By Ishaan Khanna
What are some important considerations to look out for when comparing different EB-5 projects for investment? How can investors best select the project that is right for them and avoid some of the most common pitfalls?
BUT FIRST, WHAT EXACTLY IS A PPM?
When researching EB-5 projects, its important to study the PPMs, which stands for Private Placement Memorandum. They are documents created by parties seeking funding, like EB-5 Regional Centers (RCs) or sponsored developers for example, which are then reviewed by investors. They are the primary source of information about the investment, used to outline all the information, requirements and potential financial risks that investors face in making that investment.
For an EB-5 project, the PPM should detail and explain what happens to the EB-5 investors’ money, and what protections are put in place by the New Commercial Enterprise (NCE) that receives the investment if something goes wrong during the investment.
Here are some of the most important issues to keep in mind when selecting a project and going through its PPM:
REPAYMENT TERMS IN CASE OF DENIAL (I-526 DENIAL GUARANTEE)
The I-526 is the first form an investor file with the US immigration services to apply for EB-5. Many EB-5 offerings come with a refund guarantee, in case the application is denied (also called an I-526 Denial Guarantee). Make sure to read the terms and conditions of the guarantee carefully. Check to see if the offering promises a refund of both the capital contribution, which is the $500,000 investment, and any administrative fees paid.
SECURITY OF INVESTMENT
It is very important to note how the investor’s capital is secured in the investment. In an equity model project, the EB-5 fund combines investors to hold an equity ownership of the project. The project will need to produce profits for these investors to receive their returns/interest, and the EB-5 fund will need to be bought out or refinanced before the EB-5 investors receive their money back. There is usually not a maturity date like in a loan where the money is required to be repaid, and repayment will rely on this sale of ownership. The equity investment is not secured by the property like a loan would be, so this model will inherently create risk that can be mitigated by a loan structure. This added risk and less definitive payback structure are why equity projects can produce higher returns to investors, but if preservation of the investors’ $500,000 investment is a priority, they need to heavily research the viability of the project.
A loan or “debt” model project will be a loan from the EB-5 fund to the development and will have a set coupon/interest rate that is required to be paid, as well as a maturity date that requires the money to be repaid to the EB-5 fund on a specified date. This lowers risk of the investor’s capital remaining in a deal longer than expected. The EB-5 fund can be secured by the developer’s assets, where it may recover some or all its money by liquidating the asset. It’s important to know which position the investor is in to be repaid and get an idea of what the asset is worth today.
If secured in a first position, the EB-5 fund has first priority to overtake the property and sell all assets to get the money back. In a second position, investors have rights after the first-position lender. In an unsecured loan, there is no underlying asset of which to take control.
A first position debt with full collateralization will inherently create a less risky situation in the loan model, but investors need to study the structure of the deal because the structure could make a loan risky. Because a loan is secured by property as collateral, this also allows investors to recover their funds even if the project fails, just like a bank would foreclose on a home when mortgage payments are not made. It is very important to find out what the value of the asset is today and what the loan/value ratio is. If the value of a property is more than the EB-5 fund’s loan, the investor’s loan may be fully collateralized from day one and the building would have to lose value for them to lose money.
NUMBER OF EXTENSIONS AND OVERALL DURATION OF THE INVESTMENT TERM
In loan or preferred equity loan-based projects, the EB-5 loan has a definitive term (usually five years) with the option to extend (usually one year or more). Make sure that the NCE doesn’t have the right to exercise multiple loan extensions as it may delay the return of capital. In loan model projects there is a stated maturity date. Equity-based projects do not have a maturity date, and most of the time it is not defined when you will get paid back.
TIMELINE OF PROJECT DEVELOPMENT AND JOB ALLOCATION
USCIS rules state that the business plan submitted with the form I-526 immigrant petition must establish a likelihood of job creation within two and a half years of petition approval. So, it's important to take a close look at the timeline of the offering and ensure that enough jobs will be created, preferably, before the I-829 petition is adjudicated.
If a project is already under construction, it’s always a good idea to check with the RC on how many jobs have been created thus far and the date from which they are estimating the creation. Sometimes a project can have spent enough money to show your 10 required jobs created even before you invest in it.
It’s also important to understand the order in which these jobs are being assigned to each investor. By default, jobs are assigned to each investor in the order they obtain their conditional green card, which means that if the project does not end up creating all the jobs it was supposed to, it could potentially lead to individuals from backlogged countries not having enough jobs left to assign to them.
Some PPMs will specify when the NCE will return investors’ capital. Keep in mind that investors are eligible to be repaid after their conditional residence is satisfied. Until then, the funds must remain “at risk” until their conditional green card expires. This is called a sustainment period (usually two years). In accordance with the 2017 USCIS memo, they are eligible to be repaid even before their I-829 approval comes and so the PPM should explicitly state that as well. Especially, so investors don’t need to wait another 2 or more years to get their money back. The I-829 processing currently takes about 30 months.
Beware that some PPMs state that all investors’ I-829 petitions must be approved before any repayment. This particular scenario is undesirable because it will most likely result in investors’ money being locked in for several more years, especially if any investor in the project is from a country that has a backlog in processing times, like China that has about 15 years backlog.
REDEPLOYMENT AND CONSENT
Investors from backlogged countries may need their funds reinvested once the project has been completed and the NCE has been repaid.
In this case the investors’ money must be redeployed into an investment offering that qualifies under the USCIS “at risk” rules. Ensure the RC or manager of the NCE requires the consent of the investor before redeploying funds to be able to control that the money will not end up in a high-risk investment, or another project the investor haven’t fully vetted.