By Marianna Tarantur and Kevin Wright
A business plan is an essential tool for migration agents to decide whether a project will be marketable to investors. Agents have a tremendous responsibility to act as gatekeepers for their investors and help guide the them to the best projects to achieve their immigration goals. Therefore, the business plan is a key tool that successful and experienced agents use for decision-making. Knowing how to use a business plan to evaluate a project’s potential for success distinguishes an experienced agent from the rest.
The sheer length and complexity of an EB-5 business plan often makes it impossible for an agent, who is bombarded with hundreds of projects a month, to do a complete review of the all the projects during an initial meeting. As a result, project salesmen often provide the agent with a PowerPoint presentation, executive summary, and other marketing materials. However, all well-respected and experienced agents know that the marketing materials must be validated by the contents of the business plan and other supporting documents.
Below are some insights into the topics that successful agents in the marketplace are inquiring about when reviewing a business plan to determine whether a project is worth introducing to their investors.
Experience and Feasibility
With a myriad of business plans piled on their desks and an endless line of sales people knocking at their doors, a large portion of agents have learned how to quickly and effectively sort through the chaos by asking for the name, experience and reputation of the developer. Agents select projects that will satisfy two major investor concerns; achieving immigration goals and being in the best position to recover their investment. For agents who have been in the EB-5 industry for more than a decade, development team experience and project feasibility dictate that the projects most likely to result in a green card and the return of investor capital are those that have experienced developers involved.
When reviewing a business plan, agents should look for a section that describes the project’s management team. This management team should consist of an experienced developer who has a reputation for successfully completing projects. It is important to note, however, that the developer's reputation and experience completing projects similar to the one discussed in the business plan is what is key. For example, a developer with a long record of successfully developing single-family homes may not be able to translate those skills into developing a hotel. An experienced agent will know the difference and before he or she places investors into a project; he or she will do a significant amount of due diligence on the developer. This includes running a background check on the principals of the development company, researching previous projects the developer asserts to have completed, and researching the developers’ experience, all of which should be highlighted in the business plan. Since the developer is responsible for creating the jobs associated with construction, the significance of the developer’s ability to complete the project cannot be underestimated.
Another equally important entity involved in a successful EB-5 project is the facility operator. This is because a developer rarely has the skill set and experience required to operate a facility. For example, a developer that has built twenty assisted-living facilities does not have the knowledge required to operate them. As such, the developer will bring in an operating partner that has the experience and tools required to make the facility operate successfully. A migration agent should research the background of the operator and its principals to ensure that they have a strong track record of successful facilities. The business plan should contain a list of past and current projects managed by the operator which can be used by the agent in their research. As the operator is responsible for creating the operational jobs required for an investor to receive their permanent green card, they are yet another significant asset that knowledgeable agents value.
Other important entities include the regional center and the companies responsible for preparing the submission documents. It is vital that the regional center has a successful track record of selecting projects and keeping track of expenditures and revenues for purposes of supporting job creation at the I-829 stage, when investors receive their permanent green card. The background of the regional center and its principals should be located in the introduction section of the business plan. Since the experience and knowledge of the regional center and its team is extremely important, a migration agent should do their own research on previous projects sponsored by that regional center and request additional information regarding the regional center principals and activities. The agents may search the Internet for articles relating to the regional center's previous projects and its principals.
Furthermore, a team consisting of economists, immigration lawyers, securities lawyers, and business plan writers who specialize in EB-5 projects and have a reputation for success in the industry is important for ensuring that each element of the project is satisfying the regulations set forth by USCIS. A team of experts will result in fewer hurdles for the investors seeking to obtain a permanent green card. All of these parties should be clearly defined and their biographies should be included in the business plan or readily available for review in ancillary documentation.
It is also important to note that once an agent does have the opportunity to review the business plan in its entirety, he or she will be looking for verification of all the material elements of the plan. This includes third party verification of construction costs in the form of AIA agreements and construction bids, along with revenue and expense projections in the form of a market study or other third party report.
The more documents the agent uses to support the content of the business plan, the more confident he will be when submitting the project to his investors.
Not All Jobs Are Created Equal
An agent’s primary concern is how he or she can assure investors that there is a high probability that they will receive a green card. For an investor to receive a green card, the project into which they invest must create at least ten full time jobs per investor. All EB-5 business plans should contain a section dedicated to job creation, which provides for the total number of jobs the project will create. As part of job creation, strong projects will often provide a job buffer as an element of security to the investor. The importance of a job buffer when selling a project is no longer a trade secret of experienced agents. Nowadays, most agents understand the significance of having more than ten jobs per investor and a 20 percent or higher job buffer has become an industry standard when evaluating a project for job creation security. Often, projects have a job buffer that is 30 to 50 percent or higher. However, more experienced agents understand that not all jobs are created equal.
Construction jobs are considered safer, as the likelihood is high of the construction expenditures used to create those jobs being met. It is rare for the development costs of a project to decrease and unforeseen additional costs are not uncommon in the construction industry. Operational jobs are considered more variable in that the revenue required to create those jobs can greatly be affected by market events. For example, in a hotel project, the revenue projections are based on a minimum occupancy and average daily rate. Any negative variance in these elements will result in lower revenue, resulting in fewer jobs created than projected.
An experienced agent will therefore calculate the job buffer as a percentage based on a ratio of construction to operational jobs a project creates. Projects that create enough jobs through construction to meet the requirement of ten jobs per investor with operational jobs used for purposes of the job buffer, are considered safer than those who need operational jobs to reach the ten-job minimum. Moreover, a project that creates enough jobs through construction only to support all required job creation, plus has additional jobs through construction to support a job buffer for each investor, is considered to be very strong. This type of calculation is usually not included in the business plan or economic analysis, but a migration agent should be able to deduce this information from the numbers provided in those documents. For example, the number of investors in any given project should be listed in the business plan, as should the number of jobs created by the construction and operation of the project. If the business plan does not contain this information, a migration agent will have to refer to the economic analysis, which should provide the breakdown of construction and operational jobs. They will then need to calculate how many jobs come from the construction and operations of the project based on the number of investors a project is seeking to subscribe.
The Key to a Proper Exit
An agent’s secondary concern is how to assure, legally, the return of capital to investors. As such, agents are interested in projects with a strong exit strategy and a greater likelihood of the return of investor capital. An EB-5 business plan should always contain an exit strategy section which describes how the developer intends to return investor capital at the end of a designated period. Often, an attractive exit strategy will include refinancing from a financial institution or the federal government.
If a project provides for refinancing in the exit strategy section of the business plan, an experienced agent may request to see evidence that a given financial institution would be interested in refinancing the project on certain terms. Sometimes, a developer may provide a Letter of Intent from a lending institution, which provides that the institution would be interested in refinancing the project in the future, should it meet its projected profitability. A lending institution may provide a Letter of Intent under numerous circumstances. Generally, this letter is provided where a bank has done their own due diligence on the project and believes that the projected metrics of the project will be met based on factors such as the project industry, experience of the development team and operators, previous financial relationship with the developer, and many others. For a migration agent, the value in a Letter of Intent is that it provides an additional level of security that the project has been reviewed by a United States financial institution who has made a preliminary determination that the project should be successful.
While there is no guarantee that the institution will follow through with the refinancing once the project is completed, a Letter of Intent carries great weight to an experienced agent when evaluating whether a project is a safe option for their investors. As the Letter of Intent is generally not part of the EB-5 business plan, experienced agents know to ask for it, or some other documentation to establish that the exit strategy will be viable. Other documents that ensure the feasibility of the recovery strategy include explanations of "Stable Value" assessment and liability equity ratio, and how they would impact the feasibility of refinancing.
Other documentation to establish the viability of an exit strategy includes an appraisal showing an “as stabilized value,” as well as explanations of debt to equity ratios in the project business plan and how that relates to the viability of refinancing.
Appraisals for projects that contain real estate should be conducted by state licensed and certified appraisers or large real estate services firms who employ professionals with the highest designation in appraisal certification and real estate consulting. When reviewing an appraisal provided for a project, an agent should take the time to research the individual and company who conducted the appraisal to ensure they are licensed and certified to provide such services.
Additionally, certain types of projects are eligible for refinancing under the U.S. federal government’s Housing and Urban Development (HUD) program. HUD administers loans and refinancing at low interest rates to assist in providing safe housing for eligible low-income families, the elderly, and people with disabilities. This financing and re-financing option is not available for all projects, and experienced agents are familiar with the type of industries and projects that can receive refinancing under the HUD program. These industries include, but are not limited to residential developments that have low-income housing as a percentage of their unit type, hospitals, and assisted living facilities. Agents who are not familiar with the program can visit the HUD’s website to learn more and the circumstances in which a project will be eligible for this type of loan.
The Foundation of Capital Raising
The business plan is an integral document in the sales process, and when used properly, can assist in distinguishing a good project from a failure. It is the agent’s responsibility to use the information in the business plan to support the claims made by the project and as a stepping stone to request additional documentation for the security of their investors.
Kevin Wright is an accomplished economist and chairman of Wright Johnson LLC. Wright Johnson LLC is committed to providing economic impact studies, business plans and operational plans for regional center applications and EB-5 immigrant investor visa applications.Wright has delivered speeches and authored numerous articles on economic issues associated with EB-5.