by Ellen Choe and Robert Lee
Introduction
In the last quarter of 2015, the entire EB-5 industry had been expecting a program overhaul with an impact potentially greater than those brought on by the last wave of changes in 2012 and officially implemented in 2013. Sometimes, even after much debate and fanfare, nothing changes. Even so, industry experts know that although it may take longer than initially expected, significant changes are on the horizon. Meanwhile, the recalibration and temporary stabilization of the EB-5 program that occurred after USCIS’ publication of its May 30, 2013 Memorandum1 has been overshadowed by the current legislative uncertainty and has turned the EB-5 process into a painful waiting game. The good news is that the changes coming will not completely blind-side the industry. Any adjustments to existing EB-5 strategies should happen quickly as soon as the new policies are unveiled. For now, many are either waiting to see how things unfold or are pressing forward with hopes that the changes are in their favor. For those anticipating strategic changes and multiple scenarios to get ahead of the curve, there is value in reviewing the impact of the May Memo on the business plan and how projects need to be evaluated.
The evolution of the EB-5 business plan over the last few years provides valuable insight into where the program is today and how to respond to policy changes. Ignoring or misunderstanding this evolution has led many down a path towards a Request for Evidence (RFE) by USCIS that could have been avoided altogether. In addition, the role of third-party data and the most recent trends highlighted in this article can help regional centers and affiliates prepare for their EB-5 project under current circumstances. Hopefully, by understanding and analyzing successful strategic responses of the past, the industry will be equipped to quickly respond to the changes that are soon to come.
Turning Point
In the ever-changing landscape of the EB-5 program, one thing has stayed constant for the business plan. It is the definition of Matter of Ho.2 Although what defines the content of a business plan has not changed, the rigor of USCIS’s scrutiny of the Matter of Ho criteria has evolved a great deal. This is evident through the volume of memo, and RFEs released in the last four years. The thought process of USCIS adjudicators displays identifiable patterns, which have become more clear with the experience of writing hundreds of business plans and 50 RFEs.
Before 2013, project planners often regarded the business plan as more of an afterthought. All of the business strategies were determined through discussion between the management team, attorneys, and economists. Once these ideas were fleshed out sufficiently, a business plan writer was engaged to merely organize the details and put ideas to paper. Financial projections, which are the crux of the business plan, were often just based on the opinion of the management team. If there was data involved, it may have been outdated or loosely tied to the project. This was an accepted practice in the EB-5 program to support revenue and expense assumptions until 2012. Many viewed the listed requirements of Matter of Ho as more of a suggestion than strict guidelines. As unbelievable as that may seem today, there were many I-526 projects that received approval through this process. Today, the only remnant of this process is in the development of a “Hypothetical Project” for a new regional center.
The May Memo officially confirmed the agency’s intention to examine in detail the factual foundations of assumptions and projections presented in the business plan. By articulating as a matter of policy that business plans would not be “comprehensive and credible” without such detailed support, USCIS required more documentary evidence of legitimacy from regional centers and their affiliates in the process of developing and marketing their EB-5 projects. It became unquestionably clear that USCIS would not find credibility based on the mere opinions of regional center management, and the industry determined that third-party data was the best way to objectively establish a basis for the business plan.
The data used must also be relevant to the project in terms of industry codes, geography, and timing (ie. must provide enough historical data and/or be recent enough for current projections). The type of third-party data can vary from industry to industry. Therefore, the right data must be researched and selected to represent the project specifically, as the subsequent analysis will need to be leveraged and integrated into the business plan. Additionally, certain industries such as assisted living, hotel, and real estate may require more third-party data for verifying potential revenue and construction costs. In the case a business plan is insufficient to establish the basis that is required, a third-party feasibility study report or a custom data report may be needed.
How Data Analysis can be used to Address an RFE Successfully – A Case Study
Soon after the May Memo was released, many regional centers received an RFE challenging their tenant occupancy-based job projection based methodologies. Most regional centers gave up “tenant occupancy” jobs, but one in particular felt a favorable decision was within reach. Their persistence paid off with an eventual approval, but it did not come easily. By providing a comprehensive list of data for all the prospective tenants, this regional center showed that there was excess demand for their project. Although USCIS rejected the conclusions of their analysis, it was apparent that the methodology of this analysis was accepted. By the time the last RFE arrived, this regional center was able to sign up tenants and provided concrete proof of their specific industries. Fortunately for this regional center, the developer was smart about the types of tenant businesses that they were bringing into the development. In response to the RFE, the data was updated with a more specific list of prospective tenants and the irrelevant industries were thrown out. What ensued was basically a chess match with the data. The discarded industries were ones that displayed no excess demand and the updated analysis now proved to be credible. The project thus was approved with tenant occupancy jobs. This example shows that proper use of data may be the only solution for approval with difficult project requirements.
The Proper Role of Third-Party Data
The evolving EB-5 environment has changed the priority of third-party data and the role of the business plans today. When preparing an exemplar EB-5 project, a project developer must start with the correct foundation. While the goal is to find the correct amount of EB-5 funds in the capital stack, the process needs to start with relevant data. This can either be done by purchasing a feasibility study or by engaging a company that will correctly identify the relevant data and use it to model out the financials and any construction costs. As long as the data can be shown to be credible, these conclusions can become the proper basis for economic model inputs. The economist should be able to easily take those inputs and model out the job creation numbers to determine the maximum projected raise of EB-5 capital. By incorporating the proper third-party data (with source attribution) into a business plan, a separate feasibility study is usually not required for I-526 approval of a project. The case where a feasibility study may be needed is when a project is unique and has insufficient data points or the data is proprietary and unattainable. When opening a new business location for an existing brand, the feasibility study can include regression analysis by plotting the data of existing locations.
Without properly analyzing and identifying both the maximum raise potential and the expected minimum raise of EB-5 funds in the capital stack, it is very difficult to fully commit to a plan. Project details may have to be tweaked according to the findings and if the job numbers need to be changed after the initial round of decision-making, the changes could have significant impact to the point that the project may no longer be viable. Therefore, the modern business plan plays an important role even at the preliminary stage due to the analysis of third-party data. Not only does the business plan provide a comprehensive representation of the project, it also provides industry-based verification of project costs and potential revenues, which gives the much needed assurance to USCIS that the project is realistic and accurate according to their definition of being “credible”.
The Trends of RFEs
By examining the trends of recent RFEs, EB-5 service professionals can see that USCIS has provided further clarity when defining what constitutes a credible and comprehensive business plan.
In 2013, many RFEs questioned the validity of tenant occupancy-based job projection methodologies, the duration of construction, the cost of construction, accuracy of market analysis, and the use of outdated data. At that time many clients moved away from tenant occupancy and began counting only indirect construction jobs. The solution for the proper response during this era was to utilize third-party data for verifying construction costs and properly supporting market analysis. The third-party data was based on specific geographic location and industry NAICS codes, usually at a minimum of the four-digit level.
Then in 2014, RFEs focused on heightened scrutiny of the project’s financial expenses, proof of permits and licenses, and the demand for a transparent hiring timeline. The issues were quickly resolved through the use of third-party data to verify revenue and expense inputs. In addition, project developers had to provide further documentation for any permits or licenses and a transparent hiring timeline with sufficient detail.
Today, RFEs request a comprehensive marketing strategy and a SWOT analysis of market competitors. To address this, project developers have had to disclose a comprehensive marketing strategy, and business plan writers have had to utilize multiple sources of third-party data and customized data research, in order to craft a proper SWOT analysis of the project’s competitors.
Through the narratives of RFEs it is evident that USCIS now has financial analysts reviewing the financial projections at a more microscopic level. This means the financial projections have to be achievable, and also sufficiently supported, to prove the accuracy in the context of a project’s location, industry, and scope.
Business Plans Today
Adapting to change is never easy, but the growing pains of the EB-5 industry have been necessary to ensure a healthy and vibrant community for stakeholders and investors. In hindsight, the standards absolutely needed to be raised. For example, verification of inputs utilized to calculate job creation counts was required to ensure that projects and their investors would be protected in the long run. Job creation has been and will be the central goal of this program, and it needs to be protected.
Due to these changes, the business plans written for the EB-5 program have evolved in the last four years. They are more sophisticated, with interweaving parts supported by third-party data, and a narrative that has to convince a skeptical USCIS adjudicator to believe that the project is not only feasible but also sustainable. This means it is imperative to have the right team of experts who can establish a solid initial strategy and clear the path, minimizing the pitfalls that can occur during the process.
Conclusion
Further changes to the EB-5 program are inevitable and the current status quo will soon be defined by a new standard, but the experts in the EB-5 industry will be ready to take on the challenge.
Understanding the evolution of the EB-5 business plan may shed light on current standards in 2016 and beyond. Including the elements of Matter of Ho will make a business plan comprehensive, but the proper use of data will make the business plan and the project credible. These are the two fundamental qualities that USCIS is looking for. By laying the proper foundations on unshakable data, your business plan can be the core of a strong, solid EB-5 project.
About the Authors
Ellen Choe is the president of Elite Visa Plans (“EVP”), a team of business plan writers and consultants focused on EB-5 and other immigration-related business plans. Choe has broad practical knowledge of the EB-5 industry, and has personally overseen the writing of over 700 business plans. She is frequently invited to speak locally and nationally. Choe also serves as the vice president of the Overseas Korean Traders Association of Los Angeles and as ambassador for the Overseas Korean Traders Association in Korea.
Robert Lee is the CEO of Elite EB-5 Solutions LLC. He helps clients structure a strong process management team to streamline the application process and focus on efficiency and execution. His strategic approach to consulting helps clients understand potential risks when assessing the proper tension between necessary business decisions and EB-5 compliance. Lee formerly managed forecasting, reporting and analysis teams for big-box retail accounts in the U.S. and Canada. He then worked as Director of Financial Planning & Analysis for a mid-sized jewelry company.
Sources
1https://www.uscis.gov/sites/default/files/USCIS/Laws/Memoranda/2013/May/EB-5 Adjudications PM
(Approved as final 5-30-13).pdf (pp 19-20).
2 https://www.uscis.gov/iframe/ilink/docView/INT/HTML/INT/0-0-0-65/0-0-0-4783.html
Ellen Choe
Ellen Choe is the president of Elite Visa Plans (“EVP”), a team of business plan writers and consultants focused on EB-5 and other immigration related business plans. Choe has broad practical knowledge of the EB-5 industry, and has personally overseen the writing of over 700
business plans. She is frequently invited to speak locally and nationally. Choe also serves as the vice president of the Overseas Korean Traders Association of Los Angeles and as ambassador for the Overseas Korean Traders Association in Korea.
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