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Due Diligence: Financial Projections and Exit Strategy

Posted by Kurt Reuss on November 24, 2015

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 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 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.

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?

Multipliers: 2007 vs 2010 Inputs

Posted by Kurt Reuss on October 04, 2015

Rohit Kapuria:I’ve got a question for the economists regarding the issue of 2007 data versus 2010 data. Now that the BEA has indicated that they’re going to update the numbers later this year, and afterward the methodology they’re proposing, do you foresee a significant difference in terms of what the new data is going to be for job creation? From my perspective, 2007 has usually resulted in more jobs, but I have always been worried about a deal that uses 2007 data because, at this point it’s eight years old versus 2010 multipliers. For 2015, what are your expectations in terms of how that’s going to impact the job count?

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 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 by USCIS, 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 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. 

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