Before investing in any EB-5 project, it’s important to be aware of the risks involved. Each EB-5 project has a unique risk profile, with several factors that come into play.
If you choose a USCIS-compliant EB-5 project that is in a strong financial position, you could receive U.S. Green Cards for yourself and your family in only months and get your money back as planned. But if you invest in a high-risk EB-5 project, you could face USCIS denial—and possibly lose every cent of your investment.
One of the most important factors to consider is whether an EB-5 project is already under development. Has construction begun? If not, is it ready to begin building? Or is it waiting for permits or entitlements to be approved?
Before you invest, you need to know whether an EB-5 project has obtained all of the permits it will need in order to be completed. These include permits for environmental compliance, site development, and building. If the project does not have its permits secured yet, it is in “pre-development.” The pre-development stage is an important part of every project, and all real estate deals go through this phase. However, this phase is NOT an ideal time for an EB-5 investor to get involved in a project. The immigration and financial risks are highest during this phase.
If an EB-5 project does not already have its permits and is not being built yet, it may experience unexpected delays. These delays are often caused by failures to obtain key approvals. In such cases, a project may be put on hold indefinitely. If that happens, the project’s EB-5 funds may be at risk as well. The pre-development stage of real estate projects is the highest risk period, and the time it takes to get through pre-development can vary widely based on the type of project, the municipality, etc.
Pre-development delays can happen even if the EB-5 project has received Form I-956F approval from USCIS.
In this post, we explain how to identify low-risk EB-5 projects that are already under development and out of the pre-development phase. We also outline the options available to you if you have invested in a pre-development EB-5 project that has been put on hold or otherwise delayed.
Key Differences Between Pre-Development and Under-Development EB-5 Projects
Even with I-956F Approval, Pre-Development EB-5 Projects Can Fail
What to Do If Your EB-5 Project Has Been Delayed
Before Investing in an EB-5 Project, Make Sure It Is on Track for Completion
Key Differences Between Pre-Development and Under-Development EB-5 Projects
Risks in the Pre-Development Stage
In real estate, pre-development is the phase where developers secure permits, conduct feasibility studies, finalize architectural designs, and arrange their capital structures. In other words, it is when all the work is done that must be completed before construction starts.
The pre-development phase is the riskiest time to invest in an EB-5 project since the project has yet to show any construction. During this stage, developers must deal with initial costs—including architectural fees, land studies, and environmental reports—typically before generating revenues or selling units.
Many issues can arise during pre-development:
Long Timelines. While the pre-development stage can be relatively brief in some areas of the United States, in others, it can take years. To obtain entitlements and permits, developers must work with local governments through a sometimes long and challenging process. And some states, such as California and New York, have more stringent requirements, including strict environmental safety laws. These laws can cause long delays.
Permit Denial. Unfortunately, permits can be denied. Each permit—whether for zoning, building, or environmental impact—must go through local or state review. Each jurisdiction has its own set of laws that a developer must navigate. And dealing with bureaucracy is rarely straightforward. A project may run into any number of issues that could result in a denied permit. This is especially true for developers that are not experienced or well connected.
Missing Capital. Projects secure their capital structures during pre-development, either through equity partners or lenders. Unless a project’s developer is reputable and supports the project with a strong balance sheet, the project may have to start construction without even securing a senior loan—a high-risk scenario for investors. If investors back out of the project or if costs exceed the budget, the project can experience delays or even fail.
Cost Increases. Rising construction costs are often an issue during pre-development. As prices and markets shift, it can be difficult to estimate how much a project will cost when building starts. A project may be forced to find alternative financing or delay the start of construction. New funding sources could impact EB-5 investors’ repayment priority, and any delays can hurt immigration and financial outcomes.
Environmental Impacts. Environmental issues present another potential obstacle. Different states and cities have different environmental laws. These laws tend to be the strictest in areas where land is less developed and consists mostly of natural features and animal habitats. Ski resorts, property in and around national parks and forests, farmland, wine country, etc., are often more heavily regulated. It can take many years to successfully pass all required environmental reviews and obtain building permits in these areas.
No Construction Spending. When investing early, the project has no track record that shows the EB-5 funds will be used to create the required jobs for investors to receive their Green Cards. And without all permits and approvals, investors cannot have confidence that the project will ever start construction and spend EB-5 funds on eligible costs.
Unless a developer takes steps to deal with each issue during pre-development, the project may have to pay for additional studies or change its plans later on. If major problems arise, a project may even have to be put on hold indefinitely or canceled. Each of these scenarios involves significant added costs.
For these reasons, pre-development is widely considered the most complex phase in a project’s timeline and thus the riskiest point at which to invest. Typically, the higher risk of these kinds of deals means a higher rate of return. Some investors want to earn more and are comfortable taking on more risk to do so. For them, pre-development deals may be just fine.
For most EB-5 investors, though, high returns are not worth the high risk of being denied a Green Card. During this stage, extended delays or unseen costs can cause a project to fail before construction ever begins or EB-5 investors are repaid. EB-5 investors should be aware of these facts before they invest. And should they choose to invest in such a project, they should be rewarded with preferential investment terms.
EB-5 investors generally favor low-risk projects that are likely to repay their funds on time and create 10 jobs per EB-5 investor. As a result, most choose to avoid the uncertainty of projects that are still in the pre-development stage.
Under-Development Projects Are Safest for EB-5 Investors
The best time for EB-5 investors to invest is during the development phase of a project. This phase occurs when all the planning is complete and permits have been acquired. Projects in development tend to have their funding in place, too.
A project that has already secured a senior loan and other funding is far safer than a project that has not. The best projects are fully capitalized with senior financing and other sources of funds. They do not rely on EB-5 funding for completion. In such cases, EB-5 capital is a small percentage of the overall capital structure and is used to replace more expensive financing.
Additionally, a financially strong EB-5 project that is under development is likely creating jobs. If the EB-5 offering is structured properly, a project like this may create most or all of the 10 jobs required for each EB-5 investor before they even invest. By choosing a project that is under development, EB-5 investors have greater chances of being repaid and receiving their U.S. Green Cards.
Even with I-956F Approval, Pre-Development EB-5 Projects Can Fail
USCIS requires all EB-5 projects to submit an I-956F application. Form I-956F provides USCIS with a thorough overview of the EB-5 offering, the investment terms, and the key people involved in supervising the flow of funds through the regional center.
USCIS grants I-956F approvals to EB-5 projects that are not fraudulent and comply with the EB-5 program’s basic guidelines. However, USCIS does not evaluate whether an EB-5 project is financially strong or properly licensed to begin construction.
That said, we have started to see USCIS deny some I-956Fs for projects in the pre-development phase if the full capital structure cannot be proven. We have also seen approvals of I-956Fs in the pre-development phase.
Form I-956F approval helps show that the project’s documents are in order, but it does not guarantee that the project will proceed as planned. As a result, EB-5 investors should not rely on an I-956F approval alone to determine whether an EB-5 project is low risk.
Multiple EB-5 projects with Form I-956F approvals on the market today are still in the pre-development phase. Many of these projects have not secured their senior funding or finalized their capital structures. Most of these projects have not obtained the all of the permits and approvals needed to start construction. Such projects put EB-5 investors at higher risk of losing their money and being denied their Green Cards.
If you invested in a pre-development EB-5 project that encountered issues and has been delayed, do not despair. Thankfully, there are still ways you may be able to salvage your funds.
What to Do If Your EB-5 Project Has Been Delayed
When you make an EB-5 investment, the money is usually held in an escrow account on behalf of the EB-5 investment fund. In most cases, the funds in escrow are managed by the regional center or a third-party fund manager. Typically, your EB-5 funds will not be released from escrow until you file Form I-526E and the developer asks for the funds. They are then released to the project company.
You should always be aware of where your EB-5 funds are deposited throughout this process.
With your immigration attorney, carefully review the project’s offering documents to identify any provisions for the EB-5 investors to recover their capital. For instance, the EB-5 investors may have redemption rights under certain circumstances or during a set period.
If your funds are still in escrow, seek to have your money returned immediately. If your funds have already been deployed to the developer entity, find out whether they have already been spent on pre-development costs. If not, you may have a chance of recovering the funds.
In either case, you will have to withdraw your Form I-526E petition related to the original project and invest in a different EB-5 offering. Typically, after being rescued from a failed project, we see investors choose projects that are under construction and have already begun to create jobs. Your immigration attorney can guide you through this process.
If you have not yet made your EB-5 investment, we strongly recommend investing in an EB-5 project that is already under construction with all required permits in place. An EB-5 project that encounters a significant delay in pre-development will likely stagnate for years or even be canceled, setting your immigration process back years or jeopardizing it altogether.
Before Investing in an EB-5 Project, Make Sure It Is on Track for Completion
EB-5 investors can drastically reduce their risk by investing in an EB-5 project that is already under construction and that has all permits and funding in place.
“Investing in a pre-development project is simply too risky for most EB-5 investors,” explains EB5AN managing partner Sam Silverman. “We encourage investors to carefully compare each project’s viability and choose the one most likely to reach completion, repay its investors on time, and create all required jobs.”
This is where doing your due diligence—and consulting with EB-5 experts—comes in. “In many cases,” adds Silverman, “EB-5 applicants have the option of investing in projects that are already well under construction and have created all the required jobs. This is the level of safety we encourage EB-5 investors to look for.”
If you would like to refile your I-526E petition in another EB-5 project or are interested in identifying low-risk offerings, schedule a free consultation with EB5AN.
