With various set-aside visa categories available, ensuring safe EB-5 investments is paramount for EB-5 investors.
EB-5 investors and the professionals advising them when selecting projects must exercise greater diligence and ask the right questions. Here are five essential questions to consider when evaluating EB-5 projects offered by a regional center.
Question 1: Who is behind the EB-5 project?
A crucial aspect of the project is understanding who the New Commercial Enterprise (NCE) and the Job-Creating Entity (JCE) are. The EB-5 visa program requires these two mandatory entities for projects developed by regional centers. Brennan Sim from EB-5 United says a clear separation between these entities ensures fiduciary responsibility, aligning with investor interests.
“Is there a separation between the two? When you work with someone separated from the JCE, you’re working with somebody who is a fiduciary acting in your best interest as an investor,” Sim says.
Question 2: How experienced is the regional center and the developer behind the project?
Understanding both entities’ backgrounds and their track record in the EB-5 industry are vital. It is paramount to know how well capitalized and how many projects they have developed.
Alexandra Loveless from Far Capital Partners is adamant about investors and their legal and migration advisors choosing regional centers experienced in the EB-5 landscape and the specific industry of interest and with strong government relations.
“You want to make sure that you’re working with regional centers and developers who have experience in EB-5 and specifically also within whatever industry the specific project that you’re looking at is located in,” Loveless adds. “It’s important to have a regional center or developer with really good government relations so that they can reach out to USCIS on your behalf to find out what’s happening with your application [..] and put a little bit more pressure on them to hold them accountable because it’s really difficult to hold USCIS accountable, as anybody that’s done EB5 or any immigration knows.”
Lulu Gordon from EB-5 Capital highlights the need for a reliable relationship between the developer and the regional center presenting the project to EB-5 applicants. “You have to have a relationship of trust. You also have to make sure they understand how the EB-5 process overlays what they’re used to, which is private equity, and how it changes things so that they’re not surprised that doing what they need to do to create the jobs is absolutely critical.” This involves thorough vetting of developers, including financial and reference checks, Gordon adds.
Question 3: How is the capital stack built?
Evaluating a project’s capital stack is crucial. It’s not just about how much EB-5 capital the project raises but the position that money occupies in the capital stack, Sim adds. A sound capital structure ensures that EB-5 investors are protected and prioritized in repayment scenario.
“It’s not necessarily always about what percentage of a project is EB-5. It’s more about where that percentage lines up in the capital stack,” he says. “It’s very important to evaluate every project, even with the same regional center. It’s very important to evaluate every one of those projects completely separately. Because every developer is different, every project is different, every structure is different. And you really have to understand what is going on with the specific deal that you’re looking at.”
Loveless adds that understanding inter-creditor agreements is critical, as investors and agencies should ensure substantial developer equity, which indicates the developer’s commitment. “Just make sure that the developer has just as much skin in the game, if not more so than you do.”
Verifying all information provided by regional centers or developers through document review is essential, she adds. “A lot of investors have conversations with regional centers or developers, and they’re told something, but they don’t verify by going through and looking at all the documents,” Loveless insists.
Question 4: What is the title insurance of the project?
Title insurance is a risk management strategy that protects against potential claims on the property title of an EB-5 project. Investors and agencies should choose regional centers and developers who offer projects with this protection, Jai Lee from Stewart Title recommends.
“Title insurance is involved in every real estate transaction. The borrowers and developers are very familiar with it. I just want the EB5 industry also to be aware when you’re looking at the projects and the developers to look at it with a real estate commercial real estate mindset because, at the heart of it, the project is a real estate transaction. We can help look at the creditors and flag anything that comes up that may be of concern to your position, whether you’re in a senior position or the preferred position. We have policies that ensure all those areas of the capital stack,” Lee says.
Question 5: What’s the timeline of the project?
Gordon states it is vital to assess the construction timeline and job creation potential. By asking this question, investors and agencies can ensure that pre-development risks are mitigated and permits secured.
“It’s important for investors to look at where they are in the construction timeline. Have the pre-development delay risks been resolved? Are the appropriate permits already issued? Ideally, construction has begun, and then you want to look at that economic report. Do you have some cushion in job creation? Is the project going to last long enough to create the jobs that are necessary for you, with some room left over?”
Recent changes in the sustainment period laws have shifted investor interest towards projects with shorter timelines, often favoring residential developments, Sim adds. Understanding these dynamics helps in selecting assets that align with current market trends.
“Now that the sustainment period laws are only two years, the hospitality model is less attractive unless you’re investing right at the end of construction on a hotel where you have a few years to stabilize, and then you can refinance or sell. Now investors are looking for more of a 3-to-5-year timeline, rather than the old typical 5-to-7. Residential has really taken over a lot of the EB-5 market and is what’s going to be more attractive,” he concludes.
DISCLAIMER: The views expressed in this article are solely the views of the author and do not necessarily represent the views of the publisher, its employees. or its affiliates. The information found on this website is intended to be general information; it is not legal or financial advice. Specific legal or financial advice can only be given by a licensed professional with full knowledge of all the facts and circumstances of your particular situation. You should seek consultation with legal, immigration, and financial experts prior to participating in the EB-5 program Posting a question on this website does not create an attorney-client relationship. All questions you post will be available to the public; do not include confidential information in your question.
