Is the Extensive Treasury Regulations Language in the NCE Agreement Relevant?
Rupy Cheema: We typically see operating agreements and partnership agreements go to great lengths talking about possible tax allocations and treasury regulations language and these provisions are very confusing unless you're a tax expert and I can't imagine the typical investor understanding what those provisions are saying.
Is this language relevant to EB-5 investors considering that in most cases investors are receiving 1/4% to 1% which is a trivial amount.
Robert Cornish: Those provisions are pretty important because they all relate to the investment vehicle as a partnership with flow-through tax treatment to the investors.
Things such as an incorporated business income tax and other provisions you'll see in the PPM's tax disclosures are actually quite important because those parameters in terms of how the fund runs and how management conducts its business has everything to do with the tax treatment that people are afforded in making the investments, not only from a federal standpoint but from a state standpoint as well.
This is particularly important if you're dealing with a California-based investment because of the franchise tax rules dealing with LLCs and things of that nature.
On the other hand, there are provisions in operating agreements and LP agreements where the manager will allocate costs to managers which are called 'cram-downs', where the manager will essentially stuff expenses and charge them back to an investor's interest. And those are certainly permissible under the tax code but you need to understand what that means to you as an investor.
Michael Homeier: To build on what Bob said, I'd point out that these provisions, you're going to see those in every operating agreement for an LLC, and every partnership agreement. They're not unique to EB-5 investment situations, in fact, quite the opposite, they're always contained in these documents including EB-5 documents.
It's another one of those situations where, as the SEC has been saying, there are no special securities laws for EB-5. These provisions are all completely standard in non-EB-5 investment and so there's no reason to exclude them for EB-5.
Rupy: Okay. So you're saying that an investor would be naive to assume that just because let's say the investor is getting a $500 income allocation per year, that they won’t get hit with other costs against their capital accounts, so they should really be having a tax advisor look at these provisions?
Michael: Yes. We always advice investors, when we communicate with them, that they should seek accounting support, legal support and investment support. Certainly if we're council for the other side of the table, the issuer, we're not in the position to advise them.
The EB5 project offering documents are typically light in their discussions about things like tax ramifications and to understand the consequences of provisions that are contained in these agreements it's really essential for the investors to understand them and in order to understand them and to get their own advisors, helping them with a view toward their personal individual situations.
