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EB-5 Due Diligence is About Asking the Right Questions

26th Jun 2024
At an event co-sponsored by JTC, EB-5 experts explained what investors should ask Regional Centers when evaluating projects.

EB-5 investors are at an inherent disadvantage when it comes to evaluating investment projects. Not only must they contend with their own inexperience regarding EB-5 (if one is making an EB-5 investment, it’s usually their first), but they may be making investments into industries and geographic regions they have little experience with as well.

There is also the matter of priorities. Normal investments can be evaluated from the perspective of returns. But in EB-5, jobs must be created, with green cards at stake. Should investors care less about returns and focus on immigration goals? Is it a good idea to pursue a project that promises to return capital quickly? How can an investor be sure their Regional Center will abide by the rules of the EB-5 Reform and Integrity Act of 2022 (RIA)? Just what should investors look for in a project?

This was the challenge posed to a panel of EB-5 experts at “Anatomy of an EB-5 Project,” a webinar from JTC and CanAm Enterprises. During a wide-ranging discussion, the panel explained how it all comes down to asking the right questions. By doing so, investors can feel comfortable with their choice of Regional Center and project. Here are a few of the major questions the panel suggested investors should ask when selecting a project.

What are my priorities?

Nicolai Hinrichsen, Partner at Miller Mayer LLP, ranked the goals for a typical EB-5 investor as “obtain the green card, return of capital, and a distant third might be return on investment.” Other investments could earn one greater returns, but that isn’t the focus of EB-5.

“Most likely you’re going to lose a bit of money,” he said. “The return is the green card. That’s why people do this.”

“I would encourage you not to blend your immigration process and your immigration needs with optimizing returns,” added Sebastian Stubbe, Managing Director & CEO, Pine State Regional Center. “The premium projects in the marketplace, the targeted return is going to be lower.”

While risk is necessary in EB-5, Stubbe cautioned investors against taking on a project that’s too risky as their main focus should be on the success of their immigration applications. If an investment sounds too good to be true, there may be a reason.

“There are some projects where there’s a much higher targeted return, but then you have to wonder why, right?” said Stubbe. “Is that because they’re having difficulty raising capital? Is it because there’s an inherent risk baked in somewhere?”

The panel largely agreed that investors should consider their visa applications first and foremost. Down the road, there will be plenty of opportunities to make investments that will grow wealth, but EB-5 should be about finding a project that will create jobs and return investor capital while following the rules of the RIA. So how do you find a project that will do that?

What is the Regional Center’s EB-5 track record?

Track record was a major focus for the panelists, who stressed that there’s no substitute for experience in EB-5. A Regional Center that has been through the process before can provide investors with greater assurance that they know what is required to comply with EB-5 rules.

Christine Chen, COO, CanAm Enterprises, noted that “longevity and track record in the program” not only prove a Regional Center understands EB-5, but can give investors assurance that they’ll be able to deal with changes that come over time, such as USCIS rule changes or economic changes that affect projects.

Jose Rincon, JTC Vice President of Business Development, suggested investors do their best to set aside the emotional component and ask, “what is the track record of the developer I’m going to work with? Do they have their own Regional Center? If so, what is the track record of that Regional Center?”

What is the relationship between the NCE & JCE? Are there any conflicts of interest?

The panel explained the basics of the relationship between the New Commercial Enterprise (NCE), which is created by the Regional Center, and the Job-Creating Entity (JCE), which is where capital is deployed to fund the project. These two entities can share common ownership or not, depending on how the project is structured.

As Stubbe explained, “some Regional Centers are part of the developer, or the developer owns the Regional Center, and in some cases, the Regional Center is an independent group.” He added that Pine State retains its independence to remove conflicts of interest. That way, “our only fiduciary obligation is to the EB-5 investor.”

It’s not illegal for a developer and Regional Center to be owned by the same entity, so investors need to ask questions to make sure everything has been disclosed, as failure to provide information on potential conflicts of interest could be a red flag. There is also the rent-a-center model, which comes with its own separate due diligence questions.

What is the structure of the capital stack?

Chen went through the basics of how capital is deployed from the NCE to the JCE and the different positions EB-5 capital can occupy in a project’s capital stack. Usually, the NCE is either taking an equity stake or making a loan to the project. As she explained, an equity position provides more control and potentially more upside, but the downside is in the investment horizon and project timeframe.

“If the NCE is an equity investor in the JCE’s project, you have to wait for that project cycle to play out” before capital is returned. Conversely, “if the NCE is making a loan, whether it’s in a senior position or a mezzanine position in the capital stack, you have a defined term.”

CanAm operates on a loan model for this reason. As Chen said at the webinar, EB-5 is “primarily a green card investment,” and the loan model helps provide predictability. “You know when you’re getting your green card. You know when you’re getting repaid.”

How long will my capital be invested?

2023 saw confirmation that the RIA had established a two-year sustainment period. That means it is possible for an investor to have their EB-5 capital returned in a minimum of two years. But just because it’s possible doesn’t mean it’s the best decision.

“It’s not exactly clear that it’s just two years,” cautioned Hinrichsen. It’s difficult to know how those two years will be calculated or whether a legal battle will result in a change to the timeline, and some developers may be making promises they don’t intend to keep.

“There’s a difference between what is being marketed and what is actually the case,” said Stubbe. While projects may be marketed as being two years, there might be extensions built in, and “the intention isn’t really there” to return capital in two years. Even if it isn’t a disingenuous marketing ploy, “there are structural issues,” he said, stating that as far as Pine State is concerned, “for us, it won’t work.”

“If the vast majority of the market is operating on 4-5 year investment terms,” said Chen, “you have to wonder, when there is an exception to that rule, what it is that’s enabling that.” Her recommendation was that investors “should ask whether their business plan really supports the likelihood” of capital being returned in two years, or “are they just going to meet that timeline if everything goes right?”

What service providers does the Regional Center work with?

Just as investors should work with the best legal and financial advisors possible, Stubbe said they should look for Regional Centers that use a “best of breed” mindset:

“Is the Regional Center working with top-notch securities counsel? Are they working with premium immigration counsel? Are they working with top fund administrators like JTC?”

Rincon added that the banking institutions the Regional Center works with are also important because of the complexity of EB-5 banking rules.

“Partnering with a bank that has EB-5 experience, I would say, is critical in this process,” said Rincon, stressing that it is not only the track record of the developer and Regional Center that’s important, but the controls that have been set up to check their processes.

“What do they have in place to ensure that this whole process from beginning to end runs as smoothly as possible?”

Does the Regional Center work with a third-party fund administrator?

The RIA created a requirement for Regional Centers to work with a third-party fund administrator. However, Regional Centers can opt out of this requirement by performing a yearly audit. We’ve discussed how these audits can be inadequate, and the panelists agreed third-party fund administration provides what Stubbe called “redundancy in terms of eyeballs” on processes.

Rincon pointed out that a fund administrator can supply greater transparency and access to documents, but only if the administrator embraces best practices and offers an online portal so investors can see project details regardless of where they are.

“As an investor, you should be requiring your developers and your Regional Centers to provide you insight into what’s happening in the project,” he said, adding that “having the ability to have all documents in one place is really something that I think investors should look at demanding.”

A quality fund administrator can not only provide greater access to project information, but can also add to a project’s integrity through the fund administrator’s track record in helping projects succeed.

“In terms of fund administration, tracking and auditing that capital; being able to provide information to USCIS, to the investor, of where that capital lies; where has it been deployed; when was it deployed; what it’s being used for. That’s something that a third-party service provider can give insight to,” said Rincon.

The panelists discussed other important aspects of EB-5 project evaluation, including whether it makes sense to bring in outside due diligence experts, the different types of advice one can get from a securities advisor and an immigration attorney, and other questions investors should ask of their Regional Centers.

“You can’t really outsource your due diligence on this,” said Chen. “EB-5 is not a regular investment. It’s a very personal investment.”

By asking the right questions, investors can find a Regional Center they trust. And if your Regional Center works with JTC for services such as escrow, cosignatory, and third-party fund administration, you can take advantage of our online portal that provides access to key information and documents 24/7, from anywhere in the world. We provide additional oversight so EB-5 investors know their Regional Center is doing the utmost to help them succeed.

Watch the full webinar here




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