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Financial Risk Due Diligence Regarding EB-5 Projects

 Due Diligence for Immigration Risks in the EB-5 Regional Center Project

A foreign investor contemplating investing in an EB-5 regional center-sponsored project must consider two forms of risk:

Immigration risk of obtaining a permanent green card, and financial risk of receiving their $800,000 or $1,050,000 investment back at the end of the investment term, or receiving the initial capital contribution back along with any administrative fees as soon as possible in the event of an I-526 denial.

This essay examines the immigration risk of EB-5 regional center investments. Please see EB-5 Project Financial Risk Due Diligence for further information on the examination of EB-5 project financial risks.


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Due Diligence on EB-5 Project Immigration Risk

Is there a backup plan in place if not all of the planned EB-5 money cannot be obtained? This is the single most critical question to ask when assessing immigration risk.

From an immigration standpoint, the most secure projects are those that will still be finished in the case of an EB-5 deficit. This can take the shape of an initial bridge loan or having extra equity/other finance sources as a fallback option. This may seem contradictory, but the single most critical project concern for an EB-5 investor (and the greatest method to limit immigration risk) is whether or not the project can be finished without the entire amount of EB-5 funding.

From an immigration standpoint, the most secure projects are those that can be built and run even if there is an EB-5 deficiency.

When assessing a proposed EB-5 project, just two immigration questions matter:

Will the project be completed?

The fact that the

Developer capital is irreversibly committed, a senior loan has been completed with a major bank, a construction completion guarantee has been executed from the parent corporation, and the project is well underway.

Will the requisite number of employment be generated after the project is completed?

The factors that truly matter in this circumstance are

the number of jobs produced by construction alone, the size of the job cushion created by construction alone, and the total construction cost spent to date when EB-5 investor funding joins the project

If the answer to the two questions above is unequivocally affirmative, then the investor’s immigration risk in the EB-5 project has been adequately mitigated.

How can an investor locate a project that replies “yes” to those two questions? Let’s go down each of the questions and decide what has to be true for each to be labeled a definite “yes.”

Will the project be completed?

The core of this concern is if the project is developed as described and planned in the EB-5 compliant business plan. This indicates that the project’s capital budget is met, there are no severe construction delays, and there are no cost gaps or overruns.

If a project has identified opportunities for full capitalization and alternatives (even if much more expensive) to EB-5 finance, the immigration risk of the project not being completed is reduced.

Consider a $100 million hotel project in which the developer has committed to investing $30 million in cash equity and has obtained a senior bank loan for the remaining $70 million. Assume that the senior loan can only be performed if $30 million in total developer equity plus EB-5 investment has been committed to the project. If the developer is seeking $15 million in EB-5 finance and has $15 million in equity in the project, the sponsor might execute the senior loan when $30 million in cash is available. The developer could either I wait for EB-5 funding, (ii) utilize a bridge loan for $15 million, or (iii) use bridge equity that will be recapped once EB-5 funding is discovered.

If the developer intends to proceed in all three of the above scenarios, regardless of how many EB-5 investors enter the project (one investor or the maximum 17 needed to reach $15 million), the project has sufficient capital for completion, and thus success is not determined by how much EB-5 capital (or how many EB-5 investors) is found for the project. If the project goes forward without the entire amount of EB-5 money, it might greatly impede the developer’s ability to complete their next project if they had to over-commit on the projected equity, but from an immigration standpoint, the project will still be completed.

This is a critical issue since the EB-5 market is extremely competitive now, with few projects achieving full subscription rapidly (i.e., find the target number of EB-5 investors within the expected fundraise time frame).

Will the requisite number of employment be generated after the project is completed?

The key to this question is employment creation. Many initiatives calculate employment creation as a mix of construction and operations costs. The most secure projects are those in which the employment generation from construction expenses alone provides several times the needed number of jobs per investment. To limit immigration risk even further, investors can look for projects that are already under construction and have very substantial job cushions.

Consider the $100 million hotel project from before. Assume that this project generates a total of 1,200 EB-5 compliant employment, of which 1,000 are related to construction expenses and 200 to operation income (once the hotel is open). If the hotel costs $100 million, that implies that once $50 million has been spent on construction, nearly half of the employment have been produced; in this example, 500 jobs. The project requires just 170 employment since it has no more than 17 EB-5 investors and must produce 10 jobs each EB-5 investor. The project provides 1,000 jobs only from construction, giving it a 588 percent job cushion. This degree of job cushion is particularly appealing to EB-5 investors since it signifies the project has a significantly reduced immigration risk.

If an EB-5 investor invests in this property midway through the building term, the EB-5 investor’s immigration risk is effectively erased. Why is this the case? Once the project is half-finished, around $50 million will have been spent on construction costs, resulting in the creation of approximately 500 of the 1,000 jobs. Because just 170 jobs are necessary for 17 EB-5 investors to obtain green cards, the project still has a 294 percent job cushion even if work was halted and the project was never completed after the EB-5 investors entered the project midway.

Assume, for example, if all 17 EB-5 investors invested a total of $15 million in EB-5 money into the hotel project midway through development. Then, the next week, an earthquake struck the region, and the whole hotel site was swallowed up by a sinkhole, rendering the property uninhabitable. In this situation, despite the fact that the project was not finished successfully, all 17 EB-5 investors would still have their I-526 and I-829 petitions accepted because the project did produce the 10 needed employment per investment. The project does not need to be completed successfully for EB-5 investors to get their I-526 and I-829 petitions granted as long as the job criterion is satisfied.

From an immigration standpoint, the safest feasible EB-5 project is one in which the mandatory EB-5 job creation for all EB-5 investors in the project has already occurred when the first EB-5 investor enters the project.

This sort of project is not unusual in today’s market, and EB-5 investors should ask all of the aforementioned questions to assess whether a project genuinely satisfies these requirements.

The bad news is that EB-5 investors should exercise caution.

Almost every EB-5 project agent will assure potential EB-5 investors that the project being offered will happen regardless of how many EB-5 investors enter into the project and that any level of job cushion makes a project safe. The reality, however, is that the devil is in the details: most of these projects are misleading investors by including exceptions in their project documents that either allow other types of financing to come in senior to EB-5 capital if there is a shortfall or allow the EB-5 loan to be cancelled if a certain capital threshold is not met.

Other typical phrases include escrow release provisions, which require a particular level of capital before money may be released. If the goal capital raising is not met, the EB-5 investors who did contribute face many years of delays and potential financial loss. The fact is that many of these “shortfall obligations” are not truly enforceable from third-party lenders, and many project developers do not want to commit to taking in EB-5 money unless it is for a specific sum within a specific timeframe.

Investors should always do extensive due diligence on the EB-5 projects given to them and utilize this framework as a starting point to screen out and avoid higher risk EB-5 projects.

Is there any employment cushion included in the project (just construction jobs)?

The project must produce at least 10 employment (indirect, direct, and induced) for every EB-5 investor. The bigger the job buffer, the safer the project. Projects are exceptionally safe when the minimum ten jobs can be met only via construction expenditures and do not require any operating employment. Many projects on the market today have an employment cushion of at least 20%, but investors aiming to reduce immigration risk should aim for a work cushion of 100% or higher.

When will the EB-5 job creation occur?

USCIS regulations demand that project employment creation take place after the EB-5 investment is made and within 2.5 years of the investor’s I-526 Petition being approved. If the project does to produce the requisite number of jobs within the time frame specified, EB-5 investors risk losing their conditional permanent residence status at the I-829 stage of the EB-5 process.

The USCIS has released a policy memorandum stating that bridge finance (equity or debt) in the project prior to the entry of EB-5 capital can be considered toward the total job creation calculation of the project. This implies that even if a project began building before EB-5 funding was contributed, all construction expenses and related jobs from the commencement of construction can be included against the EB-5 criterion of 10 jobs per investment.

Is the project pre-approved by USCIS (I-924 project exemplar)?

Investors submitting I-526 applications should inquire whether the project has been preapproved by USCIS as a project exemplar. However, because the processing period for a project exemplar can be 12–16 months, this application is frequently still pending with USCIS when investors submit their I-526 Petitions. Since submitting a project exemplar is not necessary (though it is recommended), investors should clarify with the project sponsor that a project exemplar application has been filed to USCIS and that a receipt notification can be supplied as evidence. If a project is a USCIS-approved exemplar or an individual I-526 has been authorized by USCIS, the project has successfully satisfied the USCIS requirements for the EB-5 program, and all future investors and I-526 applications should be granted (usually at an expedited rate).

Is the project in an officially recognized targeted employment area (TEA)?

Answering this question is crucial for evaluating whether the EB-5 investment would qualify as a $800,000 investment rather than the normal $1,050,000. Targeted employment area (TEA) designation must be provided by USCIS at the time of I-526 or I-924 project exemplar submission(s) to USCIS.

Is there an EB-5/Matter of Ho–compliant business strategy for the project?

One of the most basic EB-5 criteria is that the business plan be Matter of Ho compliant. The important assessment here is whether the business plan fits the standards of the EB-5 Immigrant Investor Program in terms of job creation, the amount of EB-5 money, and the key assumptions made for the successful growth and management of the enterprise in issue.

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