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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.

I-526 Insurance; Proper Disclosure is Critical

Posted by Kurt Reuss on April 20, 2016

Kurt Reuss: Proper disclosure is an important issue with this I-526 product, considering it is a new product with no claims paid to date. Doug, how do you approach a product like this, when developing disclosures in the PPM?

Doug Hauer: I think you have to be very careful to, in plain language, describe the mechanics of how this policy is actually working.

An investor who is reviewing the PPM should be able to review the section on the insurance and walk away with an understanding of how mechanically a policy would work and what kinds of claims would result in there being coverage and what kinds of claims would result in a denial of coverage.

I think the trap for an issuer or a regional center issuing a deal is that the term 'insurance' conveys a safety net, or a risk-free proposition. You have to be careful here if you're an attorney drafting a PPM for a client; you need to spell out in clear terms what the limitations are and what the parameters of the product are.

I think it would be important to alert investors, in a PPM, of the risks with this product.

One area that we see in these policies that leads to some confusion is how 'fraud' is defined. Fraud, in a securities law context, when you're talking about an issuer, can mean many different things.

It's going to be important to calibrate those disclosures, make them clear, put those disclosures in plain language, and ensure that all parties in a deal get protection through understanding what the limitations of the product are.

I-526 Insurance; The Criteria and The Coverage

Posted by Kurt Reuss on April 18, 2016

Kurt Reuss: Marc, what criteria do you use to decide whether or not a project is coverable under your I-526 policy?

Marc DiFanti: When we look to underwrite these policies and do our due diligence, we really look at it from two standpoints.

First, of course, is the strength of the project. We look at the project as a whole and its viability and its likelihood of success and how it can work going forward.

Secondly we would look at the team that’s been put together. Do they have a great securities council? Do they have a great immigration counsel? Do they have a great regional center with a great track record in the EB5 industry?

For example, we’d consider Bruce Rosetto from Greenberg Traurig as great; that is, he's somebody who’s been in this industry for a long time and he and his firm have handled a large number of EB5 projects. When we see team members like him, and a whole cohesive team that knows the industry and can handle these types of petitions and filings and understands all the work that goes into it, we realize that they're projects that we want to insure and projects that are likely to receive acceptance from us.

Kurt Reuss: That sounds like it could be a bit of a challenge to figure out who you want to enroll. Obviously, it comes down to the experience of the people involved.

The Importance of the Timeline in an EB-5 Business Plan

Posted by Kurt Reuss on March 14, 2016

Kurt: Sales and marketing, management profiles, expense and revenue projections. These are obviously important aspects to a business plan.

It also seems that a timeline can be especially helpful to understand the timing of the jobs created as well as what happens as timelines adjust and how this impacts other parts of the plan.

Marge: Project timing is very important because it affects the timing of job creation. The project economist makes adjustments to revenue, essentially deflating revenue from project year dollars to the equivalent of those dollars in the year from which the multipliers they use for their analysis were published (in this example, 2010). If the timeline for the project shows that the business will open in November 2017, the economist deflates revenue by seven years to 2010 dollars before applying the multipliers.

Is a Feasibility Study a Requirement of an EB-5 Business Plan?

Posted by Kurt Reuss on March 09, 2016

Kurt: Here is a brief summary of the items that go into a business plan:

  • Project description
  • Management's background
  • Description of the sources of funds, (i.e. whether a senior loan or equity).

Marge, how frequently are you provided a feasibility study as an aid to drafting the business plan and how important is it?

Marge: I probably see a feasibility study about 80% of the time if not more, and I think its very important to the business plan.

Not every developer wants to pay the cost for a feasibility study, but I think it adds a great deal of credibility to both the numbers you're trying to support in the business plan, as well as on the marketing side.

Using a company such as PKF Consulting or Colliers International, or another firm with brand presence adds credibility, both to the project and to the projections themselves.

Kurt: As I see it, without a feasibility study, you've got two problems. On the one hand, you could be underestimating your inputs, which means you aren't counting as many potential jobs in your business plan as you could and alternatively, you could be overestimating your inputs, which is probably going to be the bigger problem in the long run.

The Dual Purposes of an EB-5 Business Plan

Posted by Kurt Reuss on March 08, 2016

Kurt: The EB5 business plan has two purposes. First, you want to make sure your business plan is written to be I-526 compliant and ultimately approved by USCIS. Second, your plan needs to position your EB5 offering for marketing.

My belief is that everything you do in your business affects your brand and certainly this includes in a significant way, your business plan, which is given to investors as part of the offering. The plan is going to make an impression on investors and influence their decision of whether to participate. Obviously your business plan needs to recognize that reality while still being accurate.

Let's begin by discussing the I-526 approval aspects.

Martin, would you mind starting us off by talking a bit about ‘Matter of Ho’ issues?

Structural Weaknesses in Path America's Offering

Posted by Kurt Reuss on September 12, 2015

Kurt: As you’re no doubt aware, the SEC has made allegations against Path America. These allegations include the defendant’s misappropriations of $17.6 million of EB5 investor funds. Of that, it’s alleged that $2.5 million was spent on a personal residence, and other money was spent on various gambling expenses. It’s also alleged that a great deal of the money has been diverted to unrelated projects, which may threaten the green card petitions of EB5 investors. 

As an investor or an agent representing an investor, it's important that you be circumspect when evaluating projects where the entire enterprise is under the control of a single person, as it is in the case of Path America. Rupy, what are some of the weaknesses that you see in Path America’s transactional structure?

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