By Phil Cohen and Rohit Kapuria
The EB-5 program is packed with complexities and there is much to consider before venturing into a bid to raise EB-5 capital. Most introductory EB-5 seminars and educational sources focus on the basics, but there are some crucial topics that could be of immense importance to an EB-5 project developer. This article will outline some of these rarely-contemplated issues.
Consider Adjudicators When Submitting an EB-5 Business Plan
Business plans can be as diverse as the people who write them. Adjudicators at USCIS are faced with a variety of business plans that range from ‘bare bones,’ difficult-to-follow outlines to excessively detailed, highly-technical analyses. We assume that the adjudicators generally conduct an initial pass-through of the business plan using a checklist to search for key elements prior to diving deeper into the supporting materials to ensure that all the claims and projections are properly substantiated and that the plan iscredible.
One cannot assume that USCIS adjudicators will be experts in any given business. However, it is crucial that the business plan encompasses a sufficient level of detail. Information should always first be distilled in an easy-to-follow summary, prior to following up with the more complex outline containing additional technical details. Information should be well organized so adjudicators can easily find what they are looking for.
Another essential point is to steer clear of contentious issues that could invite pushback from USCIS, such as utilizing guest expenditures or considering tenant occupancy impacts in the economic jobs report.
Adjudicators, or anyone in an auditing role generally, often seek opportunities to poke holes in a project’s business plan and issue Requests for Further Evidence ("RFE"). The trick is to practice defensive business plan writing by addressing crucial questions head on and ensuring that little is left to interpretation.
The Importance of Feasibility Studies
Feasibility studies and market studies are not a requirement under the EB-5 program, but are increasingly being included in model EB-5 project petitions. One reason relates to the preponderance of hotel and hospitality-based businesses that are making use of EB-5 capital. These businesses often commission market or feasibility studies to determine whether their intended projects will be successful. As a result, USCIS adjudicators have come to recognize the value of these studies as validation barometers for some of the mission-critical claims that are presented in the business plan.
There are a host of service providers that can provide feasibility studies for EB-5 projects. Larger hotel and mixed-use projects commonly use service providers such as PKF, HVS and STR. For most other types of projects, particularly non-real estate projects, there are only a handful of other EB-5 specialist providers that have the expertise and experience to cover such project.
Feasibility studies are generally developed by researching available data related to a given industry and regional area, including elements such as competition, market, consumer behavior, local foot traffic, demand, etc. After gathering all the required data, a feasibility model is developed to provide an independent assessment and projection for the business’s anticipated performance and overall likelihood for success.
Some of the most critical issues addressed in a feasibility study include competitive profiling, market profiling and general validation of pro forma assumptions and revenues.
Because a key requirement under the EB-5 program is that a business plan be credible, validation of the aforementioned components by an independent third party cements a level of credibility that would be difficult to challenge. Conversely, building a business plan based on un-validated assumptions or the project developer’s own internal assessment of its competition does not always convey impartial assessments.
Another important contribution that feasibility studies provide to the EB-5 process is generating confidence among potential investors and their relevant financial and legal advisors that the project venture has some reasonable likelihood for success.
Any tool that can help to generate confidence in a project among potential investors can be an important part of helping to persuade investors they will achieve their immigration goals by investing in one project instead of another. With nearly 800 active regional centers in the EB-5 market today, and several hundred active projects pitching to investors at any given time, a feasibility study can make the difference in persuading investors to invest.
Beyond Matter of Ho: There is More to Know
For anybody who has done any basic research into the EB-5 program, one quickly comes across references to ‘Matter of Ho.’ In summary, Matter of Ho refers to one of four precedential decisions issued in 1998, where the Administrative Appeals Office ("AAO"), which serves as an appellate review body for EB-5 and other immigration-seeking petitioners contesting negative decisions by USCIS, defined the basic requirements for a qualifying EB-5 business plan.
The fact is, Matter of Ho was just the first step in the process. As demand for EB-5 capital exploded in subsequent years, and project developers began structuring more deals that ranthe gamut in terms of complexity, the EB-5 community began requesting additional procedural guidance from USCIS. One such clarification, issued through various memoranda and guidelines, is that not all the Matter of Ho requirements are necessarily relevant to each business plan; sometimes it is contextually irrelevant and other times it would be only mildly appropriate.
One of the often frustrating aspects of the clarifications process, however, is that USCIS continues to maintain a significant amount of discretion in its interpretation of regulations as well as its own interpretations of previous guidance. As such, USCIS has continued to fine-tune its own interpretation of credible business plans through its prevalent use of RFEs. Business plan requirements could end up even more burdensome than those imposed by, for example, a bank loaning millions of dollars to a project developer.
Experienced EB-5 attorneys and business plan writers will tell you that having a checklist of the Matter of Ho guidelines is all fine, but unless you have worked ondeals that met USCIS requirements, you might be at a disadvantage. The goal is to anticipate what adjudicators will be looking for and to work toward heading off a potential RFE. This will not only save time since RFEs delay the entire process, but will also keep the EB-5 investors happy.
Beyond USCIS: Consider the Investors and Marketplace
Successfully raising capital under the EB-5 program used to be a much simpler venture. There was significant demand for EB-5 investment opportunities, but a dearth of projects as recently as five or six years ago. Back then, one could be forgiven for thinking that a reasonable business plan and a subsequent USCIS approval of the project or an existing investor petitioner in such project would be sufficient to raise the capital. The tables have since been flipped over. There is significantly greater demand for investors with considerably more projects offered in the EB-5 marketplace. Investors and agents are spoiled for choice, and invariably more sophisticated in their approach to the EB-5 program, in what is now a true buyer's market.
For this reason, it is important to consider that developing a business plan and offering that will resonate with investors is of greater import than it once was. Project developers should always solicit advice from their marketing networks on how to structure a ‘sweet deal’ for investors. Such knowledge can go a long way to achieving marketing success and can reduce or even eliminate the need for additional structural modifications when the project is ready to go to market. Some examples of the EB-5 investor considerations are as follows:
- Likelihood of job creation is paramount.While a project developer cannot guarantee that jobs will be created, investors will have greater confidence if:
- the project avoids contentious job creation issues such as tenant occupancy;
- the economic models, which calculate indirect, induced and direct job creation, avoid the use of inputs that could be easily challenged, such as guest expenditures
- there is an absence of development hurdles at the start. This often would involve existing land acquisition on file, backup or bridge financing in the event of an EB-5 shortfall, credible financial commitments from the other sources of capital required for the project development, and absence of developer-related litigation.
- Aggressive revenue and growth projections are not as important to an EB-5 investor as they might be to, say, venture capitalists. Today’s more sophisticated EB-5 investors know that aggressive projections often come with additional risks. Conservative projections and core stability are more important to EB-5 investors; they simply want to know that the business will be secure enough to create the necessary jobs and make enough money to be able to pay them back in the future.
- Escrow terms and refund terms should be favorable to investors. Investors prefer to see deals that will release funds to a project upon approval of an exemplar business plan or approval of the project’s first investor's petition. Investors also seek comfort that they will be able to receive a full refund of their investment if their petition is denied by USCIS. In fact, it is becoming increasingly common for investors and their agent representatives to ask questions about third party developer guaranties of the EB-5 loan. While this is a tricky legal issue, given the volume of EB-5 projects some strong developer guaranties can set the project apart.
- A project’s capital stack should be verifiable and well-balanced, with significant developer equity. A model capital stack is comprised of 30 percent developer equity, 30 percent EB-5, and 40 percent senior financing and other traditional sources. A developer with ‘skin in the game’ is showing its commitment to the project.
- An increasingly important issue is ensuring that the EB-5 loan, if it is indeed structured as a loan, shows collateral by some appropriate asset. EB-5 agents and investors are becoming quite sophisticated on this matter.
There are many other factors to consider, and a project developer should strive to address as many investor-oriented concerns as possible. Ignoring the market's demand can be disastrous to a project developer's goals.
Consider the Nuances of the Adjudication Process
It is important for the project developer to anticipate delays in the adjudication process. Over the last four or five years, as the demand for EB-5 capital has exploded, it has been painfully obvious that USCIS has been somewhat ill-equipped to tackle the ever-increasing number of petitions. By USCIS's own estimate in December 2015, there were more than 17,000 investor petitions pending with the agency. When one combines the current adjudication capacity with the number of pending exemplar petitions and the large number of pending I-829 petitions, most project developers and investors will be well-advised to exercise patience with the ever-lengthening adjudication timelines. It is clear that USCIS needs more trained and sophisticated adjudicators to tackle this mountain of pending work. Even though these timelines tend to fluctuate on a monthly basis, one can spot the shift of internal resources when one set of petitions projects an aggressively longer timeline and the other a shorter timeline.
The reason why the delays should be of concern to project developers is that often, the release of EB-5 funds from escrow accounts are somewhat tied to the adjudications process. It is important to note that the release processes and triggers are constantly changing. Escrow providers are similarly in a position to dictate what they are comfortable with from a banking exposure standpoint. When one combines both of the cautionary timelines from the investor marketplace and the escrow service providers, the wait-and-see approach becomes the norm.
At the current time, the common release triggers involve some combination of a project exemplar approval, which could take anywhere from eight to 16 months from the time of submission, and a certain percentage of investor subscriptions prior to some portion of the EB-5 funds held in escrow getting released to the project developer. In a large number of cases, the project developers could be forced to wait a year or more before getting their hands on a portion of the EB-5 capital.
If the project developer is in no rush to begin development, then this is no problem. In most circumstances, however, the project developer will be anxious to get moving. Having access to some temporary bridge capital that can later be replaced with the forthcoming EB-5 capital could be an ideal adjustment. Industry observers have noticed a growing trend in this direction. While not every project developer will be able to follow this example, principally because acquisition of such bridge capital is not always easy, it is an important consideration when exploring the EB-5 process.
Pooled Direct Projects Offer Certain Advantages
An often ignored EB-5 investment opportunity involves investment in a direct EB-5 project as opposed to the more commonly cited regional center projects. While this article will not delve into the intricacies of direct EB-5 projects, it is important to consider some of the lesser-known structural processes.
One interesting structure occurs when a direct EB-5 project is structured as a ‘pooled’ investment. In such cases, the investors can invest in a commercial enterprise that has multiple wholly-owned subsidiaries. For example, using the common theme of franchise restaurant deals, a pool of 20 EB-5 investors can invest in a commercial enterprise that will own and develop 20 restaurant locations within a certain geographic zone or even halfway across the country. This can spread the business risk across the various locations so that, for example, in the event, of two restaurants failing, eighteen remain to create sufficient jobs and revenue, possibly leaving the investors in a good investment and immigration position. This is in contrast to a situation where 20 investors might invest in a hotel project within one city. If the hotel fails to both create the necessary jobs and generate sufficient financial value to repay the investors, it would be disastrous for investors.
It is worth noting that while the pooled direct approach offers certain advantages a larger project, such as the one in the example provided above, could also fit the regional center-based paradigm if based within a regional center's approved geography and have access to indirect and induced job creation, which is allowed only in regional center-based projects. Ultimately, one needs to assess all of the pros and cons of each approach in order to determine which will be best for a given situation.
There are a number of idiosyncrasies associated with the EB-5 program that are largely unknown, except to veterans of the industry. While this article has attempted to shed light on some of them, there remain a number of other considerations one must explore. The key to having success within EB-5 is to surround oneself with a strong and experienced project team.
At the same time, one must also understand that building an effective and approvable project is only half the battle. A project and offering must still appeal to the EB-5 marketplace and the project developer must attempt to set his or her project apart from the many other competing projects. For some, this could mean that EB-5 might be packed with too many uncertainties. For others, the opportunity to capitalize on affordable and attractive capital sources is worth the time, energy and effort.
As the industry demonstrates each year, though EB-5 is complex, it continues to create thousands of jobs, introduce billions of dollars of capital in the US economy, and afford project developers an opportunity to begin some spectacular projects.
 USCIS is working to mitigate this issue by hiring a more sophisticated team of economists and attorneys to fill open positions at the Immigrant Investor Program Office (“IPO”).
 It is important to realize that at the heart of EB-5 lies some largely general regulations drafted by Congress over two decades ago. USCIS, as an administrative body, is tasked with interpreting such regulations and governing the administration thereof. As such, it is inevitable that the process is not always clear cut and gray areas continue to exist.
 The logic behind the latter concept is that once USCIS has approved one investor in the project, barring any subsequent changes to the project and/or finding of fraud, USCIS is deemed to have blessed the project as approvable. Note, subsequent investors in the project could still be rejected if USCIS takes issue with some investors' individual backgrounds.
 The key issue here is that EB-5 investments are, from a regulatory perspective, required to be at-risk investments. The interpretations on the "at risk" issue continue to be debated since USCIS has consistently failed to issue official guidance on the matter.
 While some question the cautious approach escrow providers/banks take with EB-5, it is important to understand that these entities are increasingly worried about the liability associated with EB-5 escrow functions.