By Marta Lillo
Before deciding to invest in a particular project, every EB-5 investor must complete a due diligence investigation of the project in which they will invest their capital. However, projects sometimes fail even when the due diligence has been done.
David Sudeck, a corporate attorney and senior member of JMBM’s Global Hospitality Group and Real Estate Department, notes that a project can fail either before or after it commences due to the failure to generate the required minimum number of jobs or the inability of the created jobs to last for the mandatory two-year sustainment period. “When a project fails before it is started, or it is started but the jobs are not sustained for the necessary period, the investor’s immigration process will be unsuccessful,” he says.
Meanwhile, Kraig Schwigen, vice president of strategic development at American Lending Center (ALC), adds that “when I look at failed investors, I look at those that lack sufficient job creation in order to receive I-829 approval.”
What happens next? An EB-5 applicant’s options when their project fails will depend on the stage in their application process and the developmental phase of the project.
Staying in contact with immigration legal counsel is crucial in case of project failure, particularly for EB-5 regional center investors, according to James Sozomenou, senior vice president and group director of EB-5 New Business Development at Metropolitan Commercial Bank. “The investor should be in regular contact with or contact their immigration counsel immediately if the project they invested into failed. I say regular contact because, as passive investors, they may not be up to speed with everything that is happening with the project, and by staying in contact with their counsel, they may be able to get early insight as to what is happening.”
The jobs created can make a significant difference in moving forward after an EB-5 project fails
The capital available for an EB-5 enterprise is essential in defining a project’s success because it determines whether the project can meet the EB-5 program’s minimum ten job creation requirements.
“If a project is partially completed, there is still an opportunity for a new developer or receiver to come in and complete the partially built project. If there are no material changes to the project, then it is possible for the investors to complete their immigration process. Also, if the jobs were created and sustained for the necessary period, then even if the jobs no longer existed at the time of the I-829 filing, the investors should still be okay,” Sudeck says.
The attorney reflects on what the USCIS’ Policy Manual states about this particular situation: “In making the determination as to whether or not the immigrant investor has created the requisite number of jobs, USCIS does not require that the jobs still be in existence at the time of the petition to remove conditions adjudication in order to be credited to the investor.”
Therefore, “the determination of whether jobs were created as to a particular investor for a partially built project is based on the order of filing (earlier filers enjoy the benefit of the jobs created),” Sudeck says.
Schwigen explains that there would be “a total loss of the initial capital contribution when I think of a ‘failed investor’ because the EB-5 Program allows for redeployment of funds into a subsequent job creating entity [JCE] if the initial target investment fell short on job creation however it was able to return funds to the NCE [New Commercial Enterprise].”
Likely solutions for EB-5 investors in this situation depend on whether they have filed for adjustment of their Conditional Permanent Residence (CPR).
Choosing a new EB-5 project to continue the application process
Schwigen adds that any EB-5 investment is “going to be exposed to the same risks of any traditional investment, and this is where the EB-5 Program looks to the opportunity for gain and the risk of loss.”
Therefore, EB-5 investors need to make sure they can transfer their investment to a new project and file an amendment with the USCIS. However, carrying jobs created from one project to another may be challenging.
“We know that those EB-5 petitioners that have established CPR can make changes that would have been deemed material prior to CPR. The question then becomes: can they rectify the lack of job creation by making an additional investment into a new NCE and sustaining that investment for no less than two years,” the attorney questions.
Schwigen says he believes the answer is yes. “I also believe that the USCIS is looking for solutions to these kinds of challenges. My research shows me that there are likely to be thousands of EB-5 petitioners in this position. I am sure the USCIS knows this number better than I do,” he adds.
Meanwhile, Sozomenou says that, from a banking perspective, a few scenarios could play out depending on whether the investor’s funds were already released from escrow versus money remaining in escrow. “I have seen scenarios where investors can move their investment to another NCE/project and file an amendment with USCIS. Job count becomes important as well because carrying jobs from one project to another may not be that easy or allowable.”
The most likely scenario would be the investors’ funds have already been released from escrow, Sozomenou explains. “This is such because a project would not be considered a failure, for one reason or another, for some time into said project. Investor funds typically do not sit in escrow for that long a time so the developer would have had access to these funds well in advance of the project ‘failing,'” he adds.
It is also the most difficult scenario of the two, as the money has already been deployed and spent. “The question that comes down to is: ‘Is the investor’s initial investment of $800,000 in Project A (failed project) sufficient and were the jobs created?’ If so, how do they proceed with their immigration status? If not, what options are available to the investor?”
The Metropolitan Commercial Bank executive adds that the documents that formally observe the transfer of investors from one project to another are necessary. “I have seen instances where investors were moved to a new project through receivership proceedings as well. The timing of these things varies greatly. Things can move quickly or they can take a year plus, hard to really put a timeframe on it.”
Sozomenou affirms that the investor’s immigration counsel would need to handle the situation in a way that is most favorable for the investor in the eyes of USCIS.
Schwigen also cautions that the EB-5 investor experiencing these circumstances must choose the right project to continue their application.
“All EB-5 investors are seeking green cards and a return of capital. These investors have already made an initial investment that failed to produce the desired results. They also underestimated that some action is needed on their part, but they fear they could be throwing good money after bad. The right project needs to ease the additional fears and concerns they have beyond what a new EB-5 petitioner would have,” he says.
Sozomenou concludes that “projects don’t fail because of investors, so it is up to the industry to try and salvage what they can to protect the investors and protect the industry from such an occurrence.”
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