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Underwriting the NCE's loan to the JCE

Posted by Kurt Reuss on July 27, 2016

Examining EB5 Loan for Job creation

Lets explore how to structure, manage and monitor a deal so that investors are afforded significant protection against fraud.

Rupy Cheema: The first question we ask when looking at an offering is what is the NCE industry knowledge and experience? When I conduct a site visit and meet the NCE management, I want to better understand the manager’s experience with underwriting a loan or investment.

Do they understand the industry and the market they are investing in? Do they have access to the market data they need to prepare cash-flow models? Do they have an investment committee that ultimately makes the investment decisions?

When Do You Need A Broker Dealer in EB-5?

Posted by Kurt Reuss on July 14, 2016

Role of EB-5 Broker Dealer

Kurt: Lori, Could you give us your thoughts about the need for a broker-dealer in EB-5 transactions?

Lori: Since I'm the only person on the panel who doesn't work for a broker-dealer, hopefully I'm objective. Let me begin by saying that every deal is different and thus all the facts are different. Obviously, we take that into account when we advise participants in an EB5 offering what they need to do. Generally, however, we believe that participants, whether issuers or regional centers, could have a better outcome if they associate with a broker-dealer, especially in regard to the following topics:

Concurrent Reg S and Reg D Offerings

Posted by Kurt Reuss on June 17, 2016

EB5 Business plan

Kurt: Let's talk about what I find to be the most complicated part of 506(c) and squaring it with Reg S, and that is the issue of concurrent offerings. It seems to me that if you're trying to do a Reg D offering at the same time you're doing a Reg S offering, those two objectives compete with each other.

Let’s say you're doing a general solicitation under 506(c) and simultaniously under Reg S you can't have any contact with people in the US. How can you do a concurrent offering of both Reg S and Reg D?

Crowdfunding Defined Under Titles II, III and IV

Posted by Kurt Reuss on June 15, 2016

Kurt: When we look at crowdfunding in eb5 process; we're talking about three rules: Title II, Title III and Title IV.

Title IV, being Reg A+ investment offerings, requires you to register your securities with the SEC, so that's going to bring more responsibility on you.

Title III involves raising no more than $1 million.

So my sense is that Title II, Reg D - Rule 506(c) is probably most applicable to EB-5.

Managing Conflicts of Interest in EB-5

Posted by Kurt Reuss on May 05, 2016

Role of EB5 Broker Dealer

Scott: In dealing with conflicts of interest, investment advisors have a fiduciary duty to do what's in the best interest of their clients. The broker-dealers in the EB5 space has a suitability obligation to assess their clients’ financial circumstances and investment objectives, and here in the EB5 space that would include a desire to get a Green Card, in assessing what specifically is an appropriate investment for a registered broker-dealer to recommend.

I-526 Insurance; The Criteria and The Coverage

Posted by Kurt Reuss on April 18, 2016

I-526 Insurance under scope of EB 5 Visa process

Kurt Reuss: Marc, what criteria do you use to decide whether or not a project is coverable under your I-526 policy?

Marc DiFanti: When we look to underwrite these policies and do our due diligence, we really look at it from two standpoints.

First, of course, is the strength of the project. We look at the project as a whole and its viability and its likelihood of success and how it can work going forward.

Secondly we would look at the team that’s been put together. Do they have a great securities council? Do they have a great immigration counsel? Do they have a great regional center with a great track record in the EB-5 visa industry?

For example, we’d consider Bruce Rosetto from Greenberg Traurig as great; that is, he's somebody who’s been in this industry for a long time and he and his firm have handled a large number of EB5 projects. When we see team members like him, and a whole cohesive team that knows the industry and can handle these types of petitions and filings and understands all the work that goes into it, we realize that they're projects that we want to insure and projects that are likely to receive acceptance from us.

Kurt Reuss: That sounds like it could be a bit of a challenge to figure out who you want to enroll. Obviously, it comes down to the experience of the people involved.

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 EB5 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? My sense is that the immigration attorney typically acts as the quarterback on EB-5 offering package . How do you see your firm's role?

Martin: As precisely that; 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.

We usually have a kickoff call with everybody to assign tasks so everyone gets to know each other. Everybody will send out a questionnaire to the developer and we try to go through them so that there's not a lot of overlap. Then, we make sure that people are meeting their schedules to produce what they need.

The Importance of the Timeline in an EB-5 Business Plan

Posted by Kurt Reuss on March 14, 2016

Kurt: Sales and marketing, management profiles, expense and revenue projections. These are obviously important aspects to an EB-5 business plan.

It also seems that a timeline can be especially helpful to understand the timing of the jobs created as well as what happens as timelines adjust and how this impacts other parts of the plan.

Marge: Project timing is very important because it affects the timing of job creation. The project economist makes adjustments to revenue, essentially deflating revenue from project year dollars to the equivalent of those dollars in the year from which the multipliers they use for their analysis were published (in this example, 2010). If the timeline for the project shows that the business will open in November 2017, the economist deflates revenue by seven years to 2010 dollars before applying the multipliers.

Is a Feasibility Study a Requirement of 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 EB5 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: 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 EB5 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 EB5 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.