The independence of lenders and borrowers helps promote project integrity and transparency while boosting EB-5 investor confidence.
Authors: Samuel B. Silverman and Seema Mehta
The Importance of Independent Fund Managers and Developers
The Risks Associated With Conflicts of Interest
The Benefits of Independent Lenders and Borrowers
How EB-5 Investors Can Stay Protected
The Importance of Independent Fund Managers and Developers
For every participant in the EB-5 Immigrant Investor Program, the process of choosing a successful project requires many important decisions. One aspect of this decision-making process that is often overlooked is having a firm understanding of who is managing the investment fund making the loan and who is receiving the loan as a borrower to develop the project. From the perspective of the EB-5 investor, it is crucial to choose projects for which these two parties are clearly independent from one another.
While the fund manager and the developer can legally be controlled by the same entity, this would represent a serious conflict of interest, and could also have several negative impacts on the investor and the outcome of the investment itself. In addition, maintaining independence provides greater transparency in financial transactions and project management, increasing trust among EB-5 investors, regulatory authorities, and other stakeholders.
The Risks Associated With Conflicts of Interest
Over the course of an investment, several unforeseen scenarios—such as an economic downturn or recession—may occur and put the investor at risk in various ways. In instances in which issues arise over the course of the project, the developer will always take action to protect their own interests, potentially at the expense of the interests of any individual investor.
The borrower may alter the loan terms to be more favorable for themselves in order to make payments. They may adjust the loan term, for example, from five years to 10 years, thereby causing a major delay in the EB-5 investor’s timeline of ultimately obtaining their Green Card.
The borrower may also change interest rates, potentially resulting in a significantly lower return on investment. Scenarios like these can have disastrous consequences for the EB-5 investor, which is why avoiding projects with conflicts of interest among lenders and borrowers is so vital.
The Benefits of Independent Lenders and Borrowers
A structure with independent fund managers and developers not only prevents risky conflict-of-interest issues, but also has some major advantages for the EB-5 investor. Keeping these roles independent of one another is critical for maintaining the integrity and transparency of the EB-5 project. The EB-5 program must comply with specific regulations set forth by the United States Citizenship and Immigration Services (USCIS), and independent entities are better positioned to navigate and comply with these legal requirements.
The presence of independent entities also indicates a sense of credibility, increasing confidence among all parties involved by helping to ensure that funds are managed ethically and responsibly. This is also likely to result in a smoother and more efficient timeline for the project’s completion.
Fund managers have a fiduciary responsibility to their EB-5 investors, and when they are independent, they will act accordingly. This may include taking legal action against the borrower or forcing the borrower to sell other assets when necessary. As such, the EB-5 investor’s interests are significantly better protected in this independent arrangement.
Prospective EB-5 investors should always seek professional guidance and do their own due diligence in selecting a project, and the presence of separate fund managers and developers simplifies this process. By recognizing that a project is more responsibly managed at the outset, EB-5 investors can be more confident that the project will run smoothly.
How EB-5 Investors Can Stay Protected
The EB-5 program has regulatory requirements to help ensure the ethical use of investor funds. However, a conflict of interest between an EB-5 fund manager and a developer is legal, despite the unnecessarily high-risk scenario in which it puts investors. While highly uncommon in other industries in the United States, some companies that are active participants in the EB-5 program seek to take advantage of investors who may not be familiar with these conflicts and the problems they present.
This makes diligence on an EB-5 investor’s part crucial, and underscores the importance of choosing projects with independent parties while actively avoiding projects with such conflicts of interest. Investors should carefully read all disclosures in an EB-5 project’s documents and pay particular attention to the relationships between entities. The presence of an independent fund manager and developer ultimately makes it far more likely that the immigration outcome for an EB-5 investor will be successful.
Since 2013, EB5AN has protected EB-5 investors’ interests by only pursuing projects with independent fund managers and developers. EB5AN is pleased to offer low-risk real estate development projects, all of which feature an independent arrangement.
