EB-5 DUE DILIGENCE TIPS

Suggested Questions to Ask a Regional Center

There are three types of EB-5 projects: regional center-based projects, direct EB-5 projects and pooled investment projects. Below is some guidance an investor should consider as s/he contemplates an EB-5 investment.

Investor Profile & EB-5 Involvement

In a direct EB-5 investment, the investor is:

  1. keen on starting and/or managing a business;
  2. motivated to actively control the investment and make day-to-day decisions on the project;
  3. usually interested in residing in the area where the investment will be made.

In the regional center or pooled EB-5 options, the investor usually is passive and has doesn’t desire to run a business. While the investor may invest in a project in one part of the United States, s/he may reside in a different state altogether. Often, the investor maintains other businesses outside of the United States and spends a lot of time traveling. Profit maximization is generally not a top priority because the rate of return is often lower than in the direct EB-5 context. While they are not entrepreneurial, regional center-based projects usually provide the fastest and most secure exits.

(9 Tips for EB-5 Project Selection)

Timing

The major upside todirect EB-5 is that I-526 processing times are often much faster (as little as 2-6 months). However, larger developers are now exploring direct deals and processing times may, in fact, be impacted in the future.

On the regional center side, the current I-526 processing time is roughly 18 months (sometimes even longer) for the first investor. Theoretically, if USCIS approves the first investor within the 18-month timeframe, the remaining investor approvals should come faster since USCIS will primarily be focused on the source and path of funds for each investor. Although there is no consistency on this point, in larger projects, this may be an incentive for the later investors.

The processing times for pooled investments are somewhere in between the two paths.

Job Creation

A majority of the large EB-5 deals tend to be structured under the auspices of a regional center because the job count is much higher. That is because, regional center projects, can also count projected indirect and induced employment as well as direct employment.

Due Diligence

Suggested questions when conducting due diligence (please note that this list is not comprehensive, but merely includes suggestions by the author).

  1. Has the regional center (“RC”) actually been designated by USCIS?

Of course, just because the regional center has an approved designation does not mean that USCIS has approved the project (unless it is an exemplar-approved project). At the same time, keep in mind that some regional centers participate in “soft” marketing while the regional center designation is pending.

  1. Regional Center’s track record

Focus on the track record of the regional center, particularly its I-526 and I-829 approval rate.

  1. How long has the regional center been operational and how many projects has it sponsored?

Obviously, the more successful projects the regional center or developer has completed, the more confidence you can have.

  1. Consider the reputation of the project developer

Ultimately, the investor’s fate is in the developer’s hands. Therefore, the investor should research the development team’s experience and background and be on look-out for any red flags.

  1. Consider the reputation and experience of the project developer’s outside counsel and consultants

You should consider the track record of the immigration or securities lawyer, as well as the economist you hire to design the deal.

  1. Determine whether the project has been pre-approved by USCIS

Project approval is a very good sign.

  1. Determine whether the project will be developed in a Targeted Employment Area (“TEA”)

This will be necessary to determine whether the required investment is $900,000 or $1.8 million.

  1. Determine how the EB-5 funds will be released to the project

Some investors would prefer that their funds remain in escrow until I-526 petitions receive approval. However, most developers are weary of this option because it would mean that the capital contributions necessary to develop the project would not be available for 16 to 20 months (2-12 months in the direct or pooled investment context).

  1. If the I-526 is denied, when and how will the funds be returned to the investor?

The vast majority of EB-5 project developers return the full capital contribution as well as the administrative fee.

  1. Exit strategy

This is definitely a critical issue. There is never a guaranteed ROI on an EB-5 investment.The law requires that the investment must remain “at risk” until the I-829 petition is filed.

  1. Rate of return (ROI)

What is the return on investment?

  1. Is there a job cushion?

For each investment of either $900,000 or $1.8 million, the law requires that no fewer than 10 jobs must be created. If job creation is more than 10 per investor, that’s even better.Of course, if the job creation cushion is being created with impermissible or complicated job forecasts, it may not be a true cushion. See (m) below.

  1. When will the job creation occur?

Jobs must be created within 2.5 years after the I-526 petition is approved. For example, if the project proceeds with some form of bridge financing, the deal structure is critical to determining the job creation timeframe.

  1. What type of investment is being made with the investor’s funds and how are the jobs being created?

The investor should retain immigration counsel to advise on whether or not the job creation methodology will be acceptable to USCIS.

  1. What percentage of the total capital stack is comprised of EB-5 money?

Investors tend to prefer projects where the project developer is making a sizable contribution in the form of equity and/or additional financing.

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