How should private funds and investment companies structure their EB-5 funds? Learn about compliance procedures and lender and borrower representation, to placement contracts and related agreements. We provide an overview of proper fund structure in this conversation between Shae Armstrong, partner at Bradley Arant Boult Cummings, LLP and EB5Investors’ Ali Jahangiri.
Shae Armstrong: 90% of my practice last year was 20% EB-5. If you really do take care of the sponsor and that sponsor takes care of his investors, you can’t think of a higher level of loyalty that you have in the transactional world. And so, it leads to so much other work, traditional work, because these same sponsors are doing multifamily acquisitions. They’re investing in other real estate, they’re building stuff. They might have their own non-real estate related ventures as well. They’re all entrepreneurs like you. And so it leads to so much work. If you do a good job and the project succeeds, which means the investor succeeds. Most of the time you have a client for life.
Ali Jahangiri: This is The Voice of EB-5 by EB-5 Investors magazine. Each week we sit down with experts in the EB-5 investment space to get valuable insights in the latest EB-5 news. Welcome to the voice of EB-5 with Ali Jahangiri. I’m pleased to be here with one of our good friends, Shae Armstrong. Shae and I have known each other for many, many years. He was in the iteration of the EB 5 days back when it started. Shae actually represents a wide variety of clients in industries real estate, mostly some health care, some retail, some manufacturing and hospitality. Shae, I would probably say is one of the variety of corporate lawyers that cares and looks after his clients. He’s a guy who really specializes in things like PMS, loan documents, securities documents, subscription agreements, things of that sort. When a developer wants to first start up an EB-5, he’s the guy you call and talk to. He loves to travel. He’s a good dancer and very fun guy to hang out with overall socially. So if you guys get a chance to hang out with him, I would highly recommend it. Please welcome Shae Armstrong.
Shae Armstrong: Thank you, Ali.
Ali Jahangiri: My pleasure. So, Shae, you’re currently at a firm you’re a partner at, a firm called Bradley. What’s the full name of the firm?
Shae Armstrong: Yeah. So I’m with Bradley, Arant Boult Cummings. And before I give you my presentation on who I am, I want to mention the first iteration of EB-5. That was back when I didn’t have kids. I think I was engaged at the time. It was a little wilder internationally than it is now, having an eight and 11 year old, but there was definitely some good times. The most fun was just showing up in a random city, seeing all your friends and being able to help investors in projects. But yeah, I’m with Bradley Arant Boult Cummings. I am a partner in the Dallas office and our firm is a multi practice firm. Really, our geographic scope in regards to the presence of our offices is basically draw a line from Dallas to DC and that’s where most of our offices are located. I work in the corporate practice in real estate finance sections of the firm. At the end of the day, I’m just a lowly securities lawyer in real estate finance attorney, but my niche has always been EB-5 since roughly 2008.
Ali Jahangiri: I know that you do more than just corporate. I want this to be helpful for developers. Someone that comes to you says they want to do EB-5. I know you’re pumping out a lot of different projects out there, so maybe you run through a case study of who would call you? What they would ask for and what you would do for them?
Shae Armstrong: I think I have a somewhat of a unique perspective on EB-5 because I went with a lot of lawyers would say backwards in my career. My first half of my career was spent in-house managing EB-5 capital divisions for large developers. So, I’ve experienced what a lot of our sponsors are experiencing. I had my securities licenses, was dispatched overseas to do the presentations for our projects to raise EB-5 capital and also to support the legal work. So, I’ve been on that operation side before, so I understand the challenges of the sponsors to grasp the EB-5 to create efficiencies in EB-5 and to most importantly, raise EB-5 capital with our project. So, to kind of give you an example of an EB-5 project. I’ll give you a more traditional sized deal for EB-5 and then maybe a unique twist that we did recently for EB-5. Right now it looks like we’re going to have a unique project in Idaho, and this captures a rural area that support the Jackson Hole community and more affordable housing for those that are living or working in Jackson Hole and possibly Idaho Falls. And so this is a really neat deal. My sweet spot really for EB-5 is $20 million to $50 million, so it’s around that range. They’ve already engaged with numerous investors in India.
This is not going to be a 100 investor project. It’s going to be probably closer to eight investors. I can’t obviously disclose what the terms are going to be, but the traditional returns we see in EB-5 and talking about economic impacts in a rural area is a win-win. It’s a win for the investors to play in the expedited rule bucket. It’s a win for and to have a great project they’re investing in. It’s a win for their sponsors to minimize their capital costs, especially with increased interest rates. And it’s a win for the local area, real job creation, construction impacts and satisfying a real need for housing. And if I can give you kind of a unique twist, because a lot of times and, I agree, 90% of my deals are traditional real estate development projects, but we’ve done some unique ones, and one of them recently is a dental service organization. We had a client, his son, who was finishing up his master’s program in Business Management in the US, wanted to invest in his uncle’s dentistry program, and his uncle happens to be a famous cricketer from Kenya of Indian descent. And so this great human being and what this gentleman is doing is he has dental practices across DFW and he’s trying to hit the more prices to market. So inner city kids have a tough time really affording braces.
Or a real dental needs. And so he’s going in there offering affordable service to lower income families to provide dental services to their kids, which I think is awesome. So, by law, just like a non-lawyer can’t own part of a law firm, a non dentist, which is his nephew, can’t own part of a dental practice, and his nephew really had an interest in starting a dental service organization such as a MSO, a medical services organization. And so we started at DSO to manage. The sponsor to manage the dental practices. And now they’re branching out and marketing those services, which essentially the back office of dental offices, the management support, operational support of dental offices, the non clinicians. And now he’s branching out and marketing to other dental offices across Texas. And so that was a unique spin. So, that project was about $800,000. Also in my desk right now, I have a $200 million deal. And then everything in between. And so I just I love EB-5 because you don’t have to be a certain property type. You could go small, you could go big. It could be treated more like financing for the big deals. But for the small deals, it might just be straight up equity. And so I love the flexibility that EB-5 provides.
Ali Jahangiri: So are these guys, are they mostly looking for a million? $5 million? “10 million? What’s your sweet spot that you see a lot of the EB-5 doing that themselves. I know you can obviously outsource it to a regional center, but for the folks wanting to get into the market themselves, I’m guessing they come in because there’s more efficiency on the smaller deals. If you can’t really give a smaller deal to a regional center, they just won’t take it.
So is that what you’re seeing is these smaller deals coming into the market themselves, raising it through friends and family? What are you seeing?
Shae Armstrong: That’s a great question. I think it really depends on the market they’re targeting overseas. So, right now I have a heavy focus like a lot of EB-5 practitioners on India. Just wonderful clientele, just the highest integrity levels. So that’s a little different model than China because let’s take an example. If my client’s building a $25 million home Home2 Suites. In. Albuquerque, New Mexico. That Indian American already has his contacts in Gujarat or South India or wherever in India, where, you know, it’s probably where he’s from originally. So you have these family and friends abroad that are going to invest in his deal. So, I feel like there’s the communication and transparency. It’s already established on day one of the investment, even structuring of the deal. And so those sweet spots for those types of deals, maybe bringing in three, four, five, six investors, which makes a huge difference in the capital stack on $20 million deal. And it streamlines the process because everyone knows each other. And sometimes there may be a higher level of responsibility that the sponsor may have to such investor because his parents grew up together. They’re from the same town. They’re in the same community. In China, we see smaller deals too, but we also see much larger deals. Historically, there’s pluses and minuses of both markets. I would say probably China. The market’s been around longer. It’s probably more institutionalized. And I think we would all agree that you’re able to raise more capital if you’re able to connect with the right network.
Ali Jahangiri: So when it comes down to the network, are a lot of these people saying, hey, I got the investors already, or hey, I need to go out and raise some money in the mainstream EB-5 market?
Shae Armstrong: Yeah. So I would say it’s a breakdown right now, only about 50/50. Nine times out of ten. If I have an Indian-American hotelier and he comes to me, he probably already has his target set up. Now he’s looking for other investment, other EB-5 investment, but he usually knows he’s set up with 1 or 2 at the least, so he’ll profit off it. It’s going to be still a substantial decrease in capital cost, but we do have the other side of it right? I think it’s important as EB-5 Securities Project attorneys, real estate finance attorneys, to be honest with these individuals, when they come to you and not say, oh, just fly over there and you’re going to grab 100 EB-5 investors, I think you’ve got to be honest. And so I encourage them to reach out to a group like you, yours, with a proven track record and get their marketing strategy in place. Before they even engage me because my goal I don’t want to just rack up dead deal costs for my clients. Number one, it’s a horrible long term strategy to build a practice on. But no, I want them to reach out to EB-5 Investors.com come up with a marketing strategy, then come to me and then let me bake the cake how they deem fit.
Ali Jahangiri: Now I appreciate that shade, but I think what’s interesting is I get a lot of calls in general like you do about this stuff, and I think a lot of times I’m sending them to you when they’re out there and they’re looking to do it on their own and they have investors that kind of make sense. Just do the docs for them. They have 5 or 6 investors and they’re raising 3 million bucks for a million bucks. That’s not a bad way to go if you’re doing it yourself. Diy is fine. Like I actually recommend folks to grab a group of investors and do it themselves, and you’re pretty efficient at doing these docs. So, what does it come out to be like? All in for a developer to come to you and say, Hey, I got five investors, six investors, I want to raise three, $4 million bucks, Whatever it is, it’s a real estate person or whatever the business is. How much does that cost to get them past the finish line on your portion of the fees or holistically, even if they went out and got a immigration lawyer through you or did whatever? What’s kind of a holistic fee to look for when you’re going to Shae Armstrong and Bradley and saying, hey, I have 5 or 6 investors, I have my business plan, I have my econ report, I need kind of legal docs set up. What are you looking at there?
Shae Armstrong: One thing we haven’t discussed, one point I do want to bring up… As we all know, there have been two substantial changes that increase the cost of representing a project for the project, and that is the file. This is the first time where you have just lowly non immigration lawyers like me making a USCIS filing, which is the form I956F, right. Which is traditionally paid, paid by the project, right? So that’s an increase of 17,000 plus right there to the to the project cost and developing an EB-5 platform and the additional component well there’s actually two additional components once additionally if they’re affiliated with the regional center, we’ve seen those prices go up. Because fair enough, the regional center has taken on more responsibility under the under the new law. And so that’s understandable. Number three, the integrity measures. Right. Audited financials or which I recommend. I think it’s a great I think it’s safer and a better marketing optic is to go get somebody like EB-5 proxy to do your investment management right, to provide transparency to all the investors. And so that’s a really cool program. It’s blockchain-driven up to date. The investor can get on in China, log on and see real time updates on job creation, where his or her money is an absolute great platform, but you have a lot of good a lot of good options out there, but you still.
Ali Jahangiri: Have to get a business plan, an econ report. So those are third party costs. And what are those range from third parties, right?
Shae Armstrong: So I’ll go through my list for you all. So for legal fees, I mean, there’s a wide range here, right? But if we’re going to talk about a raise from let’s talk about a total development cost, assuming it’s a real estate development deal, a range of limited service hotel for $20 million to $80 million. Once we start getting up from the $200 million categories, the costs really start varying. But for this sweet spot, let’s just say 20-80 million in development costs. The paper and I do. It really doesn’t matter whether you raise 10 or 30 investors. It’s the same amount of paper I got to put together in structure. And so we see pretty consistent costs. So you’re looking at around and also there’s some contingencies here. Is it a loan model? Is it an equity model? But overall, you’re looking at somewhere between $50,000 and $70,000 on the legal fee side, on the securities, assuming it’s a securities offering on the project legal side and an economic analysis estimation, we’re seeing between $12,000 and $20,000 per project. Regional center affiliation. We’re seeing an upfront fee of anywhere between $25,000 and $35,000 plus some type of carry on the amount of investors.
So if you raise to investors, you may have to pay $5,000 a year for each of those investors. That’s a wide range, too. And then you have the nine, five, six filing fee that the project needs to submit to USCIS, essentially to open the window for the immigration attorneys to file their form I-526 and that’s $17,795. So total I have on my projection and this is once again an estimate. Around $115,000. Set up the platform. Which even if you’re racing to investors, the margin, if you’re substituting those investors for equity and you’re going to hold that equity for five years, that’s still your break even is really with one investor. At two. It’s worth it. Now at $115,000. If you raise five investors, it’s a no brainer. Your margins are huge. So we have seen prices go up. We’ve probably seen prices double on the product side. But it’s once again, they’re getting $800,000 mostly or $1.05 million and not $500,000 or $1 million anymore, too.
Ali Jahangiri: So think like $150 grand of legal probably covers their costs.
Shae Armstrong: I wouldn’t even say sometimes, but I would say even on the lighter side, $115,000 to $130,000.
Ali Jahangiri: That’s actually lower than than a lot of the quotes I hear. So, $115 grand will get you kind of the full set of docs on the legal side.
Shae Armstrong: That’s right. But only if you’re going to do a $150 Million resort project at the East Coast of Puerto Rico, you’re probably looking more towards $150,000.
Ali Jahangiri: Right? Is that a, you know, the investment doc that is used? I know there’s a slew of documents and one of them is a private placement memorandum, which is a securities disclosure document. So, if you’re going to allocate that out, what range does that come out to be, the PPM or the securities doc? How much is that if you’re going to allocate just that? You’re looking 50,000 plus?
That sounds about right with the things I hear now. Sometimes people have loans, right? Some of the developers use a loan model and they loan themselves the money and others use a pref model. What’s easier to do for you guys on the legal side? Is it easier to draft a loan agreement with the developer or to do a pref model for the drafting purposes?
Shae Armstrong: It’s easier on our side to do a pref model. Simply, it’s just less paper. The LLC operating agreement at the JC and NCA level will control the flow of funds. Unlike a loan agreement, it’s a separate pile of loan docs, right? So, you’re looking at increased costs up to probably $10,000.
Ali Jahangiri: Got it. It’s interesting to see that the bigger deals cost more money because they’re more complicated and they probably have different groups involved, like a regional centre negotiating with them and other folks. But the smaller deals, I don’t think it should cost them as much, right? The smaller developers that have 5 or 6 investors, they come to you, they spend 115 grand and now they have a full set of documents to reach out to their investors, right. And they use these third parties.
Shae Armstrong: Yeah, let’s take a super small boutique hotel or just maybe a limited-service hotel. Let’s just say it’s in a rural area. Let’s say it’s a $12 million total development cost at $12 million. If you’re bringing in essentially friends and family, or offering it to your network in India, you’re probably just going to go with the audited financial integrity measure requirement. And then also you’re not going to have an escrow function. It’s not going to be loan documents. So yeah, you’re right. You really can start stripping it down to the essential components. The smaller the deal gets.
Ali Jahangiri: Yeah, because I think there’s a lot of people that want to do. I mean, I’m getting three developer calls a day, you know, there’s a lot of people wanting to get in. What do you see as the biggest obstacle for most of these developers? Is it that they don’t have their entitlements yet? What are you always waiting on?
Shae Armstrong: I think it’s from a project side. On the real-estate development side, usually, there’s still a little fuzzy, which is understandable about the financing, especially under today’s kind of volatile market, right? And so, their cap stacks seem to be harder to put together than before in regard to EB-5. The biggest challenge, I think, and I’ll be interested to get your insight as well, but I think from the EB-5 perspective, it’s the market has been somewhat disrupted because it was shut down and it came back to life. And then China, that agency market in China was disrupted. And so, it’s a little hard to link in. We knew who the usual suspects were, or usual players were in China beforehand when it comes to marketing capital. But I think it’sthe market is settling, but it’s still, you know, who’s been effective at raising capital under the new law and who hasn’t. And so, it’s a little bit, again, of a disrupted market in China and which makes it a little more difficult to raise capital.
Ali Jahangiri: Yeah. And I do think, though, the market is picking up. I get off the phone constantly with folks and I’ve got my finger on the pulse, so it’s picking up. So I do recommend folks getting in now. It’s probably a great time to get in, probably a great time to call. You get their loan docs and their documents together and jump in. Either call a regional center, do it themselves. I do see the market picking up. And are you seeing that too, with the business that, you know, doing documents have things picked up for you guys?
Shae Armstrong: Yeah. I mean, from the Chinese perspective, I have to China, I got three Chinese deals or Chinese market focused deals on my desk right now, which I’m excited to see because for a while, as we all know, under the old law, with Chinese retrogression, I didn’t work on a Chinese market deal for three, four years. And then on the India side, and I know there’s other markets out there, but those are encapsulate 95% of my practice on the India side that that market’s just before the new law. Up until the expiration of the old law, we saw, you know, it was the 3 or 4 investor program, which they knew who these individuals were that were investing with the local developer. But now we’re seeing more aggressive offerings in the Indian market saying, no, I want 15 investors, I want 30 investors, which is exciting.
Ali Jahangiri: Right? I’ve noticed that you work a lot with the Indian market. What’s that connection there? What’s your connection to that entire Indian market? Because I know you’re an expert in that particular field.
Shae Armstrong: I’ve been fortunate to have some close friends that happen to be Indian American that are also in the EB-5 game. And I was of counsel at the Patel Law Group for three years with the managing founding partner Rakesh Patel, who I know you work with a lot, who’s done some great immigration EB-5 work out of India, and I got to credit him and his partners for introducing me to the Indian market and jumping on the plane and jumping in the old station wagon and driving all the Gujarat and then shoving me out at the local cuisines and grabbing my hand when I’m about to eat something bad. And so, they like been my tour guides. They’re like my brothers from another mother. One thing about the EB-5 industry is we all developed great relationships and that’s one of those relationships that’s happened just by being in the EB-5 community.
Ali Jahangiri: And any cool projects you’re working on right now with developers? I know you mentioned the dentist one, but do you have any other cool projects in the mix coming around?
Shae Armstrong: I’m kind of excited about the one that you know about and it’s on it’s on an island. That’s all I can say and it’s a large deal and it’s super cool. And you know, when you get a pitch book and it’s like, Yeah, hey, you can send me a home2 suites all day long and I’ll do them and I’m excited and the economics are awesome, but it’s cool to get a pitch deck with the $200 million or whatever it is, resort on the Ocean Hotel, which I’m really excited about.
Ali Jahangiri: So along the lines of your line of work, I do want to ask you, outside of your the questioning on what you guys do and what the firm does, are you guys also in the immigration space? Can you guys handle that immigration work?
Shae Armstrong: We can. Just because I handle the EB-5 projects, a lot of times it’s great having another law firm support the investors on the immigration side, but that is a service we’re happy to provide.
Ali Jahangiri: Good. So along those lines, we had a various different attorney on board talking about their practices and stuff. You your firm, you’re the EB-5 person in your firm is there what else is your firm do just for knowledge. I want to see if you guys are tax based or…
Shae Armstrong: So, we have roughly 700 lawyers, so we cover a lot of areas. One of our specialties, which really meshes well with my practice area is we’re a top tier, the number one construction litigation firm in the country, very active practice. We have lawyers all over, but heavy in Houston, Texas, but they have national and international practices. We’re heavy. Any health care projects you have, which once again, that’s a great overlap with my DSO. I brought my health care attorney in because one of our largest offices in Nashville. So, we’re a health care firm to large litigation firm. It is helpful in EB-5 to have a national practice or partners that have a national practice because when I have a deal in Idaho, I can get my attorney that’s licensed in Idaho to go bless my operating.
Ali Jahangiri: You guys have a national practice for all intents and purposes, and you guys do construction litigation like, hey, the builder, the GC messed up in this. We’re suing them or that kind of construction litigation or is it GCS going after subs or is it mostly like that or is it.
Shae Armstrong: It’s both. But the real niche is really in construction defects.
Ali Jahangiri: You know, the roof goes down and you’re like, Hey, you know, there’s a ten year warranty. Let’s hire Shae’s firm to go after the insurance or whatever that is right.
Shae Armstrong: Exactly. Which makes because of that specialty and what m partners have seen. It makes us a great transactional practice for someone to look at your construction contracts, which a lot of sponsors you take out the air contract form, and I’m not a construction specialist, but I want my partner that’s seen a lot of messes to go through and review those contract terms. So are you.
Ali Jahangiri: Guys doing third party management? Are you guys working with the third-party escrow release company for like construction releases and for EB-5? Are you also helping on that end? The EB-5 like, because, you know, a lot of money has to go to create jobs and there’s reimbursements that go out or sometimes there’s construction. Are they reaching out to you for support there too, or do you guys’ just kind of say, hey, use this third-party company, they’re going to handle your construction draws for your EB-5.
Shae Armstrong: Yeah, I mean, it’s usually a third-party company, but it’s more of coming to for the reviewing the escrow agreements, the initial paperwork that needs to be drafted. To your point, one of the great things about EB-5 this year is going to be 90% of my practice. Last year it was 20% EB-5. If you really do take care of the sponsor and that sponsor takes care of his investors, you can’t think of a higher level of loyalty that you have in the transactional world. And so it leads to so much other work, traditional work, because these same sponsors are doing multifamily acquisitions. They’re investing in other real estate, they’re building stuff. They might have their own non real estate related ventures as well. They’re all entrepreneurs like you. And so, it leads to so much work. If you do a good job and the project succeeds, which means the investor succeeds. Most of the time you have a client for life.
Ali Jahangiri: Yeah, I think the investor side, we always focus on getting paying them back and making sure they’re secure. You know, we hear that over and over with our articles and everything we do. So, I’m glad you have the same mindset. And the other thing about the developers are I think it’s important to know that I know you give this message too, but this program is not about free money. It’s about cheaper money, and it’s about giving the investors back their principal and whatever form that is on a timely manner. And working with the third party intermediaries. I know a lot of people in our industry say, oh, it’s it’s practically free money. Well, it’s cheap money. It’s not free. And it’s not like a government subsidy. There’s investors, there’s fiduciary responsibilities, there’s people you have to pay back. And I think that’s really important for the developers to know that, hey, you know, this is the reputation of the industry is extremely important to us. I mean, we’ve been in this thing for over ten, 12 years, so I know Shae, your reputation and my reputation is very important. So the developers, you know, looking for tax credits, they go elsewhere. You’re looking for EB-5 come to us. So I’m glad that you’re doing construction litigation as well. I think that’s an important aspect to all this for us to know. I had no idea your firm does that. So if I see someone interested, I’d some to you. You know, lastly, Shae, I think if you want to touch on just briefly about a little bit of the details on your spreadsheet, on what other aspects of the business like I know if I’m a developer coming to you saying, hey, do my documents, but do you want the developers to come to you without doing a business plan, an econ report? Do you want a quarterback that whole thing or do you want to have them come with you with certain documents?
Shae Armstrong: Usually we have an initial call, just like if we were doing an EB-5 deal and I’m going to have my ass list of the questions I need answered. The documents I need to complete the securities docs and the business plan. There’s a lot of good business plan writers out there on EB-5. I tell my clients I prefer to do the EB-5 business plan because if I do the EB-5 business plan, which I do first, I understand the deal that much better when I start drafting the PM with the loan docs or the subscription agreement or any ancillary documents or the escrow agreement. I understand the deal in layman’s terms. And so I always ask to do the business plan. And then initially on that initial call to always say, hey, the first two steps before you engage anybody to underwrite the deal is, you know, is it a DEA or non DEA? And if it’s an NTA, you’re willing to play in the $1.05 million sandbox. And number two, right after this call, I’m going to introduce you to my favorite economist. There’s a lot of good ones out there. But Michael Kessler, impact data source, and I immediately introduced him to Michael. And then Michael runs with a preliminary job creation estimate. So I think it’s important to get the economists and myself going through the exact same time. But to use your word. Exactly. I use that exact same word in my initial calls. I quarterback the deal because I want the sponsor. I don’t want him or her to just be pinged every day, all day about EB-5. I want him or her to do what he does or she does best, and that is build buildings or be an entrepreneur. And so I try to take as much daily stress in the EB-5 world off the client as possible. So I’m managing the affiliation of the regional center. I’m working with the economists closely to make sure he or she has everything they need. But I consider myself a quarterback of the project side of an EB-5 development quarterback.
Ali Jahangiri: I like that. I’m like.
Shae Armstrong: Russell Wilson without the without the…
Ali Jahangiri: Muscles! So awesome. Hey, we’ll say great talking to you. I’m glad your practice is flourishing and look forward to seeing you abroad. Thanks. I will be in…
Shae Armstrong: Newport Beach sooner than later.
Ali Jahangiri: Okay. We’ll see you here too. Thanks, Holly. This has been the voice of EB-5 by EB-5 Investors magazine. To learn more about this episode, please visit EB-5 investors.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 podcast and if you like the show, please consider leaving us a five-star review. It helps us out a lot. See you next week.