On this episode of our podcast Daniel Healy, CEO of Civitas Capital Group, gives his opinion on what makes a project good for funding and explains how Regional Centers work operationally. He also offers his insight on what the EB-5 market will look like in 2023 and engages on a very interesting conversation with Ali Jahangiri about redeployment.
EPISODE TRANSCRIPT
Dan: I got into this business in the wake of the global financial crisis. We did our first deal in 2009 when the real estate capital market was almost illiquid and people forget, especially in Washington. They forget what that’s like. Now, we’re getting a bit of a reminder because inflation’s up, interest rates are up, and this is where EB-5 can really shine because it can make possible projects that otherwise would be very difficult to finance.
Ali: Welcome to the “Voice of EB5” by “EB-5 Investors Magazine.” We will have provoking discussions every week on the EB-5 program. So, please tune into our podcast. Good morning, everyone. This is Ali Jahangiri, founder of EB5 Investors. I’m sitting down this morning with a friend of mine, Dan Healy. Very excited to have him here at the podcast today. Dan has actually been involved in EB-5 for 13 years. One of the first ones to start a regional center and 13 years in the EB-5 world is I would say a grandpa.
So, Dan, I wanna welcome you. A little background about Dan is before he started Civitas, he was a senior executive of Royalton Real Estate Capital and Highland Capital there managing $30 billion in alternative assets. Did went out and formed his own firm with a couple of partners he has and a great firm that is he has 40 employees worldwide, 9 regional centers, and he’s done 50 projects in about 13 years of work, and hard work, and hard sweat of effort here with building his company out. So, it takes a lot of experience and a lot of hard work.
So, Dan, we’re pleased to have you here 13 years later on the podcast.
Dan: Well, thanks, Ali. Very happy to be here with you. This is a very cool platform. It’s fun to be on.
Ali: Dan, let’s get right to it. Some of my questions may be a little controversial at times, but we wanna make it exciting for the listeners here. So, Dan, let’s maybe talk about some of the roles that your regional center at Civitas plays in the industry. And, obviously, this is part of the less controversial questions, but what your role is in the industry, how you’re integrated, maybe go into some of the types of things integration you guys have. I know you guys are vertically integrated and you’re looking for projects. That’s what I was kind of aiming at.
Dan: Yeah, sure. So, just a quick thumbnail history. We’ve been at this since 2009, and in that time, our model has evolved. At the core, we’re real estate investors. That’s my background, is what I was doing before I started this firm with Rafael Anchia, who you know. And first and foremost, we focus on making high-quality real estate investments up and down the capital stack.
So, that means that we can invest as a lender in a senior position, in a mezzanine or a subordinate position, or as an equity investor, which means we can acquire property, we can develop property. We can do that directly, or we can do that in joint ventures or partnerships with other developers or groups. And more recently, especially since the 2018/’19 timeframe when the demand for EB-5 had fallen so precipitously ahead of the regional center program ultimately being lapsed for a period of months, we really accelerated the vertical integration to focus on doing business as an operator and developer more than a third-party capital provider.
Now, with the reauthorization of the program back in March beginning to ramp our EB-5 activity back up, it’s a bit more of a balance. We’re definitely still pursuing a number of developments, particularly in multifamily, which is our largest vertical. We’re pursuing those for our own account, but we’re also providing mezzanine debt for a third-party developer right now. That’ll probably be our first offering in the new integrity act kind of world EB-5.
Ali: No, that’s great. So, Dan, when did you guys launch this new project?
Dan: We haven’t actually launched it in the market yet. We’re just finishing the documents and all of the job creation analysis and all the preparation that goes into that. So, I expect it’ll probably be in the market in the next little bit, a couple of weeks or so.
Ali: Oh, that’s awesome.
Dan: It’s not very big. It is a project that we were doing even before EB-5 was reauthorized, so it was just great timing. It’s about a $10 million loan, so not a huge raise, and now we’re looking forward to getting out there with it.
Ali: Now that’s amazing. So, Dan, back when I first got involved in EB-5, I remember you guys were starting out and you were building. So, what were some of the growing pains since, you know, we can look back in 13 years and look at the organization now as what you’ve established, but what were some of the growing pains that you had early on with, whether it’s EB-5 or your own company growing pains?
Dan: Oh, goodness. There’s a long list. A couple that come to mind right away, one is that, you know, when we were starting out and for the first several years of investment activity in EB-5, you know, we were a small company and we didn’t have much of a balance sheet. So, if I wanted to make a loan and raise EB-5 capital to fund that loan, I had to know…I had to be working with a developer or borrower, that either could close on their own and wait for me to raise the capital, or I had to find some way to bridge that myself, which was really challenging when we were smaller and had more limited resources.
Today, we manage close to a billion dollars and we’ve built our balance sheet such that, you know, like in the deal I just mentioned, this $10 million loan for a multifamily project we’re working on, that we just fund on our balance sheet and we syndicate, you know, the EB-5 capital over a period of months, but our borrower doesn’t have that execution risk, doesn’t have any risk associated with that. And that’s a huge difference that just makes life so much easier for everyone. But the ability to do that comes with some experience and some growth. So that was definitely a major growing pain to give you an example.
Ali: Yeah. At the end of the day, there’s a lot of people that obviously you guys have supported that don’t know anything about EB-5 and they’re your borrowers. So, all these experiences and underwriting everything you do for EB-5 I think, but we have a lot of our listeners who are actually developers and folks that are looking for EB-5 capital. So, it’s good to kind of address some of their questions.
So, what were you looking for in your deals before and what’s your bread and butter in what you’re looking for? Is it typically in the mezz loan space? Is it in the senior space? Is it in preferred equity? What’s your ideal?
Dan: For us, there’s not a single ideal transaction. We’re pretty opportunistic. And what I’ve learned is that, well, backing up for a second, the starting point is always the quality of the sponsor and the quality of the project or transaction itself without regard to where in the capitalization we might be playing. First and foremost, we’re fiduciaries to our investors and we want to do our very best to put them into investments. Whether we’re the primary sponsor or we’re looking at a third-party deal, we wanna put them in the best position we can.
So, it’s only from there that we look at, where is the best place for us to play in a particular opportunity. One of the cool things about the new law is that while the $800,000 minimum investment obviously is a tall order relative to $500,000 for a lot of perspective EB-5 investors, it does mean that for every 10 jobs, you have $300,000 more on capital, which is a pretty big number. I mean, that’s a pretty big increase.
Ali: I mean, Dan, does that just mean higher LTVs as well?
Dan: It doesn’t necessarily mean higher LTVs, it could. You could take it that way. But a lot of times, especially right now, it’s a great example with the rate hikes that have happened in the last couple of months or so, your senior lenders for a lot of projects, particularly hospitality projects and where senior debt is generally more conservative, to begin with, the pricing is not nearly as attractive as it was when rates were close to zero.
And so the EB-5 capital becomes relevant and valuable at lower LTVs, which I think is kind of great for everybody in the EB-5 world because our investors are exposed to less risk as of loan to value matter. And we can do somewhat larger more efficient transactions, that’s just a win-win from the EB-5 investor’s perspective.
Ali: Yeah. But at the end of the day, I think, what you’re getting at is also that on a senior loan basis, where before let’s just say your construction cost was $100 million, you could only lend $50 million as a mezz fees, with the increase to $800,000, could you bring that 50% of loan to cost up to like call it 70% because of the extra proceeds?
Dan: Yeah, conceivably. Obviously, it’s gonna vary from place to place depending on the job creation, but, yes, that’s the concept.
Ali: Yeah. That’s interesting. We didn’t have this in the past, so this is… And then it’s gotten almost like a perfect storm, right? Dealing with the interest rates going up like you’re saying.
Dan: Yeah. And, Ali, I know you know this better than anyone. And when we were working on the legislation for the last decade trying to get the program extended for a long period and make a lot of the changes that fortunately were just made, one of the things that it was hard to get congressional staff to grasp was that we were having those discussions for the most part in years where the economy was growing and interest rates were near zero and everybody had access to capital.
And even though I got into this business in the wake of the global financial crisis, we did our first deal in late 2009, early 2010, when the real estate capital market was almost illiquid. And people forget, especially in Washington, they forget what that’s like. Now, we’re getting, I hope we’re not anywhere near the 2009-like environment, but we’re getting a bit of a reminder because inflation’s up, interest rates are up, that’s constraining values, it’s constraining lending and developing projects.
And this is where EB-5 can really shine because it can make possible projects that otherwise would be very difficult to finance. That’s particularly true of more complex, mixed-use projects that involve some components that are relatively easy to finance like apartments, but some that aren’t, like, entertainment venues and hotels, and other things that traditional lenders tend to be very conservative about, especially in a possibly recessionary sort of more conservative environment.
Ali: That totally makes sense. Yeah. No. That one went definitely when I got involved, I knew nothing about finance. Now it’s amazing how the macros and micro and everything affects the EB-5 world. And now you’re extremely relevant right now, Dan, in this space.
Dan: Yeah, definitely.
Ali: Whereas, call it a year to two years ago when the interest rates were low, you were not as relevant. Now, people probably want senior loans from you, not just mezzanine because your rates are good.
Dan: Yep. That’s what we’re seeing. We’re seeing some demand there and I think it’s gonna increase.
Ali: So, with the interest rates and the storm coming in with that, what really is our bottleneck here? Is it the fact that the government hasn’t issued more potentially EB-5 inventory? What’s our current bottleneck now?
Dan: Well, there’s a few. Big picture, you’re correct. That the one thing that we tried as an industry very hard to get included in the Reform and Integrity Act that we were unsuccessful was some kind of visa capacity increase. They could be just a straight-up increase in the number of available visas or you could not count derivative applicants, or have some formula for that, or there’s any number of mechanisms. And we did make some progress in this regard, but overall that was the one area where we didn’t really move the needle that much.
So, yes, if there’s a constraint, that’s it. And obviously, for those that are listening that know this space, that’s particularly relevant to Chinese nationals but increasingly relevant to prospective investors from other countries. Beyond that, I think probably the biggest thing in the short-term is just the dust settling on exactly how the program is gonna be administered by USCIS under the new framework of the RIA.
Ali: Speaking of this RIA in a different sense, let’s talk about the Investment Adviser Act. And I know you guys are currently a registered investment advisor as Civitas. Am I correct, Dan?
Dan: Yes. That’s right.
Ali: How does that work where you also need a third-party registered investment advisor? Does that mean in this situation you’re gonna find another RIA, or is yours enough to beat the RIA under the RIA Act?
Dan: Oh, and are you talking about the fund administration piece?
Ali: Yeah, because that needs to be a registered investment advisor. Am I wrong?
Dan: No, no, it doesn’t actually. Let me back up. So, basically, the Reform and Integrity Act has this fund administration requirement, where you either have to have a third party that’s providing that service and doing so in the manner that the new law requires, or you have to audit all of your entities, your new commercial enterprises. For us, we call those funds. They’re a series of funds that we manage. So, for Civitas specifically, and it gets a little confusing because the Reform and Integrity Act is also RIA.
Ali: Yeah, exactly.
Dan: But we are a registered investment advisor under the Advisers Act. And because we are registered and we have been operating as a registered advisor years and years now, although our formal registration is relatively recent, our operations have been set up like a registered advisor for a long time. That includes audits. And we’ve audited all of our EB-5 funds and our institutional funds every year, forever, for a decade.
So, for us, that new requirement in the Reform and Integrity Act is just not relevant because this doesn’t apply to us. But for most regional centers, I think, it means that they either have to start doing what we do in terms of auditing everything, or they have to engage a third party to provide that service. And that third party doesn’t necessarily have to be a registered investment advisor, it can be just a service provider. There are accounting firms and others that provide just fund administration services that can provide that.
Ali: Oh, wow. That’s interesting, Dan. I’m glad you’re clarifying this for people, especially the listeners. If I’m confused, the listeners are confused too. So, that’s a good thing we can clear this out. So, that third-party fund administrator at this point can be a lawyer, accountants. What other form of business can it be?
Dan: We usually, like when you say fund administrator in the institutional world, that has a specific meaning. And those are the entities that the drafters of the Reform and Integrity Act had in mind. So, like major fund administrators….for example, for our institutional funds, we use UMB fund administration, which is a division of UMB Bank. They provide fund administration services for private equity managers like us.
Another big fund administrator is SS&C Technologies, I believe they’re called. That SS&C is a major global administrator. So, that’s the kind of default. There are also groups like Baker Tilly is very, very heavily involved in the EB-5 world already. And now are, I believe, offering services to help people comply with this aspect of the new law as well. So, it can be different consulting firms, accounting firms, specialty financial services firms, banks. There are a bunch of different angles.
Ali: Dan, what are they actually doing? So, I know that there’s a need for this third-party administration, what’s the oversight in title entail?
Dan: It actually can vary depending on how you’re set up. But, in general, what a fund administrator is doing is in this context, in the context of complying with the Reform and Integrity Act in EB-5, what they’re doing is they are acting as a combination of administrator and escrow agent, where there’s an account where all of the cash that is being invested by the individual, EB-5 investors, is being wired into, and they’re playing an oversight role to make sure that the conditions for releasing money from that account are actually met so that it’s not just the issuer, like in this case, just Civitas or whoever, making a unilateral decision that, “Okay, the conditions for releasing these funds have been met and we’re gonna go ahead and close the transaction.”
You have this administrator playing a sort of traffic cop role where they’re verifying that those conditions are met, and if they’re not, then they ask questions to make sure the documentation is in order.
Ali: Would this have like stopped fraud in the past? I just think this is so basic as to the transferring of money. It doesn’t really feel like they’re protecting anything with this fund administration.
Dan: Well, it does actually. It’s important in two ways. The first one is that it makes fraud harder. If you want to perpetuate a fraud, you now cannot simply invite investors to wire money directly to you. It will become known in the market that your money needs to be wired to an account that is compliant with this. So, part of it is just a deterrent, an obstacle to fraud in that regard. But the other thing is…you remember the huge Chicago fraud.
Ali: Yep.
Dan: The FBI or the feds were able to recover every dollar of principle because the escrow agent, in that case, refused to release the funds.
Ali: I see.
Dan: So, even though those guys were completely marketing a non-existent project, they had to get an escrow account, or investors weren’t gonna fund, and it was the escrow agent that realized, “Hey, there’s a problem here.”
Ali: So, now you’re saying that with this fund administration, there’s a mandatory escrow requirement?
Dan: It’s not literally escrow, but it plays a similar role. With the administrator, the escrow agent doesn’t have to necessarily be the same as the administrator, they can be separate entities, but their role from anti-fraud perspective is similar. That’s why they’re there.
Ali: So, the investors wire their money over to, and the third-party administrators ensures that the money has been wired into an account?
Dan: That it’s kept separate.
Ali: Is there some kind of condition that has to be met before the fund administrator releases the money to the developer?
Dan: Yes. Typically. And those can vary. That’s gonna be spelled out in the documents governing the offering of the transaction, and the administrator is going to look as an independent party to see if those things have actually happened. And the triggers can vary from project to project. I should mention, the other thing, that a fund administrator generally is responsible for doing is processing KYC and AML information.
Ali: Got it.
Dan: So that’s another reason why, from a public policy perspective, the Reform and Integrity Act creates this responsibility because they wanna make sure that somebody who is not a developer is checking to make sure that these investors are who they say they are and all of those things. And also, now, a lot of these offerings to the extent that there’s any activity happening in the United States, they’re offered under Regulation D, which typically will require that the individual investors are accredited, meaning they meet certain financial minimum thresholds. And an administrator will verify that too.
So, they can play a range of roles, but from a policy perspective, you’re Congress and you’re trying to make sure that everything that’s happening in this program is on the up and up, those are good things.
Ali: That makes sense now. So, it’s really another set of eyes. They are independent to the NCE or independent to the issuer who is raising money. It’s another set of eyes to kind of oversee the funds coming through. Is that generally the concept?
Dan: That’s correct.
Ali: And so if they see anything shady or fishy, they can say, “Hey, something’s going on here? Let’s put a stop to this.”
Dan: Yeah. They just say, “We’re not releasing money.” They don’t have to try to figure it out necessarily. They just say, “We’re not doing this.” And if the parties can’t satisfy them, then they can turn it over to a court.
Ali: That’s interesting. So, now this third-party oversight, which can be a lawyer or which can be an accountant or an RIA is a new role that’s been set up. So, in you guys’ particular situation, you’re also under the Investment Advisers Act, you are an RIA, Registered Investment Advisor, so you have kind of double oversight, right? You got this RIA umbrella where, correct me if I’m wrong, you’re looking at the investment in a different set of pair of glasses than a regular company would. And then you also have this third-party looking at it too, right? How does that work?
Dan: So, that’s a good question. So, there’s overlap, but it’s not literally double. This is something that I actually personally worked on the legislation over the years. The reason that there’s a choice, the reason that the Reform and Integrity Act provides that you can either use a third-party fund administrator or you can have all of your entities audited every year, one of the rationales for that is that the only people or the only companies that are likely to have all of their entities audited every year are those that are already required to do so by the Advisers Act because they’re registered investment advisors like us.
Ali: Got it.
Dan: Okay. So, the reason that we don’t have to have…we actually do have fund administrators, but we’re not technically required to under the Integrity Act is because, unlike other regional centers that are not regulated under the Advisers Act, we are directly regulated by the SEC, and we’re directly already required to audit all of our funds no matter what the EB-5 law says. So, it’s designed to not force essentially a duplicative layer of regulation on registered investment advisors like Civitas.
Ali: That makes sense. So, in your situation, even though you do have third parties involved, but you can just opt to say, “Hey, we’re gonna audit this and we have our own RIA and you’d be compliant?”
Dan: Yeah, it will. Slight clarification. I can’t opt to say, “I’m gonna audit this.” I have to audit it no matter what.
Ali: Got it. You have to audit it.
Dan: The Advisers Act requires me to audit our funds, which means that… And that’s why it’s good that the law has some flexibility in what the third-party administrator does because our administrators, obviously, we don’t need to pay them for things that we’re already legally required to do directly ourselves. So, our administrators have a slightly narrow function with us than they would with a regional center that’s outsourcing everything to them completely.
Ali: So, I know we digressed into this RIA space, but it’s really important because people have a lot of questions in this space about this stuff. So, glad you kind of covered this and you were involved in it. On kind of switching modes a little bit getting away from fund administration, since you’ve been in this for 13 years, have you guys started paying people back, and have people been starting to get…has redeployment of money been an issue, and how does that all go in?
Dan: Oh, sure. Yeah. I mean, the total EB-5 investment volume that Civitas has done since inception is a bit over $750 million. And of that, we’ve returned over $500 million. So, today, we’re sitting on $200 million plus of capital that we continue to manage in ongoing projects, some of which has been redeployed, obviously, to maintain the compliance of our investors with the rules and some of which is still in its primary or initial investment.
Ali: So, out of the $200 million that’s left, so you’ve returned $500 million, there’s $200 or so million left, some of it is in the original EB-5 deal and some of it’s in redeployment?
Dan: Right.
Ali: I actually didn’t know about these stats about your company. It’s really interesting.
Dan: We’re pretty proud of it.
Ali: That’s something to brag about. Anytime an investor becomes whole and gets a benefit, our whole industry is predicated upon making investors happy and making them not only helping with their immigration needs but also returning their capital. So, I’m happy to hear you guys return $500 million of capital. In the arena that I’ve got information from, I don’t think that’s been too public about you guys. So, I’m happy we are kind of releasing it in this podcast so people know.
Dan: Yeah, no, it’s a good point. Maybe we should be bragging more.
Ali: Well, it’s kind of a bragging point, right? I got paid back in investment recently, personally, unrelated to EB-5, and the word of mouth and people being happy is probably the best form of advertisement.
Dan: Yeah, absolutely. It’s everything, really. And all you have in this business is your reputation and the ability to be trusted. And if you can’t be trusted, you’re done.
Ali: Well, speaking of being trusted, I don’t mean to bring up the controversial issues, but I kind of wanna talk about since we’re talking about being trusted, there’s been somewhat of a cleaning house I’ve noticed in the EB-5 space. There’s less players, there’s folks that have been doing this for a long time, still in the industry, but have you noticed that too, Dan, or is it just me?
Dan: I think you’re quite right about that. From the beginning when Rafael and I drafted the original business plan for Civitas Capital Group, we knew that EB-5 was inherently subject to legislative and regulatory risk. The program could expire. The regulations could be changed in a way that could be detrimental to us as a business. And so our model was, “Hey, let’s create this platform and try to become a leader in EB-5 in this very narrow, little niche,” but we are proud.
And I tell people that we are professional investors who happen to have an EB-5 capital channel, we’re not running an EB-5 business. So, part of that is while EB-5 is great and it’s a very important source of capital that we manage, we also manage money for insurance companies and family offices, and other institutional investors. So, when the demand for EB-5 went to almost zero a few years ago, we simply continued to run our institutional business. But if we had been dependent on EB-5 solely, I think that would’ve been a totally different story. And I think that was the case for a lot of folks that had gotten into this business to fund a particular project or just on a smaller scale.
So, it’s not surprising that there’s people that have left the industry and that there’s consolidation. And, of course, now that hopefully, things will be ramping up and I expect we’ll see more people coming in, but we have to face facts. I mean, there were a lot of bad deals that got done. You know, and there are investors that got burned. And so a lot of people, even if they wanted to keep going in this space probably wouldn’t have been able to, and that’s good.
But now with the new law really raising the bar in terms of the minimum requirements and frankly, the compliance costs, and the legal, and the audits, and everything else that it imposes, there’s a real barrier to entry. We’re touching hundreds of millions of other people’s dollars. If that’s what we’re doing, then we need to be held to a high standard, and I think it’s appropriate that now we’re a lot closer to that.
Ali: Well, there’s a lot of companies like you’re mentioning that were not just EB-5-specific and there’s other companies out there, but there’s rumors now that some of them haven’t paid their agents and they haven’t paid their investors. So, I actually don’t think it’s typical to just the fact that you’re diversified to having ethics.
Dan: Fair point. You can walk and chew gum at the same time, can’t you?
Ali: I think the ethics point is the character and the fabric of people is different, and the fabric of companies is different. I can tell you, Dan, that I don’t know if I could publicly talk about who and what and where, but I have agents that I talk to that source capital that are frustrated because they have been stiffed and they haven’t been paid and the projects are doing well. So, these are with groups that are small and large. And I can’t bring anything in detail up because I don’t wanna get an email saying, “You brought up X, Y, and Z,” but have you heard of that?
Dan: I certainly have heard of it in general. Yes is the short answer. I’m aware of a couple of specific instances.
Ali: Tens of millions of dollars, Dan. Tens of millions that agents haven’t received.
Dan: Yeah. I believe it. There’s been issues out there. Some of that is investments that haven’t performed for whatever reason, whether it was just bad luck or not particularly great structuring, or sometimes are just bad actors that are choosing to do something wrong. And hopefully, some of the restrictions here, the new law will help with that. But if somebody has decided they’re gonna do something wrong, they’re gonna do something wrong.
Ali: Well, I’m glad we’ve cleared the plate a little as to say and push the scraps out of the plate. I think this time around, the players that are in the space have lasted through a famine and it’s nice to actually see it consolidated and the leaders shine.
Dan: Well, I appreciate it. It’s been a long time coming, you know, this legislation and, of course, I’m proud of the work that my team and I personally did on it, but I was far from the only contributor to that effort. It’s a long list of people that made this happen. So, hopefully, we can capitalize on it now and really get it right. In the investment business generally, wherever there’s money, there’s always gonna be some degree of bad actors and fraud and whatnot. The important thing is that it’s deterred and when it does happen, it gets corrected. And I think it’s gonna be a very different environment under this regulatory regime than in the past.
Ali: Yeah. And I also look forward to another 10 years with you. I think it’s almost been 10 years we’ve known each other.
Dan: That’s right. Likewise.
Ali: Now we have a little bit of gray hairs.
Dan: Yeah. Maybe more than a little.
Ali: Well, Dan, I look forward to coming and visiting you in Dallas. Hopefully, soon will fly out there and either see you in Dallas or actually, I’ll be seeing you probably internationally sooner than I’ll be in Dallas.
Dan: That’s quite possible.
Ali: Well, I appreciate you being on this call. Once, again, folks, the CEO and Founder of Civitas, Dan Healy. Great podcast guest for us here and honored to have you.
Dan: Well, I’m honored to be asked and I really enjoyed it. Look forward to doing it again sometime when we’re celebrating some more wins.
Ali: Awesome. Well, so far, it’s a win. We’re back to business with this new Reform and Integrity Act. Thanks again.
Dan: Appreciate it.
Ali: You have been listening to the “Voice of EB5” 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.