by Ellen Choe and Robert Lee
The EB-5 industry continues to evolve, but there is little guidance by U.S. Citizenship and Immigration Services officials when it comes to RFEs (Request for Evidence) and NOIDs (Notice of Intent to Deny).
A May 2013 memo from USCIS provided the most significant guidance to date, but the specific interpretations continue to be tweaked. Because USCIS does not provide a specific playbook with the latest updates, or any other way to obtain insight into its adjudications mindset, it’s important to be knowledgeable of historical as well as the most current trends as it relates to understanding RFEs and NOIDs.
The changes in standards are for the benefit of investors, regional centers, industry professionals, and the industry as a whole. Certainly, USCIS and other government agencies are working to make EB-5 more safe and secure. However, navigating through this period of adjustment has been difficult. Examples of RFEs will be discussed in this article to help readers understand what goes into the filing process and the evaluation of projects.
Understanding the RFE and NOID Process
What is an RFE or a NOID? When an EB-5 application lacks sufficient evidence or contains questionable details, the USCIS adjudicator typically issues an RFE to give the applicant an opportunity to clarify or provide additional evidence for approval. The applicant then has a standard response time of about 90 days for an RFE. If after a response to the RFE is submitted, and the adjudicator is still not satisfied, a NOID is issued. The applicant typically has 33 days or less to respond to a NOID. Though rare, there are incidents where an applicant received a NOID as the first response.
Please keep in mind that simply because a project or investor receives an RFE does not mean that the petition was filed incorrectly or that the project is flawed. Sometimes, it’s used as a strategy to determine how USCIS will adjudicate. Regional centers with new or sophisticated deal structures may anticipate and use RFEs as a way to learn how to respond and explain their project. As the EB-5 industry continues to mature, top developers and regional centers with investment banking and institutional investment experience have gradually entered the market. The more sophisticated deals and business models involved now have to be tested, and usually that is through the process of filing a petition and then responding to an RFE. Having financially-savvy players in the industry can provide legitimacy to the industry, but the EB-5 service providers need to have a strategic plan with contingencies when introducing these models to USCIS. As USCIS adjudicates more and more complex deals, the EB-5 industry will slowly expand the repertoire of financing models utilized.
Basic RFE Avoidance
A qualified and experienced EB-5 team (attorneys, consultants, economists, and business plan writers) will have enough volume of EB-5 deals to see how USCIS is adjudicating most common RFEs. The most basic RFE comes when there are conflicting project details. This usually occurs when a project changes details in the midst of preparing documents. For instance, when the entity names, financial assumptions or projections, staffing requirements, timelines, or service providers change in one set of documents and the details are not changed throughout the other documents in the immigration petition, USCIS will usually find it. If the senior loan was with a different bank, or the terms have changed slightly and there is conflicting information, an RFE is usually on the way. This basic type of RFE is the most common, and it is the reason why having a team of seasoned EB-5 professionals is so important to the project. Whether using a consultant or immigration attorney to quarterback the process, this is crucial for EB-5 approval. It is very important that you check and recheck that all of your facts are stating the same details. With this in mind, a quarterback managing the whole process from start to finish will help to establish a solid team that can save you time and money and avoid unnecessary headaches.
Any immigration consultant, agent or investor should make sure that the professional team who worked on the EB-5 filing documents has the necessary experience, especially if considering investing in a project that does not already have I-526 approval.
Some Common RFEs
Assuming you have an experienced team of EB-5 professionals, what topics are current RFEs addressing? Without diving into the RFEs for business plans, which will be addressed in greater detail later, some of the current trends involve issues regarding proper TEA evidence, proving capital is “at-risk,” proving the actual undertaking of business activity, the path or proof of funds for investors, supporting documentation of senior or bridge loans, job creation methodology, and staffing timelines. While many of these seem self-explanatory, the issue of “at-risk” is especially important as the EB-5 industry struggles to balance the investor’s desire to minimize risk. Many structures limiting risk have been tested, so it is important to discuss with legal counsel the projects that are currently under consideration by USCIS.
RFEs for Business Plans Since the 2013 Memo
The biggest turning point so far for the EB-5 program was the release of the May 30, 2013 USCIS memo. This document officially confirmed the agency’s intention to examine in detail the factual foundations of assumptions and projections presented in the EB-5 application. 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.
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 or irrelevant data to support financial assumptions. At that time, many clients moved away from tenant occupancy and began counting only indirect construction jobs. The solution 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.
Construction costs were the target of many RFEs because many did not provide evidence supporting that they are within industry standards. Providing support is important for regional center projects because job creation is dependent on the construction expenditures. It only makes sense that these could be easily inflated and job numbers could be exaggerated if construction costs increased. Therefore, it is important that construction costs are properly supported by a third-party data source, or that there are multiple bids for the project disclosed as evidence to USCIS. The days of providing internal construction numbers based on opinion will likely be challenged.
The data for operating businesses used must also be relevant to the project in terms of industry codes, geography, and timing (i.e. must provide enough historical data and/or be recent enough for current projections). The type of third-party data used for this 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 where a business plan lacks sufficient detail, a third-party feasibility study or a custom data report may be needed. These changes brought the business plan to the forefront. It became the foundation on top of which the economic impact reports would find their justified inputs, and where the securities documents would pull project specific details.
RFEs have been issued because of the lack of feasibility studies. However, what USCIS is primarily trying to identify is the presence of objective third-party data to support the assumptions in the business plan, which could be done through a feasibility study. Many in the industry interpreted this as saying that a feasibility study is now a required document in the EB-5 application package. Contrary to this belief, many successful I-526 filings have been filed without a feasibility study. If the business plan is properly supported with third-party data for each and every assumption that impacts revenues, expenses and job creation, then a separate feasibility study is not required in most cases. The instances where a feasibility study is imperative include cases where there is a lack of sufficient third-party data supporting the project details, such as a new industry or business model that does not currently exist. In such instances, a feasibility study needs to be utilized to provide proper evidence in more indirect models.
At the same time in 2013, there were heightened restrictions on the evidence required to prove investment funds were derived from legal sources, in addition to an increase in requests for permits and licensing relating to the feasibility of the projects. Clearly, USCIS was starting to look at the applications from cover to cover with a microscopic lens.
Then in 2014, RFEs focused on heightened scrutiny of the project’s financial expenses, proof of permits and licensing, and the demand for a transparent hiring timeline. These 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[A1] 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.
Every business and project is unique and different. However, USCIS finds comfort in the familiar and objective arguments presented in a strong I-526 petition that is well written and analyzed by an experienced EB-5 team. Currently, the most important aspects to keep in mind are consistency between all documents, impartial third-party data to verify financial and job creation inputs, supporting evidence within industry standards, and transparency. Although not a comprehensive list, many examples of RFEs have been included in this article to help readers avoid costly mistakes and understand the level of detail that goes into an EB-5 application today. By understanding the RFE process and details requested in previous RFEs, readers can make a more informed decision in evaluating potential projects.