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EB-5 Source of Funds for EB-5 investment visa

Posted by Kurt Reuss on May 07, 2016

EB-5 source of funds

A primary requirement to apply for an EB 5 visa is an initial investment in a new commercial enterprise. That investment must be $500,000 (USD) in a Targeted Employment Area or else $1 million. Proving the primary source and path of these funds, therefore, is vital to the EB-5 application. As per United States Citizenship and Immigration Services (USCIS) EB5 visa requirements, investors must provide appropriate documentation to show EB5 investment funds have been obtained or earned through lawful means.

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.

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: 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.