Telltale Signs of a Risky EB-5 Investment

The EB-5 visa is a popular residency-by-investment program of the United States government through which foreign nationals can obtain Green Cards in exchange for investing in the American economy.

Since its launch in 1990, the EB-5 Immigrant Investor Program has become popular as one of the most viable and straightforward pathways to obtaining U.S. permanent residency. It entitles investors and their eligible family members (the spouse and unmarried children under 21) to live, work, and study anywhere in the United States, besides giving them access to several other benefits. They also become eligible to apply for U.S. citizenship after completing five years of permanent residency.

The EB-5 program is open to nationals of all countries and does not require any sponsorship, work experience, or specialized skills for participation. However, to qualify for the program, applicants must make a minimum standard investment of $1,050,000 in an EB-5 project, or a reduced investment of $800,000 if the project is located in a targeted employment area (TEA).

The program requires that the investment amount must be lawfully sourced and placed “at risk” for at least two years with no guaranteed returns. Another critical requirement of the program is that the investment must generate at least 10 permanent full-time jobs for qualified U.S. workers.

The EB-5 program is administered by the United States Citizenship and Immigration Services (USCIS), which has strict compliance regulations. If an investment does not meet the “at risk” or the job creation requirement of the program, the investor’s application will most likely be unsuccessful. Considering the sizeable capital involved in the process, financial stakes are also very high for EB-5 applicants. Hence, it is extremely important that investors choose a project carefully after thorough due diligence so that the immigration and financial risk of their investment is mitigated.

No investment can ever be entirely risk-free; however, high-risk projects have some definite warning signs that investors must watch out for. This article explains how investors can identify and stay clear of such risky investments to maximize the chances of getting a Green Card as well as their invested capital.

Risks in Regional Center Projects

The main objective of an EB-5 investment is immigration. This is why most investors prefer investing through USCIS-approved regional centers, as it makes it easier for them to fulfill the crucial job creation requirement of the EB-5 program.

Unlike direct investments, regional center investments can count indirect and induced jobs generated by the larger economic impact of the project. The overall job creation is calculated through an economic analysis of the project, which is then used to demonstrate to USCIS that the project created at least 10 full-time jobs per investor.

There are hundreds of regional center projects available in the EB-5 market, and not all of them may eventually be successful. If a project fails or does not generate sufficient jobs, the investor’s petition will not be approved, and they may also lose all or part of their capital.

Therefore, investors must take the time to educate themselves on aspects that make a project unsafe for investing and about prevalent malpractices followed by some EB-5 players. While an EB-5 investment must remain “at risk,” it can still be safe enough for the investor’s successful immigration as well as the repayment of their funds if they are aware of the common red flags in EB-5 offerings. Let’s look at some of these below.

Lack of Transparency

Transparency is at the core of any high-quality, low-risk investment. The offering documents must have all the essential details and disclosures critical to the project’s performance. If the investor requires any further information, it must be provided in writing. Any claims or promises made verbally do not hold ground, and the unwillingness of the developer to validate them through written communication is a sign that the project entails undisclosed risks.

For example, the offering documents must clearly mention if the project has a secured loan from a senior lender for its successful completion. If the EB-5 salesperson claims that a bank loan has been secured but does not share the loan agreement and bank statements, it is a warning sign to potential investors that the project does not have the required financing.

Inadequate Job Creation

During project selection, investors must ensure that the project has already created or is well on its way to creating more than enough jobs for its investors. Projects that are still in the early stages of construction and haven’t created sufficient jobs are riskier than projects well under construction.

Moreover, if the project promises to create jobs through future revenue rather than construction spending, it can be considered a high-risk project.

It is always safer to invest in projects with existing sales as they have already proven their marketability and created jobs.

Unreliable Exit Strategy

In a safe investment, the EB-5 loan must be secured throughout the entire investment duration, and the loan term must be clearly defined. Some regional centers and developers may claim that EB-5 loans cannot be secured, which is not valid. A good project will have a secured loan, preferably with a repayment guaranty from an independent, well-capitalized guarantor company.

Regional centers may also mislead investors by stating that a repayment guaranty violates the EB-5 “at risk” requirement. Technically, even with a guarantor promising to repay the investors, the risk of loss still exists if the guarantor company fails. However, if the company has substantial and diversified assets, the repayment guaranty almost eliminates the financial risk for investors, but the investment remains “at risk,” as the program requires.

Investors must also avoid projects that promise repayment of their capital based on future cash flows. Such projects can be unpredictable and depend upon several factors for profitability, such as the expertise of the property management team, fluctuations in demand, and conditions of the real estate market. If the project does not earn a profit, investors may not get their invested capital back.

Risky Capital Structure

Investors must look for projects substantially funded from sources other than EB-5, such as a fixed-rate senior loan from a major bank. Projects depending heavily on EB-5 funding may never raise enough funds and could get stalled. On the other hand, well-funded projects with a smaller percentage of EB-5 capital are a safer bet as they can continue operating even without investor capital.

That said, if the senior loan has been obtained at an interest rate higher than usual, it could be because the project is high-risk. Investors must compare the financing costs of multiple projects to gauge their riskiness.

Investors must also understand the capital structure of the project and know the position of EB-5 funding in the capital stack. Some developers try to deceive investors by marketing the EB-5 loan as senior debt when, in reality, it is in the mezzanine debt position and could become senior debt only under highly unlikely conditions.

Sometimes, developer equity is made to appear higher than it really is, increasing the risk for investors. Investors must seek transparency on the project’s financial structure and avoid investing if it has ambiguous or unreliable financing.

Weak Track Record of the Developer or Regional Center

A developer with a long track record of EB-5 projects at a similar scale and in the same geographic area is more likely to successfully complete the project than a new developer with less experience in the same asset class. Investors must not fall for tall claims made by developers with no proven EB-5 track record.

Similarly, investors must stay away from developers who do not have a history of securing loans or repaying financing on time.

The regional centers’ track record in similar projects is also very important, considering their key role in managing EB-5 capital. Investors must ensure that the regional center has a good standing with USCIS and has several USCIS-approved EB-5 projects without any petition denials.

If the regional center cannot provide its record of EB-5 compliance to corroborate these facts, it must not be considered trustworthy.

Unstable Financial Standing of the Developer

Investors must also ask for the financial statements of the project developer and the guarantor entity and carefully review them to check if both entities have significant assets and net equity. If these documents are not shared with the investor or, upon examination, reveal that the developer or guarantor company is not as financially strong as claimed, it is best for investors to stay away from the project.

Conflict of Interest

EB-5 applicants typically hire the legal services of experienced immigration attorneys who assist them in evaluating EB-5 projects and help them navigate the legal and regulatory requirements of the program. Immigration attorneys also often collaborate with regional centers to ensure EB-5 investment compliance.

Sometimes, the attorney could have a business relationship with the regional center and may not act in the best interests of the investor. Such a conflict of interest could put the investor at significant risk. Investors must ensure they work with an attorney who provides them with unbiased advice, independent of the regional center or the project developer.

Investors are exposed to even greater risk if there is a conflict of interest between the regional center and the project developer. Investors must carefully investigate project documents for disclosures of any financial relationship between the regional center and the developer. If an affiliation exists between the two entities, the investment could be risky for investors as the regional center may prioritize its own concerns if the project fails to deliver.

Independent regional centers without developer affiliations are more likely to act in investors’ favor and will safeguard their interests by keeping a check on the developer.

Work With EB5AN to Reduce Your EB-5 Risk

The EB-5 visa offers significant benefits for foreign investors, including a fast-track Green Card and a pathway to citizenship, but it also involves considerable risks. It is vital for potential investors to understand the various risk factors so that their investment stays safe and leads them to a successful outcome.

As a leading regional center operator known for its high-quality projects and transparency, EB5AN can provide you with all the necessary information to help you make a well-informed and secure decision best suited to your individual needs.

If you’d like to know more about safe EB-5 investments, book a free call with our expert team today.