EB-5 Project Financial Risk Due Diligence

Evaluating Financial Risk

There are two categories of risk involved in an EB-5 investment: immigration risk and financial risk. Immigration risk involves the possibility that the investor will not be successfully granted permanent resident status. Financial risk involves the possibility that the investor will not get their investment returned either following the investment period or earlier if the initial I-526 petition is denied. Each type of risk should be carefully evaluated before beginning the EB-5 investment process.

The following section explores key issues that may affect financial risk in the investment process and provides suggestions on avoiding common pitfalls and thoroughly evaluating financial risk prior to beginning the EB-5 process.

Thoroughly review the history of the financial institutions and the project developer that will handle your investment.

Once the potential immigrant has turned over his or her investment, it is fully managed by the project developer for the enterprise that the investment has been placed in. In order to protect the investment and ensure that it is used in compliance with program regulations, it is important to evaluate the history of the project developer as well as any others involved in handling the investment. Evaluation can include looking at the number of projects the developer has successfully completed, the developer’s total development experience, any prior loan defaults, current involvement in litigation, experience the developer has with the financial institution(s) involved in the project, and the amount of equity capital that the developer has at risk.

Find out how and when the investment will be dispensed into the project.

Project developers may use one of many methods of dispensing capital into the project and releasing it from escrow. As there is always a possibility that an investor’s I-526 petition will be denied, the full investment amount is not usually removed from escrow until after petition approval. However, because Form I-526 can take a lengthy time to approve, many project developers prefer to have access to at least a portion of the funds prior to petition approval. One common structure used by many project developers is to dispense a portion of the total investment into the project as soon as the EB-5 investor has submitted his or her initial petition, with the remainder remaining in escrow until petition approval.

Find out the policy on investment return upon petition denial.

The amount of money invested into an EB-5 project is substantial; thus, investors should prepare by finding out what will happen to their investment if their I-526 petition ends up being denied by USCIS. Project developers may require the investor to keep their money in the project even after petition denial. While the investor will eventually receive the return once the project has been completed, that can take years, and in the meantime, the investor is not permitted to immigrate and has received no benefit from his or her investment. Other project developers will return the investment earlier if the I-526 petition is denied, with return timeframes ranging from two months to two years. EB-5 investors should make sure that they understand the policy associated with the project they are investing in and ensure that the institution providing the guarantee of return upon petition denial has the ability and adequate assets to honor the guarantee.

Investors should also find out if administrative fees will be returned. Administration fees paid to regional centers average around $50,000, and these fees are paid at the start of the EB-5 process. Some projects may have as their policy a guarantee of a full return of administrative fees as well as the original investment, while others may state that they will only do their best to return the fees, which does not provide any guarantee of return.

Investors should also find out if administrative fees will be returned. Administration fees paid to regional centers average around $50,000, and these fees are paid at the start of the EB-5 process. Some projects may have as their policy a guarantee of a full return of administrative fees as well as the original investment, while others may state that they will only do their best to return the fees, which doesn’t provide any guarantee of return.

Evaluate how much of the project capital is coming from EB-5 investments.

Some projects may be entirely funded with EB-5 capital, while others may be using EB-5 capital to fund only a small percentage of the project, with the remainder of their funding coming from other sources, such as bank loans. Generally, projects that carry less risk are more successful at obtaining bank loans. In addition, those projects with funding from other sources tend to be larger and able to provide more jobs. A good guideline to follow is to stay away from projects that source more than 40%-50% of their capital from EB-5 investments. Projects that get more than 75% of their funding from sources other than EB-5 capital merit more in-depth investigation

Find out how much project capital is coming from developer equity.

Most U.S. financial institutions require the project developer to have equity that makes up at least 15% of the total capital. EB-5 investors should avoid projects that are funded with less developer equity than that.

Evaluate the plan to repay investment funds.

It is important to remember that because USCIS requires EB-5 investments to continually remain “at risk,” no project can guarantee the repayment of the original investment or any returns. However, EB-5 projects will generally have a plan for investment repayment at the conclusion of the project, which should be evaluated for feasibility and credibility. One way to evaluate such a plan is to identify the other sources of capital. If the project has been underwritten with a substantial loan by a major financial institution within the United States, the plan is likely to be credible, as a financial institution would not offer a substantial loan otherwise.

Find out the rate of interest return on the project.

Current EB-5 investments have minimal interest rates, and most range from 0% to 1% annual interest. Because the range is so small and the interest minimal, this amount does not play a large role in evaluating the financial risk of a project.

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