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Common EB-5 Investor Questions

Posted by Kurt Reuss on January 09, 2017

Q:  "I haven't paid taxes, individual or business, because my country of residence doesn't require it or it isn't customary. Is this a problem?"

A: Catharine: We normally tell clients if they can provide income tax returns, it’s great to do so. If they can't, it's not going to make or break their petition. 

We let them know that if USCIS sends a request for evidence (RFE) for copies of their income tax returns, they will need to either produce them or get a letter from an attorney in their country of residence stating the legal reason behind why they can't provide those tax returns.

I always request tax returns but I’ll still file a petition if I don't have them. 

  

Q: "When will I get my money back?"

A: Rupy: Often times an investor's understanding may be that their funds are being loaned to a project for five years so they can expect a return of their capital in five years.

Investors should understand that they are making an equity investment in the new commercial enterprise (NCE), and the NCE is making the loan.  So the return of capital is dependent on two outcomes, first the repayment of the loan by the JCE and second the liquidation of the NCE by the Manager.

EB-5 Due Diligence Checklist

Posted by Kurt Reuss on December 21, 2016

Making an investment of $500,000 - $1,000,000 in an EB-5 project that ultimately fails, jeopardizes both the investor’s funds and the U.S. residency of the investor’s family, therefore every investor would be wise to know as much as possible about the investments they’re considering.

What is due diligence?

Due diligence is an investigation of an investment prior to signing a contract. Due diligence contributes significantly to informed decision making by enhancing the amount and quality of information available to the investor allowing him or her to better understand the benefits and risks.

What is included in an EB-5 due diligence review?

Due diligence begins with a thorough analysis of the investment documents including the capital structure, project viability, exit strategy and job creation potential as it relates to the EB-5 program.

The due diligence review should also identify risk mitigation strategies that have been implemented by the Manager or General Partner to protect investors. These include use of a fund administrator to oversee all transfers of investor funds, and construction monitoring to ensure transfers to the Developer are in-line with construction progress.

Inferring that EB-5 due diligence firms are not independent and their findings can be procured is a red-herring, designed to maintain the status quo.

Posted by Rupy Cheema on August 30, 2016

CMB recently published a blog titled EB-5 Due Diligence - Third Party Websites: Considering one of the many independent EB-5 due diligence services? in which they dismiss the notion that investors are served by retaining a due diligence firm before selecting an EB-5 investment.

Costs of Supervising the NCE's Loan to the JCE

Posted by Kurt Reuss on August 12, 2016

 

There are a number of responsibilities involved in supervising the New Commercial Enterprise's (NCE’s) loan to the Job Creating Enterprise (JCE). What are the best practices for ensuring proper supervision and what are the potential issues that can arise?

David Appel: One common issue is when a project starts and there's no money in the budget for supervising and administering the loan to the JCE. 

In EB-5 Loan Administration is Critical

Posted by Kurt Reuss on July 13, 2016

I have always been a big proponent of loan administration as a key EB-5 best practice.

It is essential that for the integrity of the program, given the fact that most EB-5 capital is deployed in a loan model, that loan transaction more closely resemble a traditional loan. It is prudent to provide many of the protections seen in a traditional loan transaction to the EB-5 lending company and its investors.

Loan Administration Checklist

Posted by Kurt Reuss on July 12, 2016

The Manager of the NCE (EB-5 investors) should consider the following loan administration checklist. 

    1. Retain Independent Counsel. The loan documentation should be in accordance with industry standards and consider the EB-5 Immigration program's unique requirements.
    2. Undertake the same due diligence as a financial institution.  This includes obtaining a feasibility of current market conditions, appraisers, title reports and potentially title insurance, a survey, zoning and environmental reports.

Managing Conflicts of Interest in EB-5

Posted by Kurt Reuss on May 05, 2016

Scott: In dealing with conflicts of interest, investment advisors have a fiduciary duty to do what's in the best interest of their clients. The broker-dealers in the EB5 space has a suitability obligation to assess their clients’ financial circumstances and investment objectives, and here in the EB5 space that would include a desire to get a Green Card, in assessing what specifically is an appropriate investment for a registered broker-dealer to recommend.

Challenge of Valuing Equity Contributions When Self-Dealing

Posted by Kurt Reuss on May 03, 2016

Kurt: Robert, do you have a particular conflict of interest in EB5 that you think regional centers and attorneys should be careful of?

Robert: One which did occur to me is the interests of a party which sells something into the job-creation enterprise (JCE), like a land-owner which may be related to the developer or the regional center owners or the manager of the NCE or all of the above.

There's an important challenge to validate or confirm the value that is put on whatever it is that is being sold into the entity and to disclose who is getting paid for it.

Kurt: Does that need to be disclosed in a prominent way to say, "this is what I'm valuing my property at and this is the equity contribution I'm making to this deal"? Is that how you disclose that conflict?

Robert: Yes, and "this is how we came to that value which is tied to the land."

Should the Borrower of EB-5 Funds Review the PPM?

Posted by Kurt Reuss on December 01, 2015

Dawn Lurie: Rupy, say you have a borrower who is unrelated to the NCE or the lender, and they’re providing all the information for the business plan, which will go into the PPM.

What do you think about issuers who don't want the PPM reviewed by the borrower (JCE)? In other words, all the borrower gets to see is the loan agreement, but they don't get to look at what's in the PPM. What's your feeling about that?

Rupy Cheema: The borrower is the one providing information on the business plan which is part of the PPM, so they should be reviewing it, and the NCE should be making sure there are no material misstatements.

Dawn Lurie: Do you check on that? Is that one of your questions to see if that's been done?

Rupy Cheema: You know, that's not something we've questioned because in a lot of deals, especially the large construction projects, the borrower is very involved. But that's a good question.

Greg, from a securities point of view, do you have any thoughts about that?

Due Diligence: Project Financing and Use of Funds

Posted by Kurt Reuss on November 27, 2015

Rupy Cheema: A primary question of due diligence is how the project is going to be funded and whether the capital stack is complete. If the project will be funded in part by developer equity, we look into how much equity is being committed to the deal. Most agents we speak to are looking for a minimum of 30% developer equity.

That begs the question “where is that equity coming from?" and “Is it a cash contribution or is it an asset contribution?”   If the developer is contributing land, how are they arriving at the value of the land. Was there an appraisal done? Is the value assigned reasonable and thus is the developer really contributing 30% of the project cost? If the developer plans to contribute cash, at what stage will it be funded?  Is the developer providing an additional equity commitment in case the project needs more money or if the EB5 funding does not come in as anticipated.

Part of the project costs may be funded through a secured loan from a bank.  Having a senior lender in the deal brings both advantages and disadvantages to the NCE’s investment. The biggest disadvantage is that the NCE’s investment will likely have only junior or subordinate rights or perhaps no rights at all to the collateral and the biggest advantage is that the EB5 investors have an experienced party involved in the deal, one who is going to conduct its own due diligence. The senior lender will want to make sure that the construction budgets are reasonable and the environmental assessment is complete. They will also ensure that any conditions imposed have been satisfied prior to the disbursement of their loan.

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