By Anayat Durrani
There are more than 640 regional centers (RC) approved by the U.S. Citizenship and Immigration Services (USCIS), but not all are the same. Researching a particular USCIS-approved RC before selecting it as an investment vehicle is important. Foreign investors may come across ‘in-house regional centers’ and ‘third-party rental centers’ in this search and should determine whether an EB-5 project utilizes either setup.
“The project must disclose their affiliation with an RC. In addition, proof of their relationship would be evident in project documents,” says Belma Demirovic Chinchoy, founding partner at Iyer Demirovic Chinchoy LLP. “Most investors’ first point of contact within the EB-5 space are regional center sales reps. These sales reps can and should explain the relationship between the RC and the NCE [New Commercial Enterprise].”
Demirovic Chinchoy says while there is nothing wrong with either setup, “an investor must understand the nature of the relationship and each involved entity.”
Investors should know the relationship between projects and EB-5 RCs
Catherine DeBono Holmes, partner and chair of the Investment Capital Law Group at Jeffer Mangels Butler & Mitchell LLP, says a developer/project owner who owns a regional center in the geographic area where they intend to build a project can use their own instead of a third-party RC. This way, the developer/project owner would not have to pay fees to a third-party RC, they could exercise more control over the EB-5 offering without requiring approval from the third-party RC owner and other activities.
“The one reason that developer/project owners do use third-party regional centers is because they often do not have their own regional center in the geographic region where their project is located, and it takes too long to get a new regional center approved by USCIS,” says DeBono Holmes. “If the developer/project owner has to wait for USCIS approval, it could delay the ability to conduct an EB-5 offering for many months.”
DeBono Holmes adds that from the issuer’s standpoint, having a third-party regional center, especially if the RC also manages the NCE, can bring a greater level of due diligence and accountability for an EB-5 project’s performance.
“However, this is not true for every regional center – the quality of regional centers varies greatly, and there are no required standards of financial expertise or experience for anyone who forms a regional center,” says DeBono Holmes. “The investor has to study the track record of the regional center, including how many offerings the regional center has sponsored, over what period of time, and how many of the sponsored projects have successfully returned capital to earlier EB-5 investors.”
How to assess the quality of EB-5 regional centers
Meanwhile, Demirovic Chinchoy says there are no advantages or disadvantages to either setup and that what matters most is “who is involved, how the deal is structured, principals’ expertise in EB-5, finance, and specific business being undertaken as well as the overall level of professionalism within each organization.”
The attorney explains that an investor must ensure they would like to do business with each of the involved entities – the RC, NCE, and the Job Creating Enterprise (JCE). Among the questions they should ask, she says, are whether they are professionally run organizations with stable and proven operating histories.
“Have lawsuits been filed against the entities and managers? Is there sufficient transparency about conflicts of interest, financial arrangements, and business operations?” says Demirovic Chinchoy. “These are a few questions an investor must answer in order to evaluate an EB-5 investment opportunity.”
To know whether an EB-5 project uses an in-house RC or a third-party rental center, the Private Placement Memorandum (PPM) should be evaluated. This document is penned by parties seeking funding, like EB-5 Regional Centers or sponsored developers.
“The PPM should say who owns the sponsoring regional center and whether the regional center is affiliated with the JCE and/or NCE,” says DeBono Holmes.
Investors should evaluate the PPM for any mention of conflicts of interest, even if the parties involved are not related, which can range from compensation structure to incentives provided to specific parties.
“In the past, third-party regional center arrangements were considered something small developers with no or limited EB-5 experience engaged with,” says Demirovic Chinchoy. “That is no longer the case, as the USCIS processing time for RC application has increased to multiple years. Even well-established RCs may need to rent an RC in order to develop a project outside their geographic area.”