by Christian Triantaphyllis and Catharine Yen
A regional center’s escrow account is a key component of the EB-5 process. While an escrow account is not a legal EB-5 requirement, most investors prefer to submit their investment into an escrow account, as this assures that their funds will be released into the EB-5 project upon I-526 petition approval, or refunded upon I-526 petition denial. When sitting in the escrow account, the EB-5 capital is temporarily pooled together with other EB-5 investors’ funds, and upon fulfillment of the escrow conditions, the capital contribution released is assigned to the individual investor whose I-526 petition triggered the release of the escrowed funds. Traditionally, escrow accounts were structured such that funds would be released upon the approval of an investor’s I-526 petition; however, long USCIS processing times have pushed regional center principals to pursue other models that balance their need for funds with investor uncertainty about immigration outcomes.
The evolving escrow landscape
In the EB-5 world, the concept of the “full escrow”—an arrangement whereby the EB-5 investor’s funds are released from the escrow account and deposited into the project upon the investor’s I-526 petition approval by USCIS—was the norm until recently. However, due to prolonged processing times for I-526 petitions, the regional center escrow account arrangement has undergone significant modifications to allow EB-5 projects to receive essential funding in a timely manner. This prevents them from being starved for capital while petitions remain under adjudication with USCIS, which in many cases have dragged on as long as 12-18 months. As a result, gone are the days of full escrow arrangements as the primary option. Instead, regional center escrow agreements now often contain an assortment of legal mechanisms that permit a quicker release of EB-5 funds into the regional center’s project.
The evolving landscape of the release of escrowed funds—in particular the migration away from escrow arrangements conditioning the release of funds only upon I-526 petition approval and toward escrow arrangements containing more complex, aggressive release of funds mechanisms—is a reflection of the attempt to keep up with real-world business demands. However, the increased number of triggers for escrow fund release underscores the tension between EB-5 investors’ preference for conservative escrow arrangements that provide more certainty, and the project developer’s desire to access capital as soon as possible under terms that allow for more aggressive or pragmatic release of funds in order to move the project forward.
For example, imagine a scenario in which a regional center project has raised all the necessary EB-5 capital to construct and operate the amusement park it plans on opening in a few years. Many of the project details remain in flux, however, while the EB-5 funds sit in escrow; the land purchase for the project site may not be finalized until the funds are released, and by that time, the affordable equipment prices agreed upon with local vendors may no longer be guaranteed. Furthermore, the community has expectations as to when the amusement park will open, according to originally announced plans. Under this scenario, the longer the EB-5 funds remain in escrow, the more uncertainties will arise, such as land availability and the ability to maintain originally set purchase prices for project equipment. This puts the success of the project in doubt, and in turn, puts the approvals of the I-526 petitions in doubt. Such a scenario creates the very same uncertainties that investors were trying to avoid by advocating for escrow in the first place. Loan-based deals include their own additional challenges, such as meeting financing deadlines to keep the project alive.
For regional centers with full escrow accounts, solutions for keeping up with market demands have been ad hoc and rudimentary, such as requesting investors to amend an already-signed escrow agreement to allow for an earlier-than-expected release of funds. This type of request often makes investors uncomfortable, as they are being asked to allow for the release of their capital contribution before knowing whether their I-526 petition will be approved by USCIS. In a worst case scenario for the project developer, such a request can result in investors either being unwilling to sign the amendment, or losing faith in the project and withdrawing from the investment altogether.
In order to avoid such situations, regional centers are now presenting investors with more elaborate escrow agreement terms and conditions that call for alternative ways of releasing EB-5 funds into the project, without having to wait for individuals’ I-526 petitions to be approved by USCIS. Of course, the escrow agreement might still allow for the release of funds from the escrow agent upon the approval of an investor’s I-526 petition, but investors should expect to see other terms allowing for the release of escrowed funds within the escrow agreement. Such terms might include the release of funds upon approval of a project exemplar petition, or the release of all EB-5 investors’ funds upon the approval of the first five of the I-526 petitions filed within the same project. These types of escrow arrangements are inherently riskier than a full escrow account, but the release mechanisms reflect the likelihood that USCIS will accept I-526 petitions based on their general acceptance of the project documents. However, the investment loses predictability as to when funds will be released from escrow.
Due to the changing nature of escrow arrangements, investors can no longer assume that the terms of an escrow agreement will safeguard the release of escrowed EB-5 funds until the approval of each individual’s I-526 petition. Rather, the previous role of the escrow agreement is likely to be supplanted by an escrow agreement model that permits faster and less uniform releases of escrowed funds. The above-described escrow account demonstrates this effect. If escrowed funds for all EB-5 investors are to be released upon the approval of the project’s exemplar petition, then a scenario could occur in which the exemplar petition is approved before all individual investors’ I-526 petitions are even filed. Thus, the later investors in the project will be investing their funds immediately, with no escrow period, while simultaneously signing an escrow agreement and filing their I-526 petition. In this instance, the execution of the escrow agreement may provide a false impression of security to the investor, unless the investor understands that a condition for the release of the escrowed funds has already been met; thus, their funds will be immediately released to the regional center’s project. This serves as a reminder to thoroughly review all the offering documents.
In another method to streamline their access to EB-5 capital, many regional centers are implementing escrow accounts that allow for the release of funds upon the filing of each investor’s I-526 petition with USCIS. This arrangement results in a shorter escrow period that spans from the moment the investment funds are wired to the regional center to the time it takes to subsequently file the I-526 petition based on the investment. The most notable concern for investors under this scenario is that investors’ funds are released before the adjudication of the I-526 petition. Thus, an investor’s I-526 petition eventually could be denied by USCIS, even though the investment funds have been released from escrow and sent to the regional center project many months prior to the denial of the petition.
In response to this circumstance, regional centers initially may have dealt with investors’ concerns by making informal promises to attempt to find a replacement investor in order to provide the denied investor an opportunity to withdraw from the project. However, as the evolving escrow structure is increasingly leading to the pre-adjudication release of funds from escrow, regional centers have begun to adapt in a more formal way. Project documents may now include language explaining that in the event of an I-526 petition denial, reasonable best efforts will be used to find a new investor to replace the denied investor. Nevertheless, for some investors, this type of covenant has failed to provide the necessary reassurance, so regional centers have developed more creative ways of ensuring that they have enough cash on hand to refund an investor who receives an I-526 denial notice. For example, under the terms of the escrow agreement, the regional center may direct the escrow agent to release the majority of the escrowed EB-5 funds upon satisfaction of a release condition, but retain a certain percent- age of funds in escrow in order to have cash on hand to refund an investor if his or her I-526 petition is denied. The retainage amount required by the terms of the escrow agreement would increase as the number of investors who receive I-526 petition approvals increases.
Additionally, some regional centers are opting to hold EB-5 funds outside the United States in overseas escrow accounts. The May 2013 USCIS Policy Memorandum explicitly states that the “use of foreign escrow accounts [...] is not prohibited, as long as the petition establishes that it is more likely than not that the minimum qualifying capital investment will be transferred to the new commercial enterprise in the United States upon the investor obtaining conditional lawful permanent resident status.” Dealing with an escrow account set up in his or her home country may be more appealing to some EB-5 investors. However, if EB-5 funds are held in escrow inside the United States, fewer issues may arise with regards to validating currency fluctuations and foreign capital export restrictions.
The new normal
Investors should understand that a more dynamic escrow arrangement is the new normal for regional center projects. Just as the recent USCIS EB-5 Policy Memorandum acknowledged that “business strategies constantly evolve, with new opportunities identified and existing plans improved,” the escrow agreement has also evolved to help regional center projects survive drawn-out I-526 petition processing times, and keep up with the real world business environment. Again, these business strategies are evolving not merely out of a regional center’s de- sire to access capital, but due to the backlog of more than 7,000 I-526 petitions, and the increasingly lengthy delays of processing times. These types of escrow arrangements should not necessarily keep investors from exploring EB-5 opportunities, but instead should serve as a reminder to thoroughly analyze and understand escrow terms, in order to choose conditions that the investor is most comfortable with when making an EB-5 investment.