EB-5 Fund Administration Post-RIA, with Reid Thomas - EB5Investors.com

EB-5 Fund Administration Post-RIA, with Reid Thomas

The Reform and Integrity Act has fundamentally changed the way EB-5 works on many levels. In this episode, Reid Thomas, Chief Revenue Officer and Managing Director at JTC Americas, speaks with host Ali Jahangiri about what changed for fund administration and fraud detection, as well as how the new regulations benefits investors with its increased transparency measures.

Reid: We have thought this through from the beginning. As I said, this is a specialty fund. So it goes beyond just fund administration. It really goes to focusing on what needs to happen for that investors immigration effort to result successfully. And that’s how we’ve built our platform.

Ali: This is the voice of EB-5 by EB-5 Investors magazine. Each week we sit down with the experts in the EB-5 investment space to get valuable insights and the latest EB-5 news. Good morning, everybody. This is Voice of EB-5 with your host, Ali Jahangiri. I’m pleased to announce I have a friend of mine from many years ago, Reid Thomas, who’s with us. Welcome. Reid.

Reid: Thanks, Ali. It’s great to be here.

Ali: Reid has been actually instrumental with EB-5. He’s the managing director and chief revenue officer of JTC Americas. He’s responsible for overseeing the day to day operations of JTC. He brings decades of leadership and experience in both the public and private sectors, and the JTC company actually has a foreign company, a business, and it also has domestic company and Reid runs the entire domestic US base for the JTC. So he’s absolutely the right guy to speak with and ask questions in our space and EB-5 and also an OpportunityZones. They have built a platform that has been instrumental for years and they’ve been utilized as fund administrators, consultants, etc. So Reid, welcome. I’m going to have a couple of questions for you, but please introduce yourself if I missed anything.

Reid: No, thanks, Ali. No, that was a very kind introduction. I appreciated it. I think for the EB-5 audience, many folks will know us formally as NES financial. And so we were acquired a couple of years ago and are now part of a much bigger company with many more capabilities. So thank you for having me and I’m excited to do this podcast with you.

Ali: Appreciate it Reid. So we have a few questions for we have two groups of listeners here, folks that are very experienced in EB-5 and folks that are new. And some of these questions are more towards the layman and other ones are more complicated for the more experienced folks. So the first question is what’s the role of a fund admin? If you can go into that Reid, that’d be amazing.

Reid: Well, in general, a fund administrator is somebody responsible for the back office operations of a fund and we think of EB-5 as a fund, right? You have multiple limited partners investing in an NCE, which is essentially a private equity fund that invests in other projects. So the back office functions typically include investor servicing, accounting, treasury and financial reporting. And fund administration really came into vogue after the Bernie Madoff scandal. Before that is only about 5% of funds that used a third party fund administrator. And then after that, 95% of funds used fund administrators. So fund administration and EB-5 is more specialized, of course, because in addition to investor services, accounting, etc., there’s also all of the specific and unique tracking logging of information reporting that’s required to help the EB-5 investor in their pursuit of immigration results. And also in light of helping the regional centers with the compliance and now upgraded compliance requirements for providing services in EB-5. So at a high level, it’s really all of the back office admin functions from a fund managers point of view. It provides more efficiency and compliance and from an investor point of view, it really helps give them a sense of confidence and comfort that their investments are being well managed.

Ali: Perfect. And so JTC itself, I know you mentioned the involvement as you guys got acquired, you acquired NES, JTC acquired NES. Prior to that you guys were doing fund admin. How has that changed or is that just the same stuff that JTC was doing before– NES was doing– and now the RIA Act is implemented and it’s the same functionality, or did you guys change some of the fund admin stuff?

Reid: Well, there’s some things that were incremental requirements in the RIA for sure, but in general it’s the same function. The providers in EB-5, the regional centers and developers that played in the EB-5 space and still play that I would say are more institutional. They understood from the get go that having a back office third party administrator is something that their investors would value and it’s something that they as the fund manager benefit from because it makes them more scalable and so on. But if you go into the traditional fund world, institutional investors demand that funds they’re going to invest in have third party fund administrators. So we’ve always been providing that. And I think what makes us unique compared to some of those other industries is the part about EB-5. When you think about what EB-5 is, I like to say it’s a mash up of a private equity fund with an immigration program and an economic development program. It’s really those three things built together. And so from the outset,

Ali: That’s a cool description.

Reid: Yeah, I think it’s right. And I think increasingly there’s these specialty kind of funds out there. That have these special requirements that go well beyond the typical fund administration requirements. So we built a technology platform that tracks and administers all three of those elements for our clients. So it’s really of course, it’s institutional grade accounting and financial reporting. But in addition to that, it has all of the requirements met for the the RIA. What’s new, I think, in the RIA, though, is this idea of what we call a co signatory, because the act itself requires that a third party monitor and sign off on movement of money from NCE to JCE. And that’s a new step that we’ve added. We always managed and tracked the movement of the money, but now we’re actually signing off on the movement of the money. So it’s a whole different level of fiduciary responsibility there.

Ali: Got it. So a lot of talk in the industry, as you know, about audits versus fund admin with the RIA Act. How do the audits work versus fund administration, in your opinion? I mean, what’s going to be the deciding factor for regional center to decide one over the other?

Reid: You know, it’s interesting, right, because audits are a completely different thing than fund administration. And in the traditional investment world, institutional caliber firms do both. They have an independent third party administrator like us, and then they hire an auditor to audit the financial statements. So they’re very different things and they’re focused on different results at its highest level. When you think about fund administration, it’s something that’s happening in real time every day. We are involved with our fund clients, our EB-5 clients, as we’re onboarding investors for them, as we’re helping them move money, tracking the investments, what money spent on and so on. That’s all happening in real time. Whereas when you think about what an audit is, it’s happening well after the fact. And an audit firm is reviewing something that’s happened months or maybe even a full year in the past. So right away, when you think about the Reform and Integrity Act, if one of the objectives was to add measures that reduce the potential for fraud and abuse, that’s not what an audit does, right? What an audit really does is enables an auditor, a third party to company to provide an opinion as to whether the financial statements are in conformity with general accounting principles. That’s really what an audit does. A financial audit any way I’m referring to. A financial audit does not controls processes and procedures that are really where the main source of fraud occurs. After all, Madoff himself had third party audits done on his fund, and that led to the greatest, greatest fraud of all time. Right. So so that’s what’s different. They both have their value and purpose. And so I think in terms of selection, regional centers should really think about what they’re trying to accomplish here. And I think at the end of the day, investors need to be really well educated about what these differences are and ask the right questions.

Ali: When you bring up Bernie Madoff. As a side note here, could that have been stopped? Let’s just hypothetically say if JTC was in the picture. Yeah. Would that have been caught?

Reid: Yeah, absolutely. Somebody who really wants to do fraud can probably figure out a way around. But in that specific case, absolutely it would have been 100% caught is what Madoff was doing was faking transactions, right. When we’re involved, we’re watching the money and we’re moving the money to make those investments so we know exactly what’s going on. And then we’re logging the investment in real time and we’re a completely independent third party company, Right? So that definitely would have been that fraud never would have happened. And that’s why you now see fund administration in the institutional space as essential and a standard.

Ali: So when he was creating fraudulent transactions, you guys dig one level deeper, basically, is what you’re saying, to see what those transactions were.

Reid: Yeah, exactly right. We’re enabling those transactions to happen. We’re actually physically monitoring the movement of the money, measuring what’s going on in the bank accounts, reconciling those bank accounts on a daily basis to make sure that the investors what the investors think they’re invested in is, in fact, what the investors are invested in. So an EB-5, right. We know exactly how much money is at the NCE level, the JCE level. We’re monitoring the movement of that money. We know when investors are coming in and out of the fund. We’re involved in all of that stuff and so it’s done in real time.

Ali: So veering off a little bit here on my questioning about this because it’s so interesting when it comes to someone pulling money out for their personal because I know in the past there’s been some cases you and I both know where EB-5 center principles or maybe not even the principle. It was actually the borrowers. The borrower had EB-5 funds, but if he was using it also for personal reasons, in a certain cases where they had pulled the money out and they purchased call it, they borrowed money for their mortgage or for a car or so where in the transaction does that happen and is that something that can be prevented?

Reid: Yeah, because what’s happening is in the being the fund administrator, we have to review all the documents associated with the project. Right. So those include the loan documents, the operating agreements, the escrow agreement, of course, all of those things and all the documents reflect best practices. The documents certainly don’t say that the borrower can take the money and spend it on something else. In fact, they say they’re very strict about what money can be spent on, and there’s evidence required in advance that says there’s the construction draw. The next draw of this loan is required because we did A, B and C, And so there’s evidence that needs to be produced that shows that A, B, and C were done. And so we actually review all of that evidence. That’s usually in the cases we’re involved with provided by some kind of a third party, a construction monitor or something like that, because usually the senior lender requires that as well. And so we’re reviewing all of that information before allowing any money to move.

Ali: So assume the money moves and they say, hey, we’re using this for a construction draw or for a construction that has occurred. Right. If let’s talk about a mezzanine loan, the senior has already funded the construction and the mezzanine comes in there afterwards to pay for potentially operating expenses. Some overage on construction. Right. So do they always have to show a receipt for construction to get the draw, or do they just show a receipt that these jobs were created? How does that functionally work?

Reid: Yeah, it’s very detailed about what the money is when the money’s supposed to be doing. And yes, they show receipts for how that money is being spent.

Ali: So you see the receipts and then you guys do the display.

Reid: We see the receipts or there’s a draw package that includes the receipts is typically what it is, because they typically do it in draws that accomplish several different things. And then we store all of that data and evidence on our system, which creates a really comprehensive audit trail for everything that helps the investors, obviously, because with all of that information, it makes it easier for the economists to do their calculations, makes it easier to put for the lawyers to put the 829 package together that provides the evidence that USCIS needs. And again, that’s what we’ve been doing since we got into this business over ten years ago.

Ali: Perfect. Okay, that makes sense. So let’s go into the old and yes, and the new JTC model. Has anything changed?

Reid: Well, we certainly the company is different, but we have the same core team in place. I think many of our most of our people at this point, and many of them are well known in the in the industry, in the community. So we still have the same people in our client services department. Jill Jones, who’s our lead attorney, is very active in the spaces and probably seen more PPMs than anybody in the industry. So we have the same team, but now we have many more capabilities. We’ve continued to enhance our EB-5 product itself, but we have also many more capabilities because we’re part of JTC. As you mentioned, JTC is a global company, private clients, institutional clients. We have trust company powers in the United States where an RIA in the United States we can in fact now what is new is we can now be our own escrow agent, which we think is a wonderful thing. We still work with the same bank partners that we always have, so the deposits can still end up at any of the few banks that our clients want that will take EB-5 funds. But what’s different now is because we’re the escrow agent ourselves, we can set up those accounts faster and easier than it used to be. And if something happens like banks change their minds sometimes about from which country they’ll accept investors just as an example. And so that’s no problem, because we can add multiple banks under our escrow and make it work for the client if they want to raise capital or in different countries, or if a bank changes their mind about which countries they’ll take, or if the client wants a large bank versus a small bank or some combination of the two, we can do all of those things. So that’s just an example of because we’re part of JTC, we actually can provide more service than we did before.

Ali: That’s really interesting to know. So read, I know that you’ve changed roles between NES and JTC and you have a broader scope. Do you feel like this new iteration of your role and what you’re doing is more broad than before? Because you have to do a lot more with other aspects of the company? Or are you able to go back to what you were doing with NES.

Reid: Yeah, with NES, we covered many, many specialty types of funds. You and I work together in the OpportunityZones space as well. That’s just an example of another specialty fund. And so we’ve always had several different product sets that we’ve offered. So for me it’s sort of the same as always in terms of my activity in the EB-5 space. I’m passionate about that industry. I’m an immigrant myself and am excited to see this program grow and investors to succeed. And so aside from being a personal passion, I still have it as part of my mandate. And like I said, I have a great team around me that continues to grow.

Ali: I’m excited to see this. The new iteration of JTC with your involvement. So let’s talk about the logistics. When a developer signs up, take me through the steps. Who does he or she work with and call it a regional center or developer, whoever is actually doing the documents with you? How does this all logistically work?

Reid: Yeah, so we have a course, a sales organization, a business development team that puts a proposal together. Once they’ve signed up, then it transitions over to our client services team and client services is headquartered, if you will. The bulk of the people are in the Boston, Massachusetts area. We have a staff here in San Jose, California as well. So we’ve got sort of people on each coast to help be able to work with our clients in their respective time zones. So there’s typically a kickoff meeting where the team reviews the project with the client. Jill Jones, who I mentioned earlier, is involved in setting up the the escrow contracts and then the client services organization headed up by Don Schuster will open the bank accounts, set up the client’s project on our technology platform. We assign a client services rep who lives with that client from beginning to end, who provides and heads up the team that does all the day to day servicing in addition to client services. We also have a very large fund accounting financial reporting team in the Boston area that does the for those that want that does all of the financial reporting, financial statements and so on that our customers need. Now, each client is a little bit different. What we’ve seen as a trend since the RIA is the even clients who were not clients before the RIA are now engaging us and we’re putting together sort of, I guess you could say, customized solutions to fill in some of the gaps that they might have in their systems to sort of take it to the next level and go way beyond what the the RIA requires because they’ve always wanted to sort of lead. So that’s how it works.

Ali: Right? That’s interesting. So read on the I always hear from community that JTC has a standard of care or NES has a standard care really, because that’s the name I’ve been used to as NES. Are your requirements, more stringent than the RIA Act or are they about the same, or how does that work for somebody who’s signing up with JTC?

Reid: Well, I think the Reform and Integrity Act is a good thing for the industry and all its stakeholders. But while it makes it more difficult for bad people to do bad things, the act on its own doesn’t prevent it. And so what we really try to do is try to set the gold standard for best practices. That’s what we’ve always tried to do in this industry. So we have thought this through from the beginning. As I said, this is a specialty fund, so it goes beyond just fund administration. It really goes to focusing on what needs to happen for that investors immigration effort to result successfully. And that’s how we’ve built our platform. There’s other providers I think, now that are entering the space claiming to provide fund administration services. There’s also inexpensive, relatively inexpensive financial audits that we talked about. None of those things really do what we do to the level we’ve done and we try to make it easy for investors. You’ll recall we created this program we call the Medallion program, and what we do is we award projects a Medallion based on their embracement of best practices, and we always have done that since for the last ten years we’ve been doing that. In addition, we award medallions to other service providers in the industry that, in our estimation embrace best practices. Those would include plan writers or economists, law firms and so on. And the reason we do that is really to try to help investors quickly determine who is likely in the industry, which projects and which service providers they should be involved with to have the highest levels for success. And that’s really where we’ve sort of focused on. We check all the boxes on the RIA. We can go way beyond that. We can be flexible in terms of how we put packages together. But at the end of the day it’s really brand that we bring to the table is something that I think investors should really be looking for because it sort of exudes that quality and professionalism that’s appropriate.

Ali: That’s interesting. Yes. So in looking at the big picture, Reid, where do you see this next phase of EB-5 going to I know we’re doing rule now and I know there’s a lot of excitement right now in the industry. What do you see in the future for EB-5? Do you see three or four years of really solid growth? And then we’re back lobbying because I know you’re you help with the lobbying efforts too. Are we back lobbying for more visas? Where do you see this going?

Reid: Well, I think it depends on what industry, how the industry embraces the Reform and Integrity Act and how it operates. I think that the big win in EB-5 is ultimately to have more capacity, more visas available. In my view, the demand around the world for people who want to immigrate to this country remains extremely strong. And EB-5 is a wonderful program to create jobs in this country and it doesn’t cost the taxpayer anything, but it has this history of abuses, unfortunately, or perceived abuses, and it also has to come together and really help drive job creation in communities in need. And those communities don’t have to be all rural, right? They can be urban. There’s lots of places where EB-5 could help. But I think what has to happen is before we can have more capacity and the government gives us more visas, is that, as I like to say, the industry needs to run clean for a few years. And so it’s I think many folks are really embracing this Reform and Integrity Act and I applaud them. There are some concerning signs I see where some are trying to figure out how to do the absolute minimum, how to do it in the cheapest possible way, as opposed to really focusing on what’s in the best interest of investors. And that that concerns me because if the industry doesn’t run clean for a few years and we have more instances of abuses, then I think the program is not likely to grow. So we’re kind of at a pivotal point, I think, for the next few years.

Ali: That’s interesting insight and I definitely agree with you about that. I’m looking forward to seeing you in Miami in January. I know you’re a panelist and I know JTC has always been a sponsor and a partner of ours, and I’m excited to be working with you. I also want to give a shout out and recognize some of the people on your team, Reid, that do EB-5 And so if you don’t mind going through some of the folks that are in your EB-5 team, I definitely want the people, the public, to know who they can reach out to on your EB-5 team and who we give kudos to.

Reid: Yeah, thank you for that. Yeah. So Coleen Danaher heads up our business development efforts. She’s been in the EB-5 space as long as I have one of the longest serving employees at NES-JTC. So Colleen Danaher is somebody that’s well known and somebody who clients can definitely reach out to. In Miami, we have Jose Rincon, who’s relatively new. I mean, he’s been with the company now for four years and has been doing a lot of EB-5 business and activity, particularly in South Florida, which is a hotbed for EB-5 and where your event will be. So people can see him at that event in mid January. On the services side, we have Jill Jones who I mentioned before, and Jill is really, really knowledgeable and can be very helpful to centers or developers in this space. Like I said, she has literally seen more project PPMs than anybody we’ve done in our history over 800 and some EB-5 deals. So imagine the number of offering documents that she’s reviewed, so she’s an expert on that serves on the best Practices committee of IIUSA as well. So somebody people probably know, but if not, should definitely get to know. And then on the client services side, the lead person is Don Schuster, who works out of our Boston office. And then one other person that you certainly are familiar with, Ali, who you see around is Laura Kelly. And Laura heads up our marketing department and is responsible for managing the Medallion program I discussed. And so as part of the Medallion program, we have an international website where our clients can promote their projects and there’s other information associated with the Medallion program and helping investors make the right selections.

Ali: Perfect. Really appreciate you being on this morning, and I think you gave some valuable insight to the community and look forward to seeing you very, very soon.

Reid: Well, thanks for the opportunity. It’s always a pleasure to work with you and your firm. You guys do great work and definitely look forward to seeing you in Miami.

Ali: Perfect. Thanks, Reid.

Reid: Take care.

Ali: This has been the voice of EB-5 by EB-5 Investors magazine. To learn more about the steps, so please visit eb5investors.com/podcast to stay up to date with the latest EB-5 discussions. Be sure to subscribe to the show wherever you listen to the podcasts and if you like the show, please consider leaving us a five star review. It helps us out a lot. See you next week.