Due diligence
Jun 10, 2015
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Kurt Reuss
Kurt Reuss
Kurt Reuss is a registered securities broker who has been specializing in EB-5 since 2012. He offers advice on investment structuring and market conditions related to EB-5 investments.

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Is an EB5 Loan Monitor Important?

How much risk do you associate to not having an EB5 loan disbursement monitor identified in the offering documents?

(Rupy Cheema): I consider it a huge risk, especially when the lender and developer (borrower) are the same party. I’ve seen multi-phased projects where infrastructure costs are shared by two projects but only one of the projects is being funded by EB-5, so there's clearly a lack of transparency with regard to how the EB-5 funds are being spent.  It is potentially a very big risk in conflict of interest situations.

(Rohit Kapuria): It is a huge immigration risk as well. At Klasko we have a robust I-829 and compliance practice and one of the key issues we stress to our developer clients is that compliance starts immediately following the filing of the first I-526 petition assuming prior job creating expenditures have not yet occurred.

Either way, no developer should be waiting until the I-829 stage to start thinking about these issues. 

Part of our practice, in coordination with administrative partners like NES Financial, is monitoring the loan and expenditure disbursement schedules because if we do not understand the draw packages from the start, it is going to be very difficult to try and tie them back to the prospective business plan and economic impact report produced at the I-526 stage. 

We do not want a situation, which we have faced a few times, where a client drops off 40 banker boxes full of draw packages and asks us to basically “have fun.” The bottom line is that it is very important that developers start that compliance early in the process.

(Kurt Reuss): I would imagine trying to do that two years down the road gets pretty expensive.

(Rohit): Oh yes, extremely expensive.

(Ronald Fieldstone):  There's a real need for regional centers to find someone to properly monitor loan disbursements. This could be an accounting firm or another service provider; someone who knows what they're doing, monitors all the expenditures and makes sure the reporting is done accurately, while coordinating with immigration counsel on a regular basis. 

This is one of the major responsibilities of an EB5 regional center, to ensure that the USCIS compliance is handled in order to get your I-829 approval. Somebody has to orchestrate that process all through the time period before the I-829 is filed.

(Rohit): Correct, that is part of the MOU that every regional center will sign with the NCE.

(Ronald):  Assuming they follow it.

(Rohit): We certainly hope they would comply with it.

(Ronald):  There are regional centers that are extraordinarily sophisticated and have the staff to deal with this issue but there are a lot of regional centers that don't have the staff or experience to deal with this.

(Michael Gibson):  I think that's exactly right. The traditional lenders will hire a lender consultant who's the exact specialist you just described, who will review every draw application, every AIA construction draw that the architect signs off on, and go through on a line item basis. Was this spent on concrete? Was this spent on structural steel? 

Allocating costs to each of those items seems to be what you would need as an EB5 lender, almost more so because again you want to be sure it's going towards costs that satisfy the job creation requirement. So consultants like that are very important and it should be in your loan agreement that you can hire a consultant as an EB5 lender which your borrower will pay for, because that would be typical as well.

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