(Thursday, 17 May 2018)
By Osvaldo F. Torres, Torres Law
Many potential EB-5 investors would prefer to have control over their project and benefit from its financial success. Yet most EB-5 structures are designed to deprive investors of those benefits, relegating investors to essentially passive roles with little opportunity for financial gain. Although this “passive” structure has become commonplace in EB-5, it does not have to be this way. We have counselled on various EB-5 projects where investors retained control and preserved the opportunity for financial gain – even within a regional centre model. This article explores how you can take EB-5 into your own hands and reap all the benefits EB-5 has to offer.
The EB-5 programme offers many advantages for foreign investors. Other than investors from the People’s Republic of China, investors can expect the United States Citizen and Immigration Services (USCIS) to begin adjudicating their EB-5 petitions without delay. This may render the EB-5 programme a quicker alternative to obtaining permanent US residency in light of immigration climate where investors from certain countries face visa backlogs under the H-1B programme and other family-based and employment-based visa categories.
Additionally, investors choosing to operate their own EB-5 project can achieve their immigration goals while capitalising on three added benefits: control over the project, opportunity for financial gain and ownership of an operational US business.
But these benefits are not available in the typical EB-5 structure illustrated in the chart below, where investors invest in a new commercial enterprise (NCE) controlled by a third party. The NCE then loans or invests EB-5 funds in a separate job creating an entity (JCE) that operates the project. Most importantly, EB-5 investors retain no control over the project.
Nevertheless, EB-5 investors can obtain the benefits outlined above via a well-designed “active” structure, as illustrated in the chart below, where they invest in an NCE, which can be wholly-owned by EB-5 investors or together with their friends and family. The NCE then loans or invests EB-5 funds into its wholly-owned JCE.
The EB-5 programme requires that EB-5 investors be engaged in the management of the NCE. However, developers and project principals usually structure projects to maintain day-to-day control of both the NCE and JCE, effectively relegating EB-5 investors to a passive role.
Most projects grant EB-5 investors the minimum control permitted by USCIS: the mere right to advise the NCE regarding policy or investment decisions, but such advice is rarely sought. EB-5 investors are also typically permitted to vote only in rare instances. Additionally, investor rights in those passive structures do not constitute real control because they apply to the NCE only – and not to the JCE or project (where the assets of the project are held and cash flow is generated).
Unlike the typical EB-5 structure, the active structure depicted above allows investors to control the JCE and the project via their ownership and control of the NCE. EB-5 investors can manage the NCE and JCE themselves or appoint a manager (like an experienced friend, family member or another qualified person) while retaining control.
Careful project structuring can preserve this active structure even in a regional centre model. In a direct model, only direct full-time jobs may be counted towards the ten jobs required per investor. However, the regional centre model permits counting not only direct but also indirect and induced jobs, which are created indirectly or as a result of investments in the project.
Opportunity for financial gain
A second advantage of investing in your own project is the potential for financial gain. As an indirect owner of the JCE, EB-5 investors can receive their proportional share of the project’s net cash flow, which would be upstreamed to the NCE through the JCE.
However, the vast majority of EB-5 projects are structured to ensure the cash flow available to investors is restricted. In such passive structures, investors typically end up receiving an amount more or less equal to their initial contribution plus an annual return on investment of less than one percent such that project developers and principals, and not EB-5 investors, reap the benefits of a project’s financial success. By actively engaging in their own EB-5 project, EB-5 investors can cut out the middleman and directly benefit from the project’s financial success.
Living the American Dream
Investing in your own EB-5 project eliminates the right of the developer/project principal to dictate the exit strategy. This is of great advantage. As other investors struggle to find jobs or sources of income during their transition to the United States, by engaging in an active structure, in addition to obtaining green card status, an EB-5 investor can continue to operate the project and benefit from owning an operational US business.
Selecting the EB-5 business
We have counselled several EB-5 investors and their families seeking active control and found that the following non-exhaustive categories of projects are suited for such an enterprise because they involve smaller development budgets and are more easily managed by a small group of investors.
• Franchises. Franchise projects offer the benefit of an existing franchise business model that has proven successful. Some franchisors even assist with marketing and identifying potential franchise sites.
• Real estate development. Small-scale real estate projects typically involve lower costs and expenses. Examples include boutique hotels, small multi-family residential units and assisted-living facilities.
• Manufacturing. Manufacturing deals are also ideal for manufacturing and distributing technology, medical devices or other consumer products. With the Trump administration’s emphasis on US manufacturing, manufacturing businesses and their products may receive preferential treatment. Additionally, the proposed legislation would qualify investors in manufacturing projects for the lower investment amount.
Ultimately, the EB-5 programme offers immigrants the opportunity to obtain their green cards without delay while maintaining ownership and control of a US business. Should investors decide to engage in their own project, they should hire EB-5 attorneys and professionals well-versed in the EB-5 programme’s intricacies to ensure investors minimize risk and obtain all the benefits EB-5 has to offer.