EB-5 business plan process, from start to offering

Posted by Kurt Reuss on March 22, 2016

Kurt: How long does it take from the time someone wants to start putting an EB-5 investment projects together, to completing it and being ready to take the offering to market?

Lets say from the time they meet with an immigration attorney to the time they should expect to have completed putting together the offering package?

Martin, could you walk us through the process? How do you see your firm's role?

Martin: We're the quarterback. We pull together a team which we think will be suitable for the project. That team might include a business plan writer, an economist and a securities lawyer. We also work with the client, their accountant and their business lawyer.

Is a feasibility study required for an EB-5 business plan?

Posted by Kurt Reuss on March 09, 2016

Kurt: Here is a brief summary of the items that go into a business plan:

  • Project description
  • Management's background
  • Description of the EB-5 sources of funds, (i.e. whether a senior loan or equity).

Marge, how frequently are you provided a feasibility study as an aid to drafting the business plan and how important is it?

Marge: I probably see a feasibility study about 80% of the time if not more, and I think its very important to the business plan.

Not every developer wants to pay the cost for a feasibility study, but I think it adds a great deal of credibility to both the numbers you're trying to support in the business plan, as well as on the marketing side.

Using a company such as PKF Consulting or Colliers International, or another firm with brand presence adds credibility, both to the project and to the projections themselves.

Kurt: As I see it, without a feasibility study, you've got two problems. On the one hand, you could be underestimating your inputs, which means you aren't counting as many potential jobs in your business plan as you could and alternatively, you could be overestimating your inputs, which is probably going to be the bigger problem in the long run.

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.

When should the PPM investment documents be amended and do existing members need to sign-off on the changes?

Posted by Kurt Reuss on March 17, 2015

PPM Investment document amendments

John Tishler: During our pre-webinar conference call today the panelists all agreed that an EB-5 project issue that comes up frequently in our deals is whether it is appropriate to amend the PPM for every 'material change’ that arises. You certainly have to think about amending the PPM whenever there is any change at all to what’s going on with the deal and what’s been disclosed in your offering documents.

Remember that while you may have finished the documents in March and they’ve been put out into the market, and they were as good as you possibly could make them in March, by the time September rolls around there’s been six months of the world turning and it’s fairly likely that something has changed. 

What is the impact of a 'material change' to current and future investors?

Posted by Kurt Reuss on March 14, 2015

Material Change Under PPM

This question was submitted by Rohit Turkhud of Fakhoury Law Group.

In general, the issuer of securities can be found liable for any omission of material fact or misleading statement of material fact.  This is the Rule 10b-5, often called the “anti-fraud” rule. This standard is measured at the time of each offer and sale of securities. In EB-5, the offers and sales typically take place over time -- sometimes over a year or more.

Accordingly, for sales that take place weeks or months after a PPM is finalized, an issuer can be held accountable for failure to disclose material changes or updates since the date the PPM was finalized, even if the PPM was correct in all material respects at the date it was released.  Issuers must continually monitor their project and consider whether any changes require an update to the offering materials so that the issuer can meet the Rule 10b-5 standard. 

The PPM's role in marketing

Posted by Kurt Reuss on March 13, 2015

Usefulness of Private Placement Memorandum (PPM)

Julian Montero: The Private Placement Memorandum (PPM) is the starting point for us when we’re with a client preparing the framework of their deal. We emphasis to our clients that the PPM is perhaps the most significant marketing document that they will have with respect to their project.

It is what the agents will be touching; it is what the investors will be touching; and it will be seen by the marketplace.

As critical as the disclosures are in defining the risk factors, the document has to be useful and it can’t be a race to the bottom in terms of putting all the nasty possibilities out there so that you can limit your potential exposure. You need to make sure that this document is useful and we are regularly in touch with the marketplace, in particular the agents that are driving the process in our industry which tends to be ‘China-centric’.

The 'Reasonable Investor Standard'

Posted by Kurt Reuss on March 11, 2015

The definition of 'material information' is what a reasonable investor would consider important in the total mix of investment information, so attorneys and their issuer clients need to make judgements about whether something has been omitted or whether something was misleading in the context of the total mix of information provided to potential investors. 

It’s important to remember that the test is what a reasonable investor, not a particular idiosyncratic investor would think is important. For example, imagine that you have an investor in a foreign country that is considering an investment in a hotel and she is really attracted to the lobby that is shown painted blue; she loves the picture on the front cover of the PPM showing that the lobby is painted blue. And the investor says to her agent "You know what, blue is a good luck color to me and that’s why I really like this project, because the lobby is going to be blue."

Now assume she invests in the project and it turns out that the sponsor had already planned to change the lobby color to yellow before the offering was launched. Would that investor have a claim by saying, "Hey, this was an incredibly material fact to me. I only invested because the lobby was going to be blue and it turns out it was never going to be blue". I think it would be pretty easy to conclude, based on the reasonable investor standard that no, this investor would not have a claim.

While we can accept that a particular investor might care about the lobby color, a reasonable investor would not care about that fact. 

On the flip-side, which is more important, is when someone believes that a particular investor would not care about something. That person might be right, but that is not the legal standard that the issuer will be judged against.