Articles

Making an investment of $500,000 - $1,000,000 in one of the EB-5 projects 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 EB5 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 Immigrant Visa 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 the USA investor visa 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.

1. Real estate projects have advantages

Real estate construction projects require a substantial investment with abundant job creation that EB-5 investors can rely on.  EB-5 Regional center projects are allowed to count direct, indirect and induced jobs based on the construction budget so an economic study will determine how many total jobs will be created. One needs only spend the project budget to ensure jobs will be created. Compare this to investing in a business where job creation estimates are tied to operational revenue. It is much more common to miss revenue targets in a new business than coming in under budget on a construction project.

To obtain permanent residency status (i.e. a Green Card) through the United States Citizenship and Immigration Services (USCIS), the EB-5 investor must meet specific EB5 visa requirements.

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.

On Wednesday, March 8, 2017, the Judiciary Committee of the United States House of Representatives held hearings on the Department of Homeland Security (DHS) in reforming the Investor Visa program.

For those not familiar with U.S. legislation, rule-making through regulation is often utilized by agencies that oversee particular programs to implement changes that would not necessarily require a bill to be passed by the House and Senate on to the President. With that in mind, several areas of interest to both market participants and EB5 visa investors were discussed.

Several members acknowledged the importance and appreciation of the recent “Notice of proposed rulemaking” put forth by Jeh Johnson and DHS.

Comments related to Department of Homeland Security and Jeh Johnson 

The overall theme of the hearings was concern that the EB-5 program has “strayed further and further from Congress’ intent”, which is to attract high-net worth individuals to immigrate to the U.S., which has been determined by Congress to be in the national best interest, to attract entrepreneurial talent, and to create jobs especially in hard hit rural and depressed areas.

USCIS held a stakeholder meeting today (03/03/2017) in Washington, DC on EB-5 matters.  According to USCIS personnel, over 900 people registered to attend the stakeholder meeting, whether in-person or by telephone.

According to Rana Jazayerli and Bob Cornish of the Phillips Lytle law firm offices in Washington, DC, there were several major “take-aways” from this meeting of crucial importance to those involved in projects connected with EB-5:

• The May 30, 2013 USCIS Policy memorandum on EB-5, which explicitly stated that formal I-924 amendments are not required for a Regional Center to expand its geographic boundaries was represented by USCIS, to the surprise of many, as superseded by their new policy. This policy, effective December 23, 2016, states that any Regional Center wishing to sponsor a project outside of its geographic area must file a formal I-924 amendment application. Further, any I-526 petition filed by an investor based on such a project before USCIS approves the I-924 amendment will be denied on the grounds that it was not approvable when filed.

Some audience members expressly objected, stating that (a) USCIS did not provide adequate notice of this very significant change in policy, and (b) that the adverse impact on Regional Centers, developers and EB-5 investors that have already filed I-526 petitions may be severe. 

Reid: As an industry, we need to accept that integrity measures are coming and we should embrace them. Most of the proposed requirements are already best practices, so as an industry we should be selective about what we push back on.

We should accept and implement the provisions that are not unduly burdensome and focus our efforts on combating the parts of the bill that are truly problematic.

A lot of what we see in HR 5992 has been widely deployed by the industry already and that fact hasn’t been lost on USCIS. USCIS is proposing that the director have online access because they're aware that many projects currently have that capability.

Additionally, the scope of the Account Transparency requirement is relatively narrow compared to the overall lifecycle of an EB-5 investment. The legislation is somewhat vague, but it isn’t difficult to discern what the best practices are. I encourage the industry to get in front of these best practices so they don’t become legislated later.

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 EB5 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. 

Take an overview of EB-5 visa requirements

Kurt: In EB-5 from January 2013 to 2015, the SEC received over 100 tips, complaints and referrals related to possible securities fraud violations. As of May 2015, the SEC and other enforcement agencies had 35 open investigations primarily involving securities fraud in EB-5. In 2016, the SEC Office of Compliance Examination listed EB-5 as one of its annual Examination Priorities.

There's obviously a need for more control and transprarency of EB-5 investor funds and the Account Transparency Requirement (Section P of HR 5992) is an attempt to address that need.

Account Transparency rules come into effect as soon as the EB-5 investor’s money gets deposited into either an escrow account or into the NCE 's account, and its protections continue until the funds are released into the JCE's account or into the project.

Some of the items addressed in the bill include: eliminating co-mingling of investor funds; preventing the premature release of investor funds from escrow; ensuring that investor fund transfers are first approved by an independent signatory.

And if the NCE is affiliated with either the JCE or the EB5 regional center then the signatory's role continues until all funds have been deployed into the project.

Reid: It's important to look at what's driving this to understand the intended scope of the provision.

After reading Elliot Winer’s article, who is someone I've known for years, I thought I would share these docs (Edward Kennedy Letter, the first TEA Designation Letter) which we have kept since EB-5 was conceived as part of the Act in 1989-1990.

About a week ago, I was asked by an EB-5 practitioner why I thought EB-5 TEA methods had slipped into using census-shared or, excuse the expression, "gerrymandered" Census Tract arrays?  I told this fellow that Massachusetts and the INS (USCIS) had allowed this technique from before the Industry was accepted or recognized as a viable financial alternative by the investment community.

It looks like we in Massachusetts elongated (again, “gerrymandered") the Census Tract array from the very beginning for very good reasons. We did this in Boston in 1991.

Please notice the letter from Senator Ted Kennedy (who introduced the Act for consideration in 1989) showing the makeup of the 1991 Senate Judiciary Committee! It seems to show that Senators Grassley and Leahy, and other notables, were at least aware of the genesis of Senator Kennedy's legislative interest in the EB5 Program. We were also there; we're old!