Due Diligence Process - Investment Highlights

Posted by Kurt Reuss on November 20, 2015

EB5 Diligence highlights twenty-three (23) deal terms in each due diligence report. Unfortunately, deal terms are what some people define as a due diligence checklist. As an example, earlier today I spoke with Reid Thomas (NES Financial) who’s currently in China and he told me that in speaking with local agents, he asked what they thought about due diligence. He said that from the agent’s point of view there seems to be three (3) major areas that due diligence covers.

Defining Due Diligence in EB-5

Posted by Kurt Reuss on November 20, 2015

Kurt:  In today's discussion, we're talking about what due diligence is in the EB5 context. That includes the procedures involved in performing due diligence, understanding the need for it and the benefits of due diligence.

To better define the EB5 due diligence concept, I've pulled a quote from an article written by Doug Hauer entitled “EB-5 Due Diligence Matters, Industry at Point of Inflection Regarding Securities Compliance”.

In the article Doug writes, "Pursuant to the Federal securities laws, an issuer and any parties acting for that issuer must exercise reasonable care in ensuring that the information given to the offerees and purchasers about a deal is complete and accurate."

"Due diligence is the process of ensuring, to the best of the investigator's ability that the statements, documents, and other information passing from the issuer to the purchasers are correct, and devoid of any false or misleading information to the same degree that the investigator would if evaluating his own property."

Greg, do you have any thoughts on Doug's definition?

The Need for More Checks and Balances in EB-5

Posted by Kurt Reuss on September 30, 2015

Something Doug Hauer mentioned in his article on this topic was that EB-5 issuers should consider involving a securities litigator on the offering team early on to be involved in the offering and through until the end. Ozzie, do you have an opinion about that? 

Ozzie Torres:That’s a very interesting suggestion. Of course, it can never hurt to have the experience of a securities litigator on the team. Sometimes these deals are budget driven and it's hard to even get a securities lawyer engaged. That aside, where the stakes are higher, and as these deals become bigger and more complex, I think there's going to be room for having counsel of that nature involved.

Rupy Cheema: It seems that some of the EB-5 project deals are really budget driven and there’s this notion of, "If can just put together a business plan, economic study and hire an attorney to draft a PPM,  then I can raise money.” I think there’s a lack of consideration of the fact that that’s just the beginning.  

Complexities of TEA Designations

Posted by Kurt Reuss on September 28, 2015


Rupy Cheema.: What should we look for when reviewing a TEA (targeted employment area) letter?

Michael Kester.: As an economist, when reviewing the project to see if it’s TEA eligible, especially since it is such a make or break issue, it’s very important that we see that the TEA letter is current. USCIS has specifically mentioned outdated TEA letters as being a persistent problem with applications, so that’s the very first thing we check and recommend that the project get an updated letter.

The TEA letter really comes into play at the time when the investor makes an investment and when the I-526 is filed. Where it becomes difficult is when you’re trying to figure out if your project is located within a TEA long before the investors come on board. We’ll look at the date, then we’ll look at the census tracts or census block groups that are listed in the letter and I’ll just plot them on a map myself just to make sure that they are actually contiguous.

What Are The Most Common RFEs Related to Economic Impact Studies?

Posted by Kurt Reuss on September 25, 2015

Rupy C.: What are the most common RFEs you’re seeing these days on economic studies?

Michael K.: The most common include the business plan and the econometric study not matching up, and it’s just kind of automatic that USCIS isn’t going to trust either document if the numbers aren’t matching. Another red flag is lack of support for the inputs that are being used in the economic model, and the lack of verification and support for construction expenditures and/or operational revenues. These seem to be some of the big ticket ones we’ve been seeing.

Kevin W.: I would agree with that. The majority of the RFEs comes down to the verification of the inputs, and then oftentimes there is confusion between different versions of the business plan and the economic studies. We see a little bit more lately on the year of the data (2007 v. 2010), but still that’s minor in comparison to the number of RFEs based on a lack of verification of inputs.

Review of Economic Models: RIMS II Discussion

Posted by Kurt Reuss on September 20, 2015

Michael, I had mentioned in the introduction that your firm uses RIMS II. Can you talk about the different economic models available to you and why you choose to use RIMS II?

Michael Kester: Kurt, as you mentioned, there are a number of models that are accepted under USCIS EB5, so if you’re looking at having an economic impact study done, it’ll likely be done in RIMS II, IMPLAN, REMI, REDYN and possibly even iRIMS, though I’m not sure if anyone has seen one of those studies or not. 

Due Diligence of Economic Impact Studies

Posted by Kurt Reuss on September 18, 2015


Rupy, as someone who performs due diligence on a regular basis, how do you approach due diligence of economic impact studies?

Rupy Cheema: We start off ensuring that the data in the economic impact study is consistent with the data in the rest of the project’s documents, i.e. the EB5 business plan, market feasibility study and the PPM. I don’t think I’ve ever looked at a project where we did not find inconsistencies between these four documents simply because the economic analysis happened at a certain point and then there’s different versions of documents floating around and the changes don’t get picked up. Those are some of the most common issues we find at the beginning of our review, just reconciling the discrepancies in the documents.

Related Party Disclosures in the PPM

Posted by Kurt Reuss on September 16, 2015

Kurt Reuss: Ozzie, to me the key issue in the Path America offering is the 'related party' aspect of the transaction. How do you deal with related-party disclosures in your PPMs?

Ozzie Torres: It is probably the central focus of the disclosure items. Of course, you want to disclose the project and the parties, and all of the material agreements. Clearly, you’ll find that related party disclosures are the most difficult and yet the most important aspects of disclosure, coupled with other conflicts of interest. You want to make sure that you don't bury these disclosures. 

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?

Is an EB5 Loan Monitor Important?

Posted by Kurt Reuss on June 10, 2015

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.