With the passing of the EB-5 Reform and Integrity Act of 2022 (RIA), the rules for capital redeployment changed in the EB-5 industry. How does this impact investors? Finding out how to best prepare is key for investors and Regional Centers. Rohit Kapuria, an EB-5 securities and immigration attorney for Saul Ewing Arnstein & Lehr LLP, chats with host Ali Jahangiri about the status of capital redeployment and best strategies to move forward.
EPISODE TRANSCRIPT
Rohit: The thing about EB-5 is it’s a nuanced industry sector, but at the end of the day, it’s private equity. What we do within this space in terms of non-traditional financing then gets applied to the multiple other sectors that we have within the private equity. The other component that’s also very attractive is a large part of my client base are Indian nationals or folks of Indian origin. They’re all coming into United States, eventually. They come in perhaps through EB-5, but then we then start to do other work for them. So, for me, EB-5 not only opens the door, but it also helps continue these long-lasting relationships with clients where I’m then able to assist them with many other facets of what they’re looking to do over time.
Ali: Welcome to the “Voice of EB-5” by EB-5 Investors Magazine. We will have provoking discussions every week on the EB-5 program, so please tune into our podcast.
Hello, everybody. Welcome back to the show. This is Ali Jahangiri, your host, and the topic today is “Redeployment of EB-5 Capital.” Today, I’m sitting down with the right person to chat about this stuff. His name is Rohit Kapuria. Rohit is a securities immigration attorney at Arnstein & Lehr, one of the country’s older law firms. He’s based in the Illinois office. He regularly advises regional centers, borrowers, real estate developers seeking EB-5 capital. And he actually appeared on our top EB-5 Rising Stars in EB-5 Investors Magazine. Rohit is a true world citizen, in the most literal sense. Rohit, so honored to have you on the show. Welcome, how are you?
Rohit: Thanks very much. That was a very kind introduction, and pleasure to be here.
Ali: Okay, let’s focus on today’s topic, which is “Redeployment of EB-5.” But let’s take a look at typical EB-5 investment process. So, Rohit, would you like to continue the story on why there’s a need to redeploy EB-5 capital, to set the stage for this conversation?
Rohit: Sure. So, you are correct. I mean, those were the good old days from a perspective of processing timelines. Part and parcel to the needs for redeployment also came about because of the demand, increased demand in the EB-5 applications overall. And the idea as to how this was set up, the framework, was to not only give the processing periods a chance to essentially get done but also to trigger what the congressional intent was.
Now, one important feature about the EB-5 program is the model in which we are operating with respect to removal of conditions and also the initial allocation of the conditions on the temporary Green Card are that it was built on the marriage-based scenario. So, if we run a similarity as to how it works when a foreign national gets married to a U.S. person, the individual at the first application stage has to prove their background. They have to prove that the marriage is actually not a fraudulent one, it was done with proper intent, and it’s credible. They provide all evidence to demonstrate that the marriage is a sound one and is gonna stay.
The applicant, or rather in this case the petitioner, is actually the spouse, the U.S. spouse, but at the end of a two-year period when the foreign spouse gets the conditional Green Card, they’re going back to demonstrate they’re still married outside of any extenuating circumstances. They bought a house together, they had a baby, at the end of the day, they’ve paid their taxes, they’ve been a good citizen, all of that.
So, similar framework here in the EB-5 context. They have to show, at the initial application stage, their background. They have to demonstrate that it was a true investment, and they have to demonstrate that they actually met the requirements at the front end, and then at the back end, they go back and prove they’re still invested in the EB-5 process, they didn’t commit any felonies, the project created the jobs, Those are all the rubrics.
But when we kinda look at the good old days, as you put it, at that point in time, we didn’t have the same largess of applications that we do today. If you look at how EB-5 took off, it started circa end of the last main recession, 2008, 2009. Demand skyrocketed. You had an extreme number of applications that were coming outta China. And then over time, we then started to hit the numbers with respect to how many visas were being allocated. So, there are 10,000 visas per congressional intent that are allocated on a fiscal year basis, which is October 1 to September 30th. Those 10,000 take into account the percentage from a numerical basis across the world. So, if one country accounts for more visas than there are, then that country automatically gets backlogged.
So, Mainland China became retrogressed around late 2015, early 2016, and we started to see, you know, numbers start to shift. So, redeployment came into the picture then because we had this sort of formula that said you will get your conditions removed once you file the I-829 petition and it’s successfully been adjudicated. But with this excess supply, we had USCIS that got stymied. They were not able to process the applications on time. You also had all of these individuals that were now subject to retrogression, which means they were not getting their conditional permanent residency, so that timeline got elongated.
And so then we had to do something with respect to keeping the capital at risk. So, EB-5 capital requires that the investors’ money be at risk, and this is a new definition, until they have completed the two years of conditional residency. But if that timeline takes now six or seven years, then it basically means that the lifeline of a project will not be able to support it, hence redeployment is now the case we have to follow.
Ali: Thanks, Rohit, for this clarification and understanding of redeployment. What are the unique eligibility requirements before an EB-5 investment can be redeployed that makes it distinct from the initial investment?
Rohit: Good question. There are two primary ways to look at this. We have the EB-5 policy manual, which was last updated in June of 2021, and then we have the EB-5 Reform and Integrity Act, which was just passed on March 15th of this year. So, there’s new guidance, essentially, but what we are going to be discussing on this podcast is it follows the guidelines we’ve seen in the EB-5 Reform and Integrity Act, which is the RIA. So, what I wanna make clear here and give a caution is whatever we discuss here is subject to change because USCIS still has to give us additional guidance, right?
But the framework here for redeployment is there are a couple of bulleted points. One, in order for redeployment to be effectuated, the underlying fund in which the investor has invested has actually executed its business plan. So, they’ve gone through the process of what they proposed in the business plan, the investment was made, the development, assuming it was real estate, for example, was completed. A sufficient number of jobs were created to satisfy all of the job needs for each investor in that particular fund. And both of these prongs, by the way, are consistent with the old policy manual.
And then the third prong is that the borrower, if there’s a borrower or the job-creating entity, whichever one is applicable, has actually repaid that capital, and this is the new language, in conformity with what was initially proposed. So, this nuance is interesting, and we’ll get to that in a little bit, but the money has basically gone back to the fund. And then the fund, after receiving the capital, has maintained it at risk, which invites some other questions, and then further then redeployed in coordination with the requirements of the programmer.
So, the key here in terms of nuance is whatever action the new commercial enterprise, which is the fund that the investors are investing in, take, it must be in conformity with what the operating agreement or the limited partnership agreement has stipulated to the investor from the very beginning. There are obviously discretionary powers that the manager or the general partner has in the fund. There are, of course, other symptoms of force majeure that may be applied. But the key rubric is the original business plan was executed, the jobs were created, the money has come back, and then now, depending on what the offering documents stipulated to the investor, the redeployment is being made in conformity with those.
Ali: I’m curious, how much money is invested through EB-5 redeployment each year?
Rohit: That’s a difficult answer to provide. So, the advantage that we have from our law firm perspective, from our practice, I would venture to say we are probably one of the most active in the redeployments law firm. We’ve worked on approximately $4 billion worth of redeployment in the last six, seven years. So, hard to say what…I mean, there’s obviously other large law firms, other players in the space that they’ve done it, but we don’t really know what the full numbers look like.
Ali: Wow, that’s $4 billion with capital B, that’s a lot. What limitations are there in the type of scope of redeployment investments? For example, if I’m an investor or an investor’s initial project was at real estate and they wanna redeploy it, say at a construction project, do they have flexibility to choose their redeployment?
Rohit: That depends on what the operating agreement calls for or the limited partnership agreement. Generally, the investors will receive disclosure on what the general partner or the manager of the fund are looking at. And to the extent that the original operating agreement had called for certain asset classes and to the extent that it’s not a material change and, you know, a few other stipulations, then investors typically will not have the ability to choose, if you will, where the capital goes.
There are obviously securities concerns on this, right? So, from a securities perspective and a corporate perspective, you must give the investor sufficient notice. You must have told them from the beginning what to expect, and you must have articulated to the point that they knew what they were bargaining for, right? So, you can’t do a bait-and-switch. Redeployment is tricky because it’s essentially a new offering, right?
So, if we use your example, it was a hotel, right? So, let’s assume it was a fund that was raising…we’ll make the math easy, right? So, let’s assume it was just 10 investors at $8 million. That’s kind of what? At $800,000 each? That was what the fund initially raised. And let’s assume that the total development was a $40 million hotel development, which include the land cost. The investors are bargaining for the hotel that’s located at the corner of X and Y in whatever city, geography, with ABC Regional Center. They understand what it’s gonna comprise of, they’ve reviewed the business plan, they understand the total number of jobs. If that is all that’s stipulated in the offering documents, then that’s all they bargained for.
And then if redeployment then comes in because of retrogression or whatever needs or because the JCE, the job-creating entity has repaid the money back, then, at that point, investor consent will be necessary because if the fund is gonna redeploy and the investors never even knew that redeployment was a thing, then yes, they will need to actually give some sort of consent, depending on whether a majority consent or super majority or, you know, what have you in the governing documents articulate.
But, if the offering documents had already stipulated in the beginning that there will be a redeployment and it will be in another hotel or if we’ve identified what that hotel is, or they’ve said it will be this other asset class in this general area, then within those boundaries, if we operate, technically investor consent may not be required. Certainly, from a disclosure standpoint, when the redeployment is to happen, the manager of the fund should give a sufficient amount of information so that the investors understand where the money is going into because technically now they’re getting into a brand new deal.
And as long as you’re doing everything with transparency, as long as the fund is actually giving the investors enough to have a good understanding, then they will be in compliance. But if there’s a bait-and-switch and there is something that they’re not anticipating, it’s a brand new asset class, you’ve now gone from a hotel to, let’s say, manufacturing or a different risk analysis, then theoretically, yes, you would need some sort of consent, and the investors will have the opportunity to make a decision.
Now that’s on the investor side, and I’ll take one more minute just to give a different perspective. From the manager perspective, we also need to be sensitive because if there is 10 different investors, 10 different people, they are at different stages within the EB-5 process, some may not want to redeploy because they’re close, let’s say, to completing conditional residency versus another couple of them are really far away as a result of retrogression.
If the managers now to go back and get 10 different responses because everybody needs to consent, and it’s not even a majority consent, that makes it a lot more difficult to effectuate the redeployment, and in turn, could negatively impact one or two or more of the investors because we are extending the time of redeployment.
As of right now, the old policy guidance was we had one year to effectuate redeployment. The RIA, the Reform Integrity Act does not give us a timeline, but we’re assuming that that’s going to be a model that’s continued to be applied. And so those are all considerations essentially before we make a redeployment move.
Ali: So, fast forward to 2022. You mentioned that there are yet to be clarifications to be made. Where do we stand now with the new law and the redeployment? How does a new EB-5 RIA impact redeployment of capital?
Rohit: A lot of that is gonna be contingent on what happens with the ongoing drama with USCIS at the moment. USCIS has its hands full because it is currently battling three different sets of litigation efforts that are now going to be combined in some formula. They were in different jurisdictions. But the government basically had indicated after the passage of the RIA that the regional center program was essentially repealed.
Now, the purpose of this podcast is not to get into that particular component, but just to give some context because the government is very busy litigating the issue on what the new requirements are, it’s busy providing new forms and new guidance on how investors can make an investment under the new RIA. It has not yet focused its energy on updating or rather publishing an updated EB-5 policy manual, which effectively, for us, is our Bible, for lack of a better word. It’s the authority that we will look to because it includes interpretive guidance that we should be looking at when we’re trying to make decisions for clients.
So, the only thing that we can do when we’re looking at redeployment at the moment is we look at the old policy manual, we look at what the RIA says within the body of the law, and then we’re able to advise. But we have to, at the end of the day, give a certain level of flexibility because USCIS could change a lot of that interpretation that we have when it actually publishes new data. So, what I’d mentioned a little bit earlier in the podcast in terms of the prongs that we have to take, those are looking at both of these levels of guidance, and those are my interpretation and many in the industry until USCIS comes out with something else that could be different.
Ali: So, on one side I see that redeployment can offer investors an opportunity to select another project that fits their investment goals. Do you think redeployment is the best system with dealing with these issues? In general, do you think it’s fair approach for investors?
Rohit: From the perspective of the investors, most times there is concern. From the perspective of the funds, it is a burden to a certain degree, but it is also an opportunity to, for lack of a better word, recycle the capital into some other development. Now, from just a general private equity fund basis, this model of redeployment is very common. It’s not unique to EB-5 in any shape or form. And governing documents usually have a lock-in period for the investment that is longer, and therefore, the funds have the ability, within their discretion, to apply the money across more than one project over time. So, from that regard, it is a useful system, and it helps effectuate a lot more economic impact than one development would have. Certainly, however, for the investors, it is anxiety-provoking in many instances. It’s anxiety-provoking because, at the front end, they understand that they bargained for X, Y, Z project.
So, if we go back to our earlier example, they understood that they were going into a hotel, they understood that it was a $40 million development, they understood it was at the corner of X and Y, they understood it was ABC Regional Center and with, you know, CDE developer. All of that was premised, all of that was disclosed in the business plan in the operating offering documents, and there were all of the projections that they were allocated, right? This is the type of hotel and this is what they’re projecting on, average daily night rates, and so on, and so forth.
Once the money is repaid, because the burden that congressional intent has that the money be at risk, that creates a different nuance because now, all of a sudden, in order for the funds to be at risk, the new commercial enterprise cannot simply hold the money. Both the EB-5 policy manual and the RIA have specifically indicated that if the money sits with the new commercial enterprise in a checking account or in stocks or in bonds that are “not as risky”, then that will not rise to the level required under congressional intent, which is that the investment must be at risk until the investor completes the two-year conditional resident period.
So, if an investor from a non-retrogressed country, let’s say the UK, has a timeline of start to finish, completing their two-year sustainment period, which is the terminology, by Year 5, let’s say, and then an investor from Mainland China has a 10-year period, you are going to see a differing treatment, possibly, with respect to the two investors. From a fund perspective, that has to be done because the fund has no other way of dealing with it because you have to meet the EB-5 law. If the fund does not redeploy, the investor that has not completed their conditional residence period is going to get denied. So, yes, it’s a burden, but it’s also a compliance issue.
What the RIA has done, though, that was not previously permitted, and which is very good for us because it is a clarification that’s necessary is it has outright indicated that once you’ve created the jobs in the old development and you’ve met all the other terms and conditions of the initial investment, you are no longer geographically bound in the redeployment sense because USCIS had indicated a few years back, contrary to any policy, that if redeployment were to be initiated, it had to be within the limited geography of the regional center. But now if you are in…let’s say it’s a California project, let’s say that the regional center only has the geography of Southern California, if we need to redeploy from Southern California to, let’s say, Washington D.C., we are now permitted to do that. So, that’s the good news.
Ali: But does it have to be with the same regional center, or can you change regional centers?
Rohit: That’s not abundantly clear. The regional center still needs to continue to comply with the terms. We are waiting for further guidance as to how exactly that happens because once you’ve stepped out of the scope of the regional center’s geography, you’re going from Southern California to Washington D.C., how exactly is the regional center supposed to comply? That is a little bit difficult to articulate because the main guidance that you see in the RIA, it talks about if a redeployment happens and it is not within the confines of a previously executed business plan and it wasn’t in conformity with the offering documents, and so on, and so forth, then the regional center could get terminated. But if you’re now stepping outside the boundaries of the regional center, the regional center still has to continue to provide information. So, there’s still oversight required. The regional center still is party to the new commercial enterprise in whatever agreement it is, but technically, it’s outside the boundaries. So, it’s gonna be a fine balance. We have to see how USCIS comes out with interpretation here.
Ali: Right. How many years are we looking for with people who impact redeployment, like, for example, citizens of China and Vietnam? How many years do you think it’ll take them to get their Green Card?
Rohit: So, the lawyer’s favorite response, it depends, right? The considerations are numerous. One of the main considerations is, was the original project in a rural area, or was it in a regular targeted employment area? The RIA has given additional scope where projects in rural areas are going to be adjudicated at a faster pace. We don’t know what faster pace means, but it’s opened up a brand new line. So, technically speaking, a person born in Mainland China now is able to invest in a rural project without the effective retrogression. They will get processed faster, assuming we don’t meet the 7% cap on that line item in the visa bulletin. And then, they technically could be at a shorter duration to meet their sustainment period.
So, there’s also some projections we could make on this, but it’s very difficult to do so because we just don’t have the data. We haven’t seen how USCIS is going to actually allocate all of this. So, I simply have to say it depends.
Ali: I can understand this is frustrating, obviously, for investors, and you engage with them on a daily basis. So, what do they have to say about the redeploying concept? Give us some background on that. And, you know, my question to you is, would investors typically say redeployment is something they prefer, or do you think that it’s something that they ask you questions about?
Rohit: Well, set aside the economic risk because certainly, any type of investment has a certain amount of risk attached to it, right? The initial investment had one type of risk, the secondary investment…and by the way, you could have projects that have more than one redeployment. There could be two or three redeployments. We’ve done that in several cases, right? But each time you redeploy, you’re going into effectively a new asset and/or a new asset class, so there is a new risk assessment that needs to be done.
If the investor is present in the United States at the time redeployment is done and they are here as a temporary permanent resident, then for them, the bane of the redeployment is going to be the risk assessment. If the investor is abroad and is unable to begin their conditional residency, so such as someone born in Mainland China, the risk assessment for them is both the economic impact as well as the frustration that they haven’t even started their conditional permanent resident and their money is already being recycled.
So, it really depends on where they are. The way Congress sought to reduce the burden of this issue on people that are subject to retrogression is under the RIA. If the primary applicant is here already in the United States, they’re here on H-1B, they’re here on L-1 visas or an F1, which is a student visa, is they could concurrently apply for adjustment of status while they’re applying for the I-526, the initial application. So, that’s the best that Congress could come up with that actually alleviates. But for those that are abroad in Mainland China or elsewhere and they’re stuck in that processing time gap where the government is not able to process applications at a good time, then they are going to essentially have to wait, unfortunately, unless they go for a rural project and then they’ll be faster.
So, there’s different mechanisms by which an investor could try and take to mitigate the wait, but the overall exposure to redeployment remains a reality. I think for most individuals, they should expect that their money will likely be redeployed at least once during the life cycle of their EB-5 application.
Ali: Right. As you know, after the pandemic and the war between Ukraine and Russia, supply chains were disrupted. Market prices are currently skyrocketing. My question to you is, what are the effects of inflation on redeployment? Do EB-5 investors have to infuse more money than their initial investment from the five or seven years ago?
Rohit: No, not unless the operating agreement calls for additional capital. The requirement for the fund redeploying is that they’re there to keep the money at risk, right? So, one point I wanna make clear on this, slightly before I answer your direct question, it’s not that funds like to redeploy. So, certain times there is a misperception that investors have, right? And, unfortunately, sometimes that perception is driven by perhaps lack of communication, lack of clarity, or perhaps just, you know, general suspicion overall as to how things work.
It’s not that redeployments are easy for the new commercial enterprise or fund. The fund is looking at the process as being equally burdensome to them because, in many circumstances, they have to find a new redeployment mechanism. They have to communicate that to the investors. They have to apply within the rubric and constraints of what the offering documents are saying. They also have to measure up to that. Whatever the new redeployment is, it’s going to be, from a risk perspective, a net benefit or at least a net neutral effect on the investors’ capital.
So, there are all of these considerations that the fund has to take plus all the legal costs and ramifications and the processing, and, you know, so on, and so forth. So, when the fund is looking at it, it takes a lot of time and it takes a lot of energy. But with your direct question, do they have to infuse more capital? No. If they’re an old investor that invested $500,000 and they only have $500,000 left to redeploy, then that’s what they’re gonna redeploy. So, many times, if that amount of redeployment is not sufficient, then they look to the ongoing developer to buttress it up, right? So, it kind of has to match up where when they put in that EB-5 capital, it’s going to do the job, it’s gonna keep the money at risk, and it’s not going to necessarily result in a full loss of the money. That’s essentially what they’re trying to do.
If they’re going to call for new capital, then, A, it has to be permitted in the scope of the offering documents, and, B, there needs to be some explanation of why. And one of the possible explanations would be that when the original investment was completed and the funds were repaid or redeemed, it didn’t result in the investor’s capital contribution coming back up to the $500,000, right? So, maybe the original investment resulted in a net loss, and each investor’s pro rata amount, instead of being $500,000 was, let’s say, $200,000. Well, if it’s $200,000 left and then they’re redeploying, you know, it’s not necessarily going to be a huge chunk of cash potentially. And maybe, at that regard, the fund says, “Look, let’s do a capital call because, you know, this other redeployment we found requires more money,” and then you’re infusing. But that’s not necessarily the quotient that’s gonna be driven by inflation nor a requirement, in general.
Ali: I’m glad we’re going over the basics here, Rohit. This is good for, you know, folks out there to understand. I’m gonna ask you another question.
Rohit: Sure.
Ali: Why did you choose EB-5 as an industry to get in, and what made you stay involved in it?
Rohit: I’ve been fortunate in my career to have worked with many amazing and talented individuals and mentors. Within the perspective of EB-5, there are two main individuals that have been of most impact to me. The first is Ron Klasko of Klasko Immigration Law Partners, and the second is Ronnie Fieldstone, who is with Saul Ewing. Both of those individuals are extremely talented, very knowledgeable, and it is for, you know, in large part because of them that I continue to remain within this space. So, I worked with Ron Klasko for many years. He is the one who actually brought me into the industry, introduced me to the space, and I learned quite a bit working with him. And then it was with his blessing, actually, I moved over and began working with Ronnie Fieldstone subsequently. So, I got the benefit of the immigration knowledge from Ron Klasko and then the corporate securities knowledge and experience from Ronnie Fieldstone.
Over time, you blend and you begin to absorb, and then I basically fell in love with this space. Because the thing about EB-5 is it’s a nuanced industry sector, but at the end of the day, it’s private equity, right? It’s bread and butter private equity. And so what we do within this space in terms of a non-traditional financing then gets applied to the multiple other sectors that we have within the private equity. But then the other component that’s also very attractive is a large part of my client base are Indian nationals or folks of Indian origin. And so over time, because I’ve been able to build a good rapport and a good place within the market, I work with many individuals coming from India, from Dubai, from East Africa, West Africa, what have you. They’re all coming into United States eventually. They come in perhaps through EB-5, but then we then start to do other work for them, right?
So, for me, EB-5 not only opens the door, but it also helps continue these long-lasting relationships with clients where I’m then able to assist them with many other facets of what they’re looking to do over time.
Ali: Right. Thanks so much for your insights, Rohit. I really appreciate it, both immigration and securities perspective. I’m sure our listeners could take a lot from today’s discussion. Thank you, and I will see you on the other side. Ciao, Rohit.
Rohit: Very nice. Thank you.
Ali: You have been listening to the “Voice of EB-5” podcast by EB-5 Investors Magazine. To learn more about this episode, please visit eb5investors.compodcast. Join again soon for more conversations, and please stay tuned.