Understanding EB-5 Structuring Issues

By Ronald R. Fieldstone and H. Ronald Klasko

Overall Concerns for Migration Agents

In analyzing the structuring of EB‑5 transactions from a migration agent’s standpoint, it is important to consider many of the concerns that affect an agent’s determination of whether or not to proceed with a project and what factors go into the process of approving a project.  These factors include, in part, the following:

1. Due Diligence Accountability.  Given the concerns over transparency and credibility, especially in light of the Chicago Convention Center case and other subsequent EB‑5 problematic projects, the industry has taken a very hard line on diligence and verification.  Agents should therefore insist that either the developers and/or the regional centers create a website or cloud storage folder that contains all appropriate due diligence materials that would normally be provided to a lender in a standard loan transaction.
2. Developer Equity and Financial Capacity.  Developer equity being provided to the Project and its financial capacity to support the debt service on the loan should be of prime consideration to agents.  The more equity, the more protection, and the greater likelihood that the project may succeed.  There is no hard and fast rule as to the minimum percent of the capital stack that should be developer equity, but at least 20% or 25% of total project cost should be the guideline.

   Other forms of equity beside direct developer equity include tax credits, government grants or even a developer guarantee on a portion of the loan amount that supplements the equity contribution.  The key for the agent is to evaluate and determine the total amount of equity or even debt being contributed to the project that is subordinate to the EB‑5 debt.  The willingness of the developer (or its principals) to personally guaranty a portion of the loan supplements the equity contributed by the developer in much of the same manner as senior lender would want all or a portion of a loan personally guaranteed, and should be highly considered by agents.

3. Amount of Senior Loan.  Some agents believe that as long as there is a significant amount of senior debt, the project could be considered as financially secure.  This issue cuts both ways.  The larger the senior loan, the greater the potential risk of a default thereunder and a potential foreclosure.  However, there is merit to the argument that an institutional based loan undertakes multiple due diligence and regulatory type requirements that add comfort to the due diligence process and the monitoring of the entire financing process.
4. Other Developer Guarantees.  In addition to a full guaranty of the loan amount or a portion of the loan amount, agents should consider a guaranty of lien free completion of construction to at least insure that the developer principals are standing behind the completion of the project.  The valuation of a completed project should exceed the actual cost of development.
5. So-called “bad boy” guarantee against improper acts should also be considered.  This provides for full or partial recourse of the guarantor for actions constituting fraud, waste or the voluntary filing of a petition in bankruptcy or other similar type negligence or intentional improper actions of the borrower.
6. Quality of Collateral.  The ability to obtain a first mortgage lien is obviously preferred since then the EB‑5 position cannot be wiped out by a senior lender.  This may not be realistic in most situations due to the limitations on the job creation component and the need to obtain senior financing along with the EB‑5 financing.  This will be explained in more detail hereafter.
7. Nature of Job Creation.  An obvious concern from an immigration standpoint is the safety of the job creation, not only for purposes of the I 526 petition approval but also for purposes of the I‑829 petition approval.  Agents should carefully review the nature of the job creation.  To the extent that a substantial majority of the jobs are direct and indirect construction jobs, then for purposes of achieving I‑829 approval, it is much easier to document the job count since once the project has been completed and the expenditures documented, most if not all of the job count requirements would be deemed satisfied.  Therefore, the I‑829 petition documentation requirements should be clearer.  This is one of the main reasons why large real estate projects with significant construction expenditures are favored compared to jobs dependent upon revenue based and/or direct employment models.  The timing of the job creation may be affected by retrogression with respect to operational jobs compared to construction jobs that are premised on expenditures and not operation. 
8. Developer Experience.  Agents should place significant emphasis on the experience of the developer with respect to the type of project.  Developers that have had a significant track record in the applicable asset provide significant comfort.  Therefore, the detailed track record of the developer should be recovered, even to the extent of having references checked and claimed successes verified.  Obtaining the financial statement of the developer principals is also helpful to verify that there is back-up financial support for the project, similar to what an institutional lender would verify.  It is valuable to determine if the developer has consistently performed and has never defaulted under a mortgage loan.  It is common practice today for agents to undertake their own Google search, social media searches, litigation searches through Bloomberry Law and similar type publications, as well as actually obtaining filed court documents in connection with any adversarial proceedings.
9. Location of Project.  It is preferable that the project be located in “bigger cities” such as New York, Los Angeles and San Francisco.  Other major cities are also desirable, such as Las Vegas, large cities in Florida, Houston, Dallas, the Washington D.C. area and, to some extent, Chicago.  The perception is that larger cities provide more financial comfort and market acceptance since they are more familiar to Chinese agents and investors.
10. Projects Under Construction.  There is a preference given to projects that are under construction or just beginning construction to take away the risk that construction will not be commenced.  Generally, construction jobs only depend on proof of expenditure and verification of the minimum construction time period of two (2) years in order to count both direct and indirect jobs.  Once the I‑526 petition has been approved, then for I‑829 petition purposes only the expenditure verification should then be required as to the proof of job creation.
11. Exemplar Approval.  Preferable to have a prior exemplar approval, either from an I‑526 petition approval or an I‑924 exemplar approval.  Otherwise, agents like to see a sufficient amount of funds in escrow and a developer guarantee of refund that is supportable by appropriate financial verification.  The advantage of the undertaking the I‑924 exemplar is to expedite the USCIS approval process since the exemplar can be filed immediately upon completion of the offering package, compared to the filing of the first I‑526 petition that could take several months thereafter to accomplish after the offering package is circulated to investors (the time it takes to find investors, sign documents, source funds and file the I‑526 petition).

Structure Preferences

The structure of a transaction is vital in making the project more acceptable and marketable in the Chinese marketplace.  Factors to be considered include the following:

1.  Senior Loan vs. Second position vs. Mezzanine Loan.  A senior loan from EB‑5 financing may be the safest investment, but it is difficult for large projects to obtain senior EB‑5 funding since the job creation will not support a sufficient amount of debt to justify providing a first lien EB‑5 collateral.  From an agent’s standpoint, the concern here is whether the senior lender will provide an intercreditor agreement that could provide the following protections (although these provisions are all subject to negotiation):

1. Notice of default and opportunity to cure;
2. Right to step into the position of the developer and take over the project, or at least bring in a qualified agent to do so; since a senior lender will require a qualified developer entity involved to complete and/or operate the Project;
3. Right to acquire the senior indebtedness, although that would require the new commercial enterprise (NCE) to obtain substitute financing for the senior loan.

A second lien position is generally safer than a mezzanine position since the NCE has a lien on the assets that will prime other creditors compared to a mezzanine lien that only liens the membership interests in the borrower, but does not prime creditors.

2. The Loan Model.  Most agents prefer the loan model over a preferred equity model since there is a clear path to exit as opposed to an equity model, which may have no clear path to exit.  For an equity model and based upon Matter of Izummi, there cannot be any guaranty of redemption or payments from the EB-5 company to the investors directly.  Agents in a direct equity investment program either through a regional center or with a direct investment, need to be concerned about how to provide the NCE or investors the right to force a liquidation at some point in time in order to insure that the proceeds of the liquidation will first be applied to EB‑5 preferred equity in the same manner as if the property was sold under a forced sale circumstance.  The loan model does not have this issue since a loan can generally be paid at maturity under USCIS guidelines, as long as the funds are returned by the NCE and remain at risk under USCIS guidelines.

Public/Private Projects: Pros and Cons

There has been a significant increase lately in EB‑5 private/public projects for multiple reasons, including the fact that eb‑5 funding has become more mainstream.  Government and quasi-governmental or institutional type organizations (such as a university) partnering with developers or on a stand are successfully utilizing EB‑5 funds to supplement other debt in order to fund very large public/private projects that produce a substantial number of jobs.  The market places significant value on the fact that a governmental agency or institutional has participated in the Project.  These type of projects may involve public support by means of tax credits, grants and/or favorable long-term leases of public property in order to promote projects that are perceived as beneficial to the public.  Projects of this nature include the following:

1. Infra-structure development.
2. Healthcare facilities or additions to healthcare facilities.
3. Projects on government-owned properties that will enhance economic development in an area, as well as enhance employment.
4. Development in certain high unemployment areas that require special treatment to enable the utilization of capital whereby the developer subsidizes the project by property tax expenses or other grants noted above.

As part of the due diligence process, it is very important that the project description and due diligence materials adequately disclose the nature of the public involvement both financially and from a promotional standpoint to determine the actual degree of support from the governmental agencies.  Agents need to be mindful that many of these projects are non-recourse in nature to the government sponsoring entity and that a complete financial analysis needs to be undertaken by the regional center or project sponsor to understand the degree of public institutional support.

Types of Public/Private Partnership Projects.

The following is a list of the types of projects that have generally been widely accepted by agents as being desirable that have been undertaken on a public/private partnership basis.

1. Student Housing/Boarding.  University housing whereby the institution or the government provides certain concessions in order to enable the student housing to be developed.
2. University research centers and the like whereby the institution itself is utilizing EB‑5 capital to develop buildings that would otherwise not be funded.
3. Renovation of public property for economic revitalization.
4. Charter Schools.  A public charter school project involves the licensing of a school to receive automatic tuition payments from the applicable state as part of a state charter school mandate.
5. There are certain environmentally challenged properties owned by the government where EB‑5 capital is utilized to undertake the environmental clean-up and redevelopment of the property for commercial use.

Authors

Ronald Fieldstone is a partner at Arnstein & Lehr LLP’s Miami office, where he focuses on corporate/securities and taxation law. Mr. Fieldstone has been active in the EB-5 industry since 2009 and has represented regional centers and developers in over 125 projects. He is a frequent author and lecturer on EB-5 and securities matters.

H. Ronald Klasko is recognized by businesses, investors and other lawyers as one of the country’s leading EB-5 lawyers. He has practiced immigration law exclusively over three decades. His firm was chosen by Chambers Global as one of six top tier business immigration law firms for the past 5 years. Ron was named by International Who’s Who of Business Lawyers as the world’s most respected corporate immigration lawyer.

Ronald Fieldstone

Ronald R. Fieldstone, chair and partner of Saul Ewing Arnstein & Lehr LLP’s Global Immigration and Foreign Investment Practice, routinely serves as corporate/securities/real estate counsel in EB-5 immigrant visa investor offerings for an array of industries. Both developers and regional centers rely on his advice in these deals, resulting in his track record of handling more than 400 EB-5 projects with a combined capital raise in excess of $8 billion. He is chair of the firm’s Opportunity Zones and Qualified Opportunity Funds Practice. Fieldstone received his undergraduate degree and his MBA from the Wharton School of Business and his law degree from the University of Pennsylvania.

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