EB 5 projects due diligence checklist

Posted by Kurt Reuss on August 14, 2019

Making an investment of $800,000 - $1,050,000 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 EB-5 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 EB-5 green card 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.

Loan Administration Checklist

Posted by Kurt Reuss on May 18, 2018

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.

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) EB-5 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. 

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 process 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.

Conflicts of interest in EB-5

Posted by Kurt Reuss on May 05, 2016

Scott: There are various kinds of conflicts of interest. The clearest in EB-5 is when an attorney represents the investor and either the regional center or developer.

As a securities attorney, I've focused my career on the securities space; just the idea of representing both the developer and the investor strikes me as difficult.

The number one problem I foresee is the conflict of interest provisions in the various attorney-disciplinary rules that are required to be complied with. Additionally, there are also conflicts of interest which have to be disclosed in the offering documents. The failure to disclose conflicts of interest could be considered to be fraud by various regulators like the Securities and Exchange Commission, when the information is considered to be material.

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 EB5 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?

EB5 Projects Due Diligence: Project Financing and Use of Funds

Posted by Kurt Reuss on November 27, 2015

EB5 Project Financing 

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 projects 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.

Due diligence on financial projections and exit strategy

Posted by Kurt Reuss on November 24, 2015

EB-5 Exit strategy

Kurt: When it comes to financial projections and exit strategy, how do you vet the numbers?

Rupy Cheema: A financial review starts with a review of the EB-5 project market feasibility report (if available). Most large deals have an extensive, say 200-page, market feasibility report prepared to help the developer assess the viability of the project. When we review a third-party report from an industry expert, what we're really looking into are the assumptions they're using and the competitive analysis, or the demand generators being used. We're looking for reasonableness and that income projections do not seem to be overstated and that expenses do not appear to be understated.

With small projects we might get a 5-page report prepared from a marketing firm or we may only receive internally prepared financial projections. In those cases we really have to do some independent research. We'll look for publicly available information or research reports, depending on the industry and the project. The bottom line is that if we don’t have a good market feasibility report to work with we tend to have to do a lot more digging.

The EB-5 market feasibility and appraisal will go into calculating the sale price of the project upon stabilization. We review the inputs being used such as capitalization rates to project the sales price and compare these to industry averages for similar projects.  The projected sale price of a project allows us to calculate the expected return for the equity holders. 

Most private equity holders expect to receive a 20% to 25% return on their investment.  If the numbers show that after all debt is paid off, the equity holders will earn an IRR of say 5%, this would be of concern because if the NCE is a preferred equity investor or an unsecured lender, there is a possibility that the developer does not have enough cushion to pay back the unsecured investors.