(Wednesday, 16 May 2018)
by Stephen Strnisha, chief executive officer, Cleveland International Fund
In the wake of a recent increase in Notices of Intent to Deny (“NOIDs”) or outright denials by the United States Citizenship and Immigration Service (“USCIS”) surrounding EB-5 project (“I-924”) applications and reports that some high profile projects may not be able to repay investors, there is a greater need for investors to ask important due diligence questions at the outset of their EB-5 investment decision. There is nothing necessarily new in all this. USCIS has continually evolved in their guidance on important terms, such as what constitutes an investment remaining “at risk.” Moreover, the term “at risk” is often minimized during the marketing process when all investors should be well aware that the EB-5 program does not allow for a guaranteed return of an investor’s principal. With that said, even well-planned and executed investments sometimes go awry.
So with a realistic view, how can today’s EB-5 investors navigate among their many choices and achieve their intended result – permanent green cards for their family and repayment of their investment? The reader of this article should first take note and comfort that the vast majority of EB-5 investors to date have achieved this objective, and undoubtedly thousands are close behind to reaching the same satisfactory result. Know, however, that this outcome does not come from only a certain type of regional centre, project location or even asset class. So what are the core considerations to take into account when considering your EB-5 investment? In short, what are the key questions to ask?
While no single regional centre holds a magic key, the track record of a regional centre should be an important factor in an investor’s decision. From the point of investment funding and filing an I-526 application until permanent residency (with repayment shortly before or thereafter), an investor these days takes what is typically at least a six-year journey in which he or she is counting on the experience, commitment and capacity of the regional centre to fulfil its obligations. The practical considerations resulting from this are as follows: Has the regional centre done this before? Have they failed in the past to achieve conditional or permanent residency status for their investors or failed to repay principal and what are the reasons for any rejections or payment shortfalls? Is EB-5 a program the regional centre managers do as a primary business or is it something they “offer” as they focus on other activities? Does the regional centre have any conflicts that may become an issue in representing its investors, if problems arise?
Regarding location, know that projects have succeeded and failed in both large cities and small, as well as in all different regions of the country. For full disclosure, Cleveland International Fund operates in the U.S. Midwest, and I often feel at a disadvantage as we compete with offerings for projects located in major U.S. cities or tourist destinations. These areas are obviously well-known, which can be a comfort to investors. I must also admit that most of these projects ultimately meet their investors’ objectives. However, the same can be said for well-structured offerings that come from regional centres located across the U.S. On average, offerings from areas outside major cities are smaller, which can be an advantage in that fewer EB-5 investors will need to be secured to meet project financing needs. Offerings from less well-known locations also often present stronger financial margins or the potential for a higher rate of return, in order to attract investor attention. More important than the city itself are the following questions: What is the experience and financial capacity of the project developer? While the city may be well-known, is the actual location of the project one in which an independent analysis has indicated it can succeed? Is the project too far ahead of where the market currently is or does it appear to be entering a market with supply growing faster than demonstrated demand?
As to the project itself, we know that the large majority of EB-5 projects are real estate related. There is a good reason for this given USCIS guidance on how job creation can be evidenced which favours real estate, as well as investor comfort stemming from the easy understanding of real estate security provisions such as mortgages, assignment of rents etc. Knowing this is the preferred EB-5 investment type, is there any single asset type better than the rest? Of course not, but here are some key questions to ask whether considering apartments, hotel, office retail or other: Is it clear where the EB-5 loan or equity (and it should be clear which form EB-5 is taking) is in a project’s capital stack? In other words how much other money needs to be repaid ahead of EB-5? Does the developer have a significant amount of its own funds “at risk” behind the EB-5 such that they are strongly motivated to see the EB-5 funds repaid? Almost all EB-5 loans are designed to be repaid in 5 to 7 years by sale of the project or refinancing of its debt. Therefore, are all loan maturities aligned so this can be easily accomplished? Does the developer/owner have experience in refinancing its properties and is there significant refinancing activity for the asset class in the local market?
Finally, as an overall observation, investors also need to be increasingly mindful of USCIS interpretation of EB-5 rules. For example, USCIS has caused considerable market uncertainty recently from their interpretation of what constitutes acceptable bridge financing to be repaid with EB-5 funds. This issue alone has stymied offerings because I-924 applications, previously assumed to be easily approved, are now facing possible denials with investor I-526 applications already filed. Of course, one way to avoid this pitfall is for investors to consider offerings in which an I-924 has already been approved. Where this is not possible, an investor is extremely well-served, as it relates to programme-related issues, by receiving guidance from an experienced EB-5 immigration counsel.