Our due diligence process
EB-5 industry news is filled with stories of failed projects and fraud. Due diligence is thus a necessary part of the investment process, and leads to more informed decisions and can lead to immigration success and the full return of capital.
Work with an expert who knows what to look for, what questions to ask, and what determinations to make. This is who we are and what we do.
The following overview includes some of the key areas we review as part of the scope of our services.
STARTING POINT: EB-5 program requirements
In order to determine whether the investment structure meets the EB 5 visa requirements, we review the following key documents:
- Offering memorandum (PPM)
- Business plan
- Economic impact analysis
- Operating or limited partnership agreement
- EB-5 loan agreement
- TEA Designation Letter
- EB5 Regional Center Designation Letter
We attempt to determine the following:
- The business plan is credible and Matter of Ho compliant with reasonable financial projections.
- The EB-5 capital has been placed “at-risk,” and is likely to remain “at-risk” until the end of investor’s conditional residency period.
- Any bridge financing is temporary in nature.
- The EB-5 capital is being used for qualified expenditures related to job creation.
- Job creation is sufficient to meet the needs of all investors.
- Construction inputs are modeled correctly, are reasonable, and align with the investor’s timeline.
- There is third-party corroboration that the Project budget is consistent with industry standards, and that the construction timeline is reasonable.
- The investor’s role in the New Commercial Enterprise (NCE) meets the EB-5 visa requirements. The NCE is the EB 5 investment company.
- There are no guarantees of return of capital.
- TEA designation is appropriate.
- Regional Center designation includes the project’s geographic area.
LIKELIHOOD OF PROJECT COMPLETION & JOB CREATION
As job creation is a key requirement of the EB-5 program, we seek answers to the following questions regarding the job-creating project to be funded by EB-5 capital (Project):
- Is the required funding in place or likely to be in place for completion of the Project?
- How will the Project be funded if EB-5 financing is not fully procured?
- Has the Project received all non-EB-5 funding commitments?
- Does the Project developer control the Project site through ownership or a lease agreement?
- Has the Project budget been finalized and a guaranteed maximum-price contract executed with the general contractor, so that the Project budget is not likely to increase as the Project moves forward?
- Does our review of the Project’s budget and the to-date expenditures confirm that the EB5 Project is progressing as expected?
- Do construction status reports reveal that delays have occurred, and if so why?
- Has the Project received all necessary approvals to commence construction?
- Does the EB-5 loan agreement require a completion guarantee, and what remedies are available in the event of the Project developer failing to complete the Project?
- Does the Project developer have industry experience to execute the business plan?
- Are the required jobs being created through construction or operations, or a combination of the two?
- Are the projected jobs sufficient to meet job creation requirements of all EB-5 investors with a reasonable job cushion?
INVESTOR FUND PROTECTIONS
Almost all cases of fraud in EB-5 have one common element: lack of transparency. Therefore, we analyze whether the interacting EB5 companies — the Regional Center, NCE, and Job Creating Entity (JCE) — are under common control. Conflicts of interest can be effectively mitigated through the proper use of third-party fiduciaries. In evaluating conflicts of interest and the role of third-party fiduciaries, we review the following documents:
- Ownership structure of NCE and JCE
- Subscription agreement
- Escrow agreement
- Fund Administration agreement
- Any other third-party agreements
Our review includes the following:
- Escrow release conditions to determine whether eb5 investment funds are held in escrow, and the terms pertaining to release from escrow to the NCE.
- Prepayment clauses applicable in events where EB-5 investor funds are released prior to Project approval or I-526 approval, and whether investor funds will be refunded in the event of Project or I-526 denial.
- Any I-526 refund-guarantee language and financial statements of guarantor to ensure funds are available in the event of a denial.
- Engagement of any third-party fund administrators, and whether the fund administrator will be a signor on the NCE’s bank account.
- Engagement of any third-party construction monitor who is responsible to confirm construction completion and to authorize the release of funds by the Eb 5 investment company to the Project developer.
- Facts related to an event of default, to understand who will enforce the default and whether a third-party loan administrator will represent the interests of EB-5 investors.
In order to ascertain the rights and remedies of the EB-5 investors and obligations of the Manager/General Partner of the NCE, we review the following items:
- The form and frequency of reporting provided to investors
- Annual audits (if available)
- Conditions related to reinvestment of funds
- Conditions and process necessary to replace the Manager/General Partner
- Matters that require investor voting
- Frequency of payments related to return on investment (ROI)
- Triggers that might cause the liquidation of the NCE
- Guarantees of return of capital that might violate the EB-5 Program’s at-risk requirement
- How offering expenses and operating expenses are paid
- Whether a reserve for extraordinary expenses exists
- Whether the NCE’s management fee is guaranteed, thereby obligating the NCE to pay the Manager regardless of the success of the EB-5 investment
- Whether the NCE been duly organized and remains in good standing
SECURITY INTERESTS & DEFAULT CONDITIONS
Deals can fail. The rights and remedies available to the NCE will vary from project to project depending on the structure of the EB-5 investment.
We therefore review the following:
- The organizational chart, to understand the relationship between the borrower entity and the EB 5 project entity, the holder of the assets. If the EB-5 loan is not being directly made to the Project entity, we determine what steps would be required to enforce default in order for investors to get access to the Project’s assets.
- Whether the EB-5 loan is secured or unsecured (whether the EB-5 loan will have a lien on the Project’s assets, which should be recorded).
- Whether a senior loan has been concluded, and whether consent has been received from the senior lender. If the senior loan has not yet been concluded, the senior lender may not consent to the terms that have been offered in the EB-5 loan. We review the intercreditor agreement to determine what remedies are available to the EB-5 lender in case of default.
In evaluating the feasibility of a Project, we review the following documents:
- The market feasibility report
- Cash flow projections
- Construction cash flow schedule
The review seeks to determine:
- Are the assumptions used in the construction cash flow schedule reasonable?
- Are the contingency reserves reasonable?
- Is there an interest reserve to pay interest expenses to all lenders during the construction period?
- Are the assumptions used in projecting revenue and expenses reasonable?
- Is the projected valuation of the Project sufficient to refinance the senior loan and the EB-5 loan upon maturity?
- Is the value of Project sufficient if the net operating income is reduced by 10-30% (sensitivity analysis) by adjusting factors such as occupancy rates, average daily rates, key expenses, and net operating income?
REGIONAL CENTER REVIEW
Some basic reviews include the EB5 Regional Center designation letter, the ownership structure of the Regional Center, and the most recent I-924A filed. We need to ensure the following:
- That the Regional Center entity is duly organized, and remains in good standing.
- That the Regional Center received approval for the Project’s geographic scope.
- That the most recent Form I-924A filed lists the Projects sponsored by the Regional Center, any I-526 approvals, any I-829 approvals, and the number of jobs created by each sponsored Project.
- That the Regional Center has appropriate written policies and procedures, in cases where the Regional Center is unaffiliated with the issuer for the EB-5 offering.
EVALUATION OF THE NCE’S BACKGROUND & PROJECT MANAGEMENT
We perform searches on the persons and entities involved in the NCE, JCE, and Project, read Project news or press releases available, and review local government websites to confirm approval of the Project. Our searches can identify any pending litigation or resistance to the Project by local authorities or neighbours.
VISITING THE PROJECT SITE
When making site visits, we arrange to meet with management of the Project developer and the NCE in order to evaluate the following:
- The current condition of the Project site and the surrounding demand generators
- Whether the NCE has sufficient expertise and staff to manage investor funds
- Project management motivations for using EB-5 funds, and future plans for the Project
- Any questions that may have arisen from our review to date
DUE DILIGENCE IS A MOVING TARGET
Due diligence can only provide a snapshot in time. Continual updates are necessary throughout the capital raise and the lifecycle of the Project. Our scores for Likelihood of Immigration Success and Likelihood of Financial Success are subject to constant updating as construction progresses, key agreements are executed, project or I-526 petition approvals are obtained, and unforeseen problems occur.
CONCLUSION: DON’T TAKE CHANCES WITH YOUR GREEN CARD DREAM & YOUR CAPITAL — ONLY INVEST WITH DUE DILIGENCE
EB-5 due diligence targets investment characteristics that can affect EB-5 investor goals: a permanent Green Card and timely return of invested capital. We consider these characteristics particularly material to likelihood of immigration and financial success:
- A viable business plan
- Experienced management in both the NCE and JCE.
- Mitigation for conflicts of interests.
- Updates throughout the lifecycle of the investments.
Whether you’re working alone or with an EB5 broker dealer, ensure your investment selection process is guided by due diligence before you start the EB5 application process. Your dream of a Green Card and financial well-being deserve it.