EB-5 Chinese Quota Retrogression: Analysis of Potential Impact and Recommended Solutions

By Wassem M. Amin, Esq., MBA

(Visit our Publications Page for a FREE PDF Download of this Article)

Over the past few years, the skyrocketing popularity of the EB-5 Immigrant Investor Visa program has fueled record demand from foreign investors.  The EB-5 Immigrant Visa allows foreign investors and their immediate family members to obtain permanent residency, providing an eventual path for citizenship, in exchange for a $500,000 to $1,000,000 investment in a job-creating enterprise.  The overwhelming majority of EB-5 foreign investors, over 80%, have come from China.  Allotted a maximum quota of 10,000 visas per year, the EB-5 Immigrant Visa is further subject to a numerical per country limit in the event that quota is met.   Known as “retrogression,” this limitation essentially works by creating a backlog in visa availability for immigrant investors from oversubscribed countries.

The U.S. Department of State cautioned in a December 2012 bulletin that projected demand of EB-5 Visas in that fiscal year may subject Chinese immigrant investors to retrogression.  Although that never came to fruition (not due to demand, but primarily caused by slow processing times), the Department of State renewed its caution alert again in December 2013.  Although the 10,000 visa-quota has never been met since the inception of the EB-5 Program, based on new statistics recently released by the United States Citizenship and Immigration Service (“USCIS”), it is now evident that the demand will surpass the available quota inevitably, perhaps as soon as this Fiscal Year 2015.  This no longer makes the likelihood of Chinese quota retrogression a question of “if,” but rather “when.”

The implications of Chinese quota retrogression are far-reaching and affect not only potential Chinese investors but the entire EB-5 industry, including Regional Centers, project developers, agents, and professional service providers such as attorneys.  This article will begin with a brief overview of the EB-5 program and how visa retrogression works.  It will then assess the potential ramifications of Chinese EB-5 visa retrogression for investors and the EB-5 industry.  Finally, it will propose solutions to alleviate the potential impact of Chinese quota retrogression on project developers and Regional Centers.

Background

In 1990, the U.S. Congress created the employment-based fifth preference (“EB-5”) immigrant visa category for immigrants who invest in and manage U.S. commercial enterprises that benefit the U.S. economy and create jobs. Allotted 10,000 immigrant visas annually, the EB-5 immigrant visa was designed to attract foreign direct investment into projects that would directly impact the economy, i.e., not merely passive investments.

Immigrant investors can apply for an EB-5 visa through two primary routes. The first route is through a direct investment into a qualifying “new commercial enterprise.” The second is through the Regional Center Pilot Program. The Regional Center Pilot Program allows USCIS to designate private or public entities as so-called Regional Centers to function as conduits or administrators of large or medium-scale projects funded, at least in part, by EB-5 investors. Regardless of which route is selected, the EB-5 Investor Visa allows foreign investors to obtain permanent residency in the United States conditioned upon an investment of a minimum of $1,000,000 (or $500,000 in a high unemployment or rural area) in a project which creates and sustains at least 10 full-time jobs for U.S. workers.

How Does Visa Retrogression Work?

Congress sets limits on the number of immigrant visas that can be issued each year. In order to adjust status to that of legal permanent resident, an immigrant visa must be available to the applicant both at the time of filing and at the time of adjudication. Visa retrogression occurs when more people apply for a visa in a particular category or country than there are visas available for that month. Retrogression typically occurs toward the end of the fiscal year as visa issuance approaches the annual category, or per-country limitations.  When an applicant files an immigrant petition, he or she is given a “priority date.”  The priority date is the date when the immigrant petition is properly filed with USCIS.  If, at the time of adjudication, an applicant’s priority date no longer meets the cut-off date published by the Department of State, due to retrogression, his or her case must be held in abeyance until a visa once again becomes available.

The EB-5 Program is allotted 10,000 annual immigrant visas.  However, that number is misleading because the quota counts an investor as well as  his beneficiaries, i.e.,if an average investor is married and has two children, the total number of visas counted towards the quota will be four.  In reality, the average number of actual EB-5 principal investors is around 3,000, substantially lower than the available quota.

Once that annual quota is met, the per country limitations on EB-5 visas will be imposed, creating a waitlist for applicants from oversubscribed countries.  Since Chinese applicants account for the substantial majority of EB-5 visas, they will be the ones directly impacted.  This backlog would essentially delay an investor’s ability to obtain an immigrant visa by a year or more, in addition to normal USCIS processing times for an I-526 (the Immigrant Investor Petition).  Therefore, if, for example, an I-526 petition normally takes 6-9 months, a backlog due to visa retrogression would extend processing times to an average of two years, if not more.

 What is the Likelihood of a Chinese Visa Retrogression?

In FY2013, 8,567 EB-5 visas were issued.  In the first two months of FY2014, over 6,700 EB-5 petitions are already pending with USCIS.  Absent Congressional action, the prospect of EB-5 petitions exceeding the annual 10,000 allotment is inevitable.  Once that quota is met, the per country limits will result in visa retrogression for Chinese investors, delaying their ability to obtain an immigrant visa by at least a year or more, in addition to the time it takes to process the I-526.

Potential Implications

In the long-term, the delay and complications of EB-5 processing will result in Chinese investors looking to other countries that actively compete for foreign investors, including Australia, Canada, and the United Kingdom.  Retrogression adds further strains on the EB-5 program which has already been plagued by extraordinarily slow processing times and delays by USCIS.  Faced with the prospect of waiting two or more years before being able to immigrate to the United States, a Chinese investor may decide to immigrate elsewhere.  Other countries will surely capitalize on visa retrogression to draw away potential investors.

In addition, the Chinese retrogression creates a significant conflict of interest between project developers, Chinese investors and immigration agents.  It also raises new ethical issues for an attorney representing the project developer or the Chinese investor.

From an investor’s perspective, an investor with children who are reaching the age of 21 may have incentives to delay the approval of the I-526 as long as possible.  Under the Child Status Protection Act (“CSPA”), commonly known as the “age-out provisions,” a child can immigrate as a beneficiary of a parent’s immigration application until he or she turns 21.  The CSPA freezes the age of children who are derivative beneficiaries of an I-526 petition while the petition is pending, but not once the petition is approved and awaiting the quota to become available for an immigrant visa.  This benefits a Chinese investor whose children are close to aging out.  Thus, it will be their benefit to delay the I-526 approval as long as possible.

From a Regional Center or project developer’s perspective, job creation projections and capital redemption timelines will be directly impacted by retrogression.  Capital redemption, or the investor’s exit strategy, is, essentially, the time period before which the investor can have his capital returned.  A protracted visa immigrant visa availability will tie up the investment money for a longer period of time.  Although that may seem like a benefit to the project developer, most current EB-5 investments provide for an exit strategy in which the developer sells or refinances the business, using the proceeds to repay investors.  A delay in visa availability will delay the developer’s ability to do so–since an investor cannot redeem capital before the approval of an I-829, which is the petition to remove conditions on investor’s permanent resident card.

Another potential implication is whether such a delay would impact the developer’s ability to access investor funds.  In a typical investment through a Regional Center, the investor’s capital is held in an escrow account until the approval of the I-526, at which point the funds are released to the developer.  Previously, an I-526 approval typically meant that the investor would be able to immigrate to the United States (or adjust their status) shortly thereafter because an immigrant visa was always available.  However, visa retrogression will delay that process by a significant period of time.  An investor, therefore, may dictate that the funds be held in escrow until a visa becomes available, not simply until the I-526 is approved.  Without alternate financing, this delay could essentially result in an inability to proceed with a project’s development and, ultimate failure.

From an attorney’s perspective, counsel for a Regional Center must recognize the additional securities disclosures that may result from visa retrogression.  Specifically, new risk factors for offering documents or Private Placement Memoranda would need to be disclosed.  Similarly, counsel for an investor would need to highlight the possible implications to their client.

Solutions and Proposals

Bridge Financing

However, the growth in EB-5 financing market has the creation of spurred specialized loan companies that address this very issue.  There are now several companies that provide specialized EB-5 bridge loans which allow a developer access to all or some of its anticipated capital.

Bridge or interim financing provides the opportunity for EB-5 project developers to take out short term financing to help construct and develop the project, then the EB-5 capital, as it is received, may replace that short term financing yet still receive credit for job creation by USCIS.

Moreover, in its latest Policy Memorandum, USCIS has specifically indicated that such financial arrangements are allowed in the EB-5 context.  In a May 20, 2013 Adjudications Policy Memorandum, USCIS stated, in pertinent part:

It is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation [arguably the main requirement of the EB-5 program] under the regulations….Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.

Tapping Alternative Markets

Prudent project developers and Regional Centers should hedge the risk of any impact a shortage in Chinese investors may cause.  Since over 80% of EB-5 investors are from China, even a small decrease in the number of investors may have an significant impact.  Creating an alternative pipeline of EB-5 investors from different regions is the key to ensuring continued and sustained growth in the EB-5 Program.

---

[1] Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Division of the American Bar Association.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently concentrates his practice on Corporate Law, Business Immigration and International Business Transactions.  He has advised countless Eb-5 Investors and assisted developers in structuring USCIS-compliant EB-5 Regional Centers as well as sourcing investors throughout the Middle East.  For more information, please visit the About Us page or request more information on our Contact Us page.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

EB-5 Regional Centers in Project Finance: Using EB-5 Capital in lieu of Mezzanine Financing

By Wassem M. Amin, Esq., MBA

The EB-5 program — which was created in 1990 but has grown in popularity only over the past few years — allows overseas investors to obtain a green card in exchange for providing a minimum of $500,000 in financing for qualified projects.  The explosive growth of the EB-5 program has caught the attention of real estate and project developers nationwide.  Developers have been using the program to establish so-called EB-5 Regional Centers, which are essentially entities, approved by the United States Citizenship and Immigration Service (“USCIS”) that allow a developer to raise capital from foreign immigrant investors for a specific project or projects.  The total capital raised per project has ranged from $1,000,000 to over $300,000,000.  As the use of EB-5 Regional Centers has expanded, the structure of EB-5 Regional Centers and underlying investments has also increased in complexity–which has allowed EB-5 capital to be used in increasingly diverse types of projects.

Of course, at the outset, it is critical to ensure that any contemplated EB-5 financing meet the stringent requirements set out by USCIS for the program.  The details of the program, and the differences between EB-5 financing through a Regional Center, are discussed in prior posts, here and here (each post includes downloadable PDFs, as well).

EB-5 Financing as an Alternative to Real Estate Mezzanine Capital

A potential, and increasingly popular, use of EB-5 funds in Real Estate finance is as a source of capital in lieu of traditional mezzanine loans.  In the context of real estate finance, mezzanine loans are typically used by developers as a source of supplementary financing for development projects.  Unlike a traditional mortgage, real estate mezzanine loans are collateralized by equity (such as stock or other ownership interest) in the development company rather than the property itself.  To account for the higher risk, lenders of mezzanine capital typically charge interest rates and fees that range between 12-20%, a substantial cost for the developer.

This is where EB-5 financing shines –  EB-5 cost of capital is one of the primary reasons the program has become very popular with developers.  EB-5 financing, whether structured in a debt or equity model (more on EB-5 financing structures, here), typically cost around 1-2%.  For example, in a debt model, an EB-5 loan from the foreign investor would carry an interest rate of 1%–significantly lower than traditional mortgage-backed loans, and exponentially lower than the cost of mezzanine financing.

EB-5 Financing as an Alternative to Mezzanine Capital in Leveraged Buyouts

In a leveraged buyout (“LBO”), mezzanine capital may be used in conjunction with other forms of financing and equity as part of the capital stack to fund the purchase price of a company being acquired.  In LBOs, Private Equity firms or an acquiring company often use mezzanine capital to lower the amount of capital invested.  Since Private Equity firms typically have higher target rates of returns than a mezzanine lender, use of mezzanine loans may increase the rate of return on an investment.  EB-5 Financing in the context of LBOs could replace the mezzanine loan in a capital stack and significantly enhance the rate of return on an investment or acquisition.  For example, in an LBO, if the capital stack of a purchase includes $50 million in mezzanine financing, at a cost of 15% to the borrower, using a simple interest rate calculation, the cost of capital to the purchaser is at least $7.5 million.  The significant cost of a mezzanine loan may have the effect of not only reducing the value of an LBO target, but also greatly diminishing the rate of return on an investment.

As in Real Estate finance, use of EB-5 capital in an LBO can have significant advantages.  For example, in the above scenario, if the LBO uses EB-5 capital in lieu of its mezzanine financing, the cost of capital would be around 1-2%, or between $500,000 to $1,000,000 in a $50 million capital raise–that is a savings of over $6,500,000.  In other words, using EB-5 capital just increased the return on the investment by an additional $6,500,000!

Making EB-5 Financing Work: Bridge Loans

Assuming the underlying project meets the requirements of the EB-5 program, many project developers or companies are still reluctant to use EB-5 financing simply because of the length of USCIS processing times.  Although USCIS has made significant strides over the past few years to address that issue, the fact remains that structuring an EB-5 financing takes a significant amount of time.  It may take anywhere from 6 months to 2 years before a developer is able to have funds from an EB-5 financing at its disposal.  The delay in access to these funds can prove fatal to a project.

However, the growth in EB-5 financing market has the creation of spurred specialized loan companies that address this very issue.  There are now several companies that provide specialized EB-5 bridge loans which allow a developer access to all or some of its anticipated capital.  Moreover, in its latest Policy Memorandum, USCIS has specifically indicated that such financial arrangements are allowed in the EB-5 context.  In a May 20, 2013 Adjudications Policy Memorandum, USCIS stated:

“It is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation [arguably the main requirement of the EB-5 program] under the regulations….Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.”

The increasing popularity and exponential growth of the EB-5 market has expanded the possibilities in which EB-5 capital can be used.  More than ever before, EB-5 capital can be used in a variety of flexible financing structures to fund increasingly diverse projects.  The key to successfully raising EB-5 capital is proper planning with the assistance of attorneys and professionals who, not only have expertise in Securities, Corporate, Immigration and, if applicable, Real Estate Law, but are also well-versed in the unique requirements the EB-5 program.  Finally, proper and extensive due diligence and risk analysis on the underlying project and the overall financing should also be completed contemporaneously.

If you would like more information about the EB-5 Visa or Regional Center development and investment offerings, please contact Wassem M. Amin, Esq., at wassem@aminconsultingllc.com.

___________________________________________________________________________________________

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA, a Managing Director of Amin Consulting LLC and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently concentrates his practice on Corporate Law, Business Immigration and International Business Transactions.  He has advised countless Eb-5 Investors and assisted developers in structuring USCIS-compliant EB-5 Regional Centers.  For more information, please visit the About Us page or request more information on our Contact Us page.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Using EB-5 Regional Centers to Raise Capital for Non-Real Estate Projects

 By Wassem Amin, Esq., MBA

Many people wrongly assume that the EB-5 Regional Center program is only feasible for real estate developments.  While it is true that the majority of Regional Center projects have been real estate developments, the program has also been successfully used to raise EB-5 capital for projects in diverse industries such as biotech, manufacturing, clean energy, and franchises.  This article examines the various ways, outside of the real-estate-development context, that an EB-5 Regional Center can be structured.  The EB-5 Visa category allows a foreign investor to become a permanent resident in the United States if they invest either $500,000 or $1,000,000 and meet other requirements.  A Regional Center is an entity approved by USCIS that is established to develop a commercial enterprise using EB-5 capital.

The EB-5 Regional Center can also be structured to function as a holding company or a mutual fund, enabling the deployment of funds across many projects and even the reinvestment of funds from one project to another.  These structures are typically used by those in the financial services industry.  As discussed below, the only issue to keep in mind is the ability to track job creation to each investor.  Notwithstanding that, there is virtually no limitations on the structure of the Regional Center and the industry or project it is used for.

At the outset, no matter what structure is used, the basic requirements of a Regional Center and EB-5 Investment must be met (e.g., 500K or $1MM minimum per investor, 10 jobs per investor, etc.)  The benefit of using a Regional Center is the ability to meet the jobs requirement through not only direct (i.e., W-2) jobs, but also indirect and induced jobs, using an econometric forecast analysis.  This allows a prospective Regional Center flexibility in meeting that requirement.

In terms of structuring the Regional Center, it can be structured several ways.  First, it is possible to structure the Regional Center as a holding company, where the business plan would provide for investments in multiple job-creating businesses over time.  That structure would be allowed under current USCIS regulations and would also allow the commercial enterprise (the holding company) to move money from one job-creating business to another.  The key here is the business plan submitted to USCIS – it must sufficiently detail the proposed multiple investment activities and specifically provide for investments in multiple job-creating businesses over time.  The business plan must also demonstrate that the requisite jobs will be created through the succession of capital investments through the holding company.

Second, in the EB-5 Regional Center context, a “fund of funds” (mutual fund) model may be feasible where the EB-5 money is invested and disbursed across a number of projects.  In that structure, the business plan and documentation must be able to adequately track each individual EB-5 investor’s capital investment into the commercial enterprise (the fund) and then into the job-creating investment projects.  This is necessary because USCIS must be able to make a determination as to whether each alien’s investment was sustained and to determine the allocation of jobs among the multiple EB-5 investors.

Finally, a private equity strategy is also an acceptable fund structure, but, again, USCIS advises that the level of complexity needs to be well documented to include easily recognizable job creation estimates.

In any of these models, it is important to note that the start-up expenses incurred in establishing a holding company or mutual fund that will not create jobs but will rather invest in other entities that will create jobs for U.S. workers cannot be counted in determining whether the investor has made the minimum investment.  However, as with the case with any Regional Center structure, administrative fees that may be charged to each investor, which are in addition of the minimum investment, may be used to recoup start-up expenses and operating costs. These fees typically range from 35,000 to 65,000.

These are just a few of the different ways a Regional Center could be structured in order to make it feasible for use in various, non-real estate, industries.  The level of complexity is only limited by the project’s ability to track job creation to each investor throughout the period required by USCIS.

The EB-5 Regional Center program is a very attractive option to raise capital after, of course, determining the feasibility of the underlying project.  Past regional centers have raised anywhere from $1,000,000 to almost $300,000,000 in EB-5 Funds.
_____________________________________________________________________________________________________________________________________________

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law and International Business Transactions.  For more information, please visit the About Us page or request more information on our Contact Us page.

4 Ways that EB-5 Regional Centers will Benefit From SEC’s Lifting of the General Solicitation Ban

By Wassem M. Amin, Esq. MBA

On July 10, 2013, the Securities and Exchange Commission (“SEC”) adopted a new rule that lifts the ban on general solicitation of private offerings.  The rule was adopted as a part of the commission’s decision to implement Section 201(a) of the Jumpstart Our Business Startups Act (the JOBS ACT”).     Prior to July 10, Companies who wanted raise capital through a private offering had two options: (1) Register the securities offering with the SEC; or (2) rely on an exemption from registration.  In a separate release, in order to implement Section 926 of the Dodd-Frank Act, the SEC adopted amendments to Rule 506 which disqualified issuers from utilizing Rule 506 if “felons and other bad actors” are participating in the offering.

While the SEC lifted the ban on advertising, they issued a rule proposal for Regulation D that requires issuers to provide a greater amount of information regarding the offerings in order to allow the SEC to regulate the market.  The proposal is aimed to protect victims from fraudsters trying to solicit stocks to inexperienced investors.  The proposed rule would require one who wishes to solicit a private offering to file a Form D before they engage in the advertising.

General Solicitation will Increase Demand for EB-5 Investments

Lifting the ban on general solicitation will allow startups, venture captilists, EB-5 Regional Centers, the EB-5 Program and hedge funds to openly advertise that they are raising money in private offerings.  That should make it significantly easier for companies to raise financing and/or expand operations — the Rule still limits solicitation from accredited investors (for now, until the remaining part of the JOBS Act is implemented)

EB-5 Regional Centers Can Advertise in Publications That Are Read By Potential Investors

Regional Centers now have the ability to advertise in national and international newspapers and media.  In fact, an EB-5 Regional Center from Florida recently placed an Ad in the Wall Street Journal.  The Wall Street Journal and similar publications target the demographic EB-5 Regional Centers are seeking.

EB-5 Regional Centers Can Target the International Student Demographic in the U.S.

There are millions of international students in the United States – many of whom are very wealthy and are looking for options to stay in the country post-graduation.  Advertising to these students through targeted marketing can be very profitable.

The Lift on the Ban Will Create New Service Providers

The lift on the Ban will undoubtedly create a significantly new and large pool of investors.  Additionally, I predict that there will be a new industry which caters specifically to connecting investors with companies looking for capital, a type of investor match-maker of sorts.

Investment is still limited to a requirement that all purchasers in the offering are “accredited investors”.  An “accredited investor” is defined as:

• An individual with net worth (or joint net worth with a spouse) that exceeds $1million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or
• An individual with an annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Moreover, EB-5 Regional Centers engaging in general solicitation activities will be required to verify through “reasonable steps” that EB-5 investors are accredited.  The SEC has not yet issued guidance on the steps necessary to satisfy the reasonableness requirement, however EB-5 Regional Centers engaging in general solicitation activities should be prepared to obtain guarantees of income requirements for all investors.

ncluding a requirement that all purchasers in the offering are “accredited investors”.  An “accredited investor” is defined as:

• An individual with net worth (or joint net worth with a spouse) that exceeds $1million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or
• An individual with an annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Moreover, EB-5 Regional Centers engaging in general solicitation activities will be required to verify through “reasonable steps” that EB-5 investors are accredited.  The SEC has not yet issued guidance on the steps necessary to satisfy the reasonableness requirement, however EB-5 Regional Centers engaging in general solicitation activities should be prepared to obtain guarantees of income requirements for all investors.

– See more at: http://connect.wolfsdorf.com/?p=1638#sthash.PJRkxOgN.dpuf

To help the SEC collect data on how investment will change, fundraisers have to file a Form D with the SEC at least 15 days before they begin general solicitation, and amend that Form D to state that they’re done soliciting within 30 days of finishing.

I have previously authored an Article predicting the impact of the JOBS Act on the EB-5 Program, here.

For more information, including access to the Final Rule and Proposal, please visit the SEC’s website which can be found here.

Wassem M. Amin, Esq., MBA is an Attorney at Dhar Law, LLP in Boston, MA and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.. Wassem has extensive experience as a business advisor and consultant, domestically and abroad (in the Middle East region), having worked as a consultant for over 9 years. Wassem currently focuses his practice on Corporate Law, Business Immigration Law, and International Business Transactions; where he works with Firm Partners Vilas S. Dhar and Vikas Dhar to advise Regional Centers and individual investors on EB-5 Visa matters. For more information, please visit http://www.dharlawllp.com and email Wassem at wassem@dharlawllp.com.

Disclaimer: These materials have been prepared by Dhar Law, LLP for informational purposes only and do not constitute legal advice. This article is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel. This material may be considered advertising according to the rules of the Supreme Judicial Court in the Commonwealth of Massachusetts. Reproduction or distribution without prior consent of the author is prohibited.

Real Estate Development: Raising Capital Through the EB-5 Immigrant Investor Program

By Wassem Amin, Esq., M.B.A.

Over the past couple of years, the use of EB-5 Regional Centers by project developers to raise capital has been increasing in popularity.  A designation as a Regional Center by United States Citizenship and Immigration Services (“USCIS”) allows a project developer, or an entity on behalf of a project developer, to raise capital from foreign investors seeking an EB-5 Immigrant Investor Visa.

The increased interest in EB-5 investments has been attributed to a combination of factors including: (1) the overhaul of the program by USCIS and the creation of a dedicated EB-5 adjudication department; (2) the decrease in domestic investment capital after the 2008 recession; and (3) the increased political instability in foreign countries leading many high-net worth immigrants to relocate to the United States.

Utilizing Regional Centers as a source of funding for project developments is an attractive option due to the typically low cost of capital to the developer as well as the ability to generate a profitable revenue stream from administrative fees charged to the immigrant investors.  In addition, administrative fees generated from a Regional Center typically offset the up-front costs involved.

Investing through a Regional Center is attractive for foreign investors because the investment is usually held in an irrevocable escrow account pending the approval of their initial application with USCIS (Form I-526).  Upon the approval of the I-526 Application, the funds are released to the developer and the investor is issued conditional permanent residency.  This ensures that, in the unlikely event the foreign investor is denied by USCIS, they are refunded their investment.  As an additional layer of protection, a comprehensive questionnaire is typically used to qualify the foreign investor and determine their eligibility beforehand.  That way, the Regional Center would be able to suggest alternative investments to potential foreign investors who may not be approved by USCIS.

What are Regional Centers?

USCIS defines a Regional Center as “any economic entity, public or private, which is involved in the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment.”  A Regional Center could be independent of the actual project or created in connection with a specific development.  Regional Centers are set up to act as intermediaries between foreign investors and EB-5 eligible projects in the United States.  To apply for Regional Center designation, a Form I-924 is submitted to USCIS, and processing times are between 4-8 months.

A range of different real estate projects have qualified for regional center status, including shopping malls, hotels, mixed use developments, warehouse distribution centers, manufacturing facilities, and business incubators. Because the key thrust of the Regional Centers is to create jobs, many regional centers are sponsored by or work extensively with local governments in a form of public-private partnership, but this is not a requirement.

In order to obtain approval from USCIS for designation as a Regional Center, the entity has to submit a proposal which must:

1. Clearly describe how the center focuses on a geographic regions of the United states and how it will promote economic growth through improved regional productivity, job creation, and increased domestic capital investment;
2. Provide in verifiable detail how jobs will be created indirectly;
3. Provide a detailed statement regarding the amount and source of capital which has been committed to the Regional Center, as well as a description of the promotional efforts taken and planned by the sponsors of the Regional Center;
4. Contain a detailed analysis regarding the manner in which the center will have a positive impact on the regional or national economy in general, as reflected by such factors as increased household earnings, greater demand for business services, utilities, maintenance and repair, and construction both within and without the Regional Center; and
5. Be supported by economically or statistically valid forecasting tools, including, but not limited to, feasibility studies, analyses of foreign and domestic market for the goods or services to be exported, and/or multiplier tables.

The Job Creation Requirement

The EB-5 visa has two different minimum investment requirements, depending on whether the geographic location of the investment is a Targeted Employment Area (“TEA”).  A TEA is an area that is in a rural location (as determined by each specific state) or an area with an unemployment rate of at least 150% of the national average.  If the investment is in a TEA, the minimum amount per each immigrant investor is $500,000.00.  If it is not in a TEA, then the minimum amount is $1,000,000.00.

Each foreign investor must demonstrate that their investment has created (or will create within two years) a minimum of 10 full-time jobs for U.S. persons  (a permanent resident or a citizen).  This requirement is the same whether the investment is within or outside of a TEA—i.e., whether the investment is $500,000 or $1,000,000.  However, if the investment is through a Regional Center, indirect (and induced) jobs may be counted.

To establish that 10 or more indirect or direct jobs will be created by the business, USCIS rules provide that indirect methodologies may be used, which may include multiplier tables, feasibility studies, analyses of foreign and domestic markets for the goods or services to be exported, and other economically or statistically valid forecasting devices which indicate the likelihood that the business will result in increased employment.

For example, if a multitenant shopping center is designated as a regional center, the full-time jobs created by the ownership and management of the shopping center are directly created jobs.  The jobs created by the tenants of the shopping center are indirect jobs. There may be 5 or 10 full-time positions created by operating a property management office, but the jobs created by the tenants of the shopping center could be over 100, and those jobs would all be counted to satisfy the job creation requirement. For these reasons, in a regional center, it is much easier for the investor to meet the employment requirements. Further, if more jobs are counted in the business, more EB-5 investors can participate in the project, resulting in more funding for the developer.

Structuring the Regional Center: Investment Models and Exit Strategies

The creation and management of a Regional Center will require expertise in the following areas: (1) EB-5 process; (2) immigration law; (3) equity fund structuring; (4) transaction due diligence and structuring; (5) economic analysis; and (6) marketing.  Dhar Law LLP is able to assist with all of the above—except the marketing.  In addition, while the economic analysis will be conducted under our supervision, it will be primarily done by an economist within our network who specializes in EB-5 Regional Centers.  An additional requirement is having access to pipeline of foreign investors sufficient to meet the capital requirements of the project.

As for the investment models, EB-5 investments are generally one of two high-level models: an Equity Model or a Debt Model.  In the Equity Model, the investor acquires an ownership interest in the development project, entering as limited partner.  This is a well-established model with a track record of USCIS approvals and is currently the primary strategy for EB-5 investments.  At the end of the specified term (generally five years, but could be less), the EB-5 investor’s interest in the project is sold to other interested parties.  The proceeds from the sale are returned to the investor.  Complications could arise in the sale of the equity, so the return of investments is not guaranteed.

In the Debt Model, the investor also joins as a limited partner, but provides a low-interest term loan to the project developer rather than acquiring a stake in the project.  Repayment of the principal is made either through sale of the project or refinancing of the EB-5 loan at the end of the term (also generally five years).  This model, while it has received approvals from USCIS, is still fairly new and may undergo greater scrutiny.  The issue is whether Debt Model projects guarantee repayment to the investor—which is not allowed under EB-5 regulations because the invested capital must be “at risk.”

For example, if a new commercial enterprise’s limited partnership (LP) agreement contains a buy-back agreement (i.e. a redemption clause guaranteeing the return of the investor’s capital investment), then the investor’s capital investment will not be a qualifying “at-risk” investment for EB-5 purposes. Likewise, if the LP agreement requires the payment of fees from the investor’s capital investment to the extent that the investment will be eroded below the qualifying level, preventing the full infusion of the capital into the job creating enterprise, then the investor’s capital investment will not meet the required EB-5 level of investment.

Initial Evidence and Documents Required by USCIS

1. Location of Regional Center: The Regional Center must focus on a specific geographical area.  This area must be contiguous and clearly identified in the application by providing a detailed map of the proposed geographic area of the Regional Center.
2. Creation of Jobs:  Each Regional Center must fully explain how at least 10 new full-time jobs will be created by each individual alien investor within the Regional Center either directly or indirectly.  The applicant must provide an economic analysis that relies on statistically valid forecasting tools that shows and describes how jobs will be created for each industrial category of economic activity. The job creation analysis for each economic activity must be supported by a copy of a business plan for an actual or exemplar capital investment project for that category.
3. Business Plan: A business plan provided in support of a regional center application should contain sufficient detail to provide valid and reasoned inputs into the economic forecasting tools and must demonstrate that the proposed project is feasible under current market and economic conditions.  The form of the EB-5 investment from the commercial enterprise into the job-creating project (equity, debt, etc.) should be identified.  The business plan should also identify any and all fees, profits, surcharges, or other similar remittances that will be paid to the regional center or any of its principals or agents through EB-5 capital investment activities.
4. Infusion of Capital: The application must be supported by a statement from the principal of the Regional Center that explains the methodologies that the Regional Center will use to track the infusion of each EB-5 alien investor’s capital into the job-creating enterprise, and to allocate the jobs created through the EB-5 investments in the job creating enterprise to each associated alien investor.  The anticipated minimum capital investment threshold (either $1,000,000 or $500,000) for each investor must also be identified.
5. Operational Plan: The application must be supported by a detailed description of the past, present and future promotional activities for the Regional Center.  It must include a description of the budget for this activity, along with evidence of funds committed to the Regional Center for promotional activities.  The plan of operation must also address how investors will be recruited and how the Regional Center will conduct its due diligence to ensure that all immigrant investor funds affiliated with its capital investment projects will be obtained from lawful sources.
6. Prospective Economic Impact: The application must be supported by a general prediction of the prospective impact of the capital investment projects sponsored by the Regional Center, regionally or nationally, with respect to increases in household earnings, greater demand for business services, utilities, maintenance and repair; and construction both within and outside the Regional Center.
7. Organizational Structure: The application must fully describe and document the organizational structure of the regional center.  In addition, it should be accompanied by the capital investment offering documents, business structure, and operating agreements of the proposed commercial enterprise that will be affiliated with the Regional Center is compliant with EB-5 statutory and regulatory requirements, as well as binding EB-5 precedent.  A common business structure is summarized in the chart below.
8. Investment Offering Documents: Documentation of the capital investment offering documents must include, at a minimum, the following:
   • A description and documentation of the business structure of both the regional center and the commercial enterprises that are or will be affiliated with the regional center, such as Articles of Incorporation, Certificate of Incorporation, or legal creation as a partnership or limited liability company (LLC), partnership or LLC agreements, etc.;
   • Draft subscription agreements for investment into the commercial enterprise;
   • Draft escrow agreements and instructions, if any;
   • List of the proposed financial institutions that will serve as the Escrow Agent, if any;
   • Draft of the offering letter, memorandum, private placement memorandum, or similar offering to be made in writing to an immigrant investor offering capital investments through the Regional Center; and
   • Draft memorandum of understanding, interagency agreement, letter of intent, or similar agreement to be entered into with any other party, agency or organization to engage in activities on behalf of the Regional Center.

Regional Center Costs

A properly planned and managed Regional Center with a sustained project and investor pipeline can be completely self-funded, and may even generate a profitable revenue stream, using the fees charged to foreign investors.  These fees, typically labeled “administrative fees” are in addition to the principal investment and may range from $35,000 to $65,000 per foreign investor.  However, the majority of Regional Centers charge $40-45,000.

The costs associated with the set-up and management of a Regional Center vary depending primarily on the scope of the proposed project and the extent to which the Regional Center chooses to market.  In addition to start-up costs listed below, first-year sales, operations, and marketing fees should be accounted for.  However, in the case of Real Estate Investment and Development Firm, a lot of these costs could be defrayed by integrating Regional Center operations with the current Firm operations.

Start-up costs and expenses for developing a Regional Center are typically as follows:

• Economist Fees for: (1) construction and analysis of the econometric model; (2) development and drafting of the EB-5 Business Plan; and (3) development and drafting of the Regional Center Five Year Operating Plan and Budget—$25-55,000.00.

• Legal and Consulting Fees for: (1) transaction due diligence; (2) equity fund structuring; (3) EB-5 immigration law qualification; (4) securities law diligence and compliance; (5) representation before USCIS for project submission and approval; (6) individual investor preliminary qualification;  (7) drafting application and transactional documents including (i) memorandum of terms, (ii) private placement memorandum, (iii) subscription agreement, (iv) partnership agreement, (v) escrow agreement; and (8) supervision and review of economic impact analysis, operational plan, and business plan to ensure USCIS compliance—$75,000 – $200,000.

• USCIS Governmental Filing Fees—$6,500.00.

An EB-5 funding model, if carefully planned and structured, could be an excellent and low-cost method of raising capital.  The range of capital raised through EB-5 Regional Centers has individually varied anywhere from $5 Million, on the low end, to $300 Million, on high end.  There has been increased awareness and interest by foreign investors in the EB-5 program, and it is forecasted that a record number of foreign investors will be issued EB-5 visas this year.

Although this is an overview of the process behind setting up a Regional Center, it is important to determine the exact scope of the proposed project to properly assess feasibility.   The first step is to evaluate the underlying project or projects to ensure that they will not only be profitable, but will also meet USCIS requirements of the EB-5 program.  Proper planning and careful due diligence by all parties involved is essential.

_________________________________________________________________________________________

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law and International Business Transactions.  For more information, please visit the About Us page or request more information on our Contact Us page.