by Angel Brunner
For the past several months, the EB-5 industry has been filled with a great deal of discussion and speculation surrounding the pending legislation expected to alter the Program post-September 30th. Industry insiders were hoping for positive reforms that would strengthen and improve the program. The five-year extension through 2020 would have put an end to the uncertainty that we have become familiar with over the years. The 12-census tract, California-based Targeted Employment Area (“TEA”) methodology seemed to be the fairest compromise on the TEA issue to date. Additionally, the suggested integrity measures, including the annual $20,000 regional center fee, would have created an additional deterrent to fraudulent conduct in the industry. These are just a few of the many positive program changes that the EB-5 community expected to see addressed in this year’s new legislation.
There were also aspects of the proposed legislation that could perhaps have caused irreparable harm to the program. The seven-year tax return requirements would likely have prevented a great number of potential investors from investing, as many high-net-worth individuals from developing nations are not able to easily produce seven years’ worth of tax documentation. Investors who were contemplating EB-5 may now have the impetus to proceed, having been granted an additional year under the less restrictive current regulations. Furthermore, the proposed increase in the investment amount in a TEA project to $800,000, while maintaining the non-TEA project amount at $1 million, would have reduced the discrepancy between the two tiers by 60 percent – a change that may have resulted in an increase in non-TEA investment. This result would be contrary to what many representatives in Congress, and many stakeholders in the industry, were seeking to accomplish with the proposed legislative changes. The proposed bill did not address the 10,000 EB-5 visa limit, which would have left the annual quota at around 4,000 investors – very low compared to other visa categories. So, despite the many positive changes in the program that would have resulted had the proposed bill been implemented, clearly there is still work to be done. Thankfully, with the one year extension, industry leaders and legislators will have an opportunity to work together to thoughtfully craft legislation that will both reform and stabilize the industry.
Despite all of the changes in the proposed bill, and no matter what is ultimately passed next year, we can be certain of one thing – the core principals of the program will not change and regional centers will continue to be critical in maintaining the program’s integrity. For that reason, the most significant safeguard for investors will continue to be a strong regional center managed by an owner with integrity, who protects her investors. The success stories in EB-5 – from I-526 approvals, I-829 approvals, and return of capital – are almost always connected to a strong, experienced regional center with a smart, dedicated, and honorable team.
Independence is key. It eliminates major conflicts of interest. The regional center and, more importantly, the general partner of the limited partnership (or the managing member of a limited liability company), is less likely to encounter a conflict of interest when it is unaffiliated with the borrower. Protecting the investors must always come first, and it is imperative that the offering documents make this priority explicit. While there are examples of self-lending regional centers with proper due diligence practices that have achieved success for their investors – it is still clear that conflicts are more likely to arise in cases where the same group raising the funds is also borrowing the funds. Investors need to know that there is a fiduciary looking out for their interests throughout the course of their investment. Due diligence and fiduciary responsibility are the two most important attributes to success in this industry. Take the Chicago Convention Center (ACCC) as an example of what happens without due diligence and without a fiduciary. This project featured a world-class city, a great hotel location, and a very experienced team of securities attorneys, immigration attorneys, and economists. It was a very glamorous project, and the investors and brokers allowed themselves to be enticed by the optics while failing to perform the necessary due diligence that would have revealed the regional center owner and developer had no experience and no track record. In other words, when they invested their money and their future in that project, they did so without one of the key components of success – a strong, independent, reputable regional center with a solid EB-5 track record.
It is critical that investors and brokers look at the general partner of the partnership (or managing member of the company). Given that regional centers or general partners can be rented for a nominal cost, it is important to distinguish between the two and clearly identify which will serve as the investors’ fiduciary. Who is the person, or the group of people, that is truly responsible for protecting the investors? What is their history and background in this capacity? EB-5 is a very challenging business – and this is probably why, out of approximately 800 licensed regional centers, an incredibly small percentage (less than five percent) is actually successful in raising funds year after year. EB-5 cannot be done as a hobby or as a side job. It is important to have separate in-house teams performing a wide array of functions, including underwriting, asset management, investor relations, legal, marketing, and sales.
Too often, investors and brokers place their focus on individual projects. When an investor or a broker first asks us about the regional center, the due diligence process, and the track record, it is a good sign. On the other hand, when an investor or broker immediately focuses on the project, it is cause for concern. EB-5 is a long and complicated process, and investors need to be protected throughout the process – from investment to repayment. Thus, the regional center team is just as important as the project itself. Of course, strong projects are of the utmost importance, as they ultimately lead to the creation of jobs and the return of capital. However, strong regional centers beget strong projects, and if you are a reputable regional center with a track record of EB-5 success, then developers with exemplary projects will seek you out as a source of capital. Ultimately, this advantage will translate into greater security for the investors.
EB-5 is incredibly challenging, and requires a talented team to execute properly. The values that we hold are the ones that are critical to long-term success in this business. Due diligence is paramount; the investors’ safety always comes first; and our integrity is our greatest strength. Success breeds success, and EB-5 success stories can always be tied back to the experience and track record of the regional center. This has not changed with any of the legislation over the years, nor will it change with any of the legislation to come in the near future.