properties in every country, so foreign investors may not understand the need for it,” Lee explains.
Market reception to customized title insurance
Stewart’s customized product offers a feature that provides information on risks to principals, in addition to title insurance. For this, they consulted with EB-5 industry stakeholders. “It was a result of the feedback we received from lenders, developers, and regional centers,” Lee says.
The company expects to open a new era for title insurance in the EB-5 industry. “Right now, there really is no standard, according to the feedback we’ve gotten. We’re taking the initiative to create a process that other title insurance companies will follow and raise the bar,” Lee concludes.
Meanwhile, Tang believes the proposed process will benefit the EB-5 ecosystem, including specialized lenders.