5 Things That Matter – EB-5 Project Investment Framework
After researching all the options and determining that the EB-5 Program is the right path forward, an investor is ready to choose an EB-5 project. Selecting the right project is crucial for obtaining a Green Card while safeguarding the investor’s capital.
We are pleased to share an EB-5 project investment framework for investors considering EB-5.
Selecting and conducting diligence on EB-5 real estate projects can be a daunting task. Drawing on years of experience in reviewing hundreds of projects, EB5 Affiliate Network and USAdvisors.org have distilled this complex process into a list of the five things that matter most for anyone reviewing an EB-5 project. Each of these considerations identifies and explains a core issue related to the two key risk areas of any EB-5 project: (i) immigration risk and (ii) financial risk.
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(1) USCIS I-924 Exemplar Approval
Why it matters: When an investor files an I-526 petition to immigrate under the EB-5 Program, USCIS must determine whether the project receiving the investment qualifies for EB-5 and is expected to create the requisite number of jobs. Projects can file Form I-924 to apply for “preapproval” known as exemplar approval. Most projects, however, do not seek exemplar approval. Instead, projects are often initially reviewed by USCIS when the first EB-5 investor in a project submits his or her I-526 petition. The majority of projects choose this approach because obtaining exemplar approval is expensive and can take more than a year. Investors in projects without exemplar approval face greater immigration risk because the project may not be approved for the EB-5 Program—the project’s economic analysis could be rejected, the project could be improperly structured, or the project could otherwise be ineligible under the EB-5 Program. Projects with exemplar approval are reviewed and approved by USCIS before any investors file EB-5 petitions. It is important to note that I-924 exemplar approval and I-924 Regional Center designation are not the same; both are applied for using Form I-924, but only exemplar approval means that the project itself has passed USCIS scrutiny.
Investor benefit: Investors who select projects with exemplar approval know at the time of their investment that USCIS has already reviewed the project documentation and determined that it is compliant with the EB-5 Program and that the economic methodology used to calculate job creation is consistent with USCIS requirements. The I-526 petition contains only two types of documentation: project documentation and investor documentation. USCIS will not need to re-review project documentation, which means investors do not bear the risk that the project might not be approved by USCIS. For projects with exemplar approval, USCIS will only review individual investor information and source of funds documentation when adjudicating investors’ I-526 petitions. Exemplar approval typically results in faster processing times for I-526 petitions because the information under review by USCIS is significantly reduced.
Question to ask:
- Has the EB-5 project received Exemplar Approval? A project sponsor should be direct and honest, answering either “Yes,” or “No.” If the sponsor claims the project has exemplar approval, follow up by requesting a copy of the official USCIS exemplar approval letter. Any reputable project sponsor can provide the letter and will be proud to do so.
(2) Sufficient EB-5 Job Creation
Why it matters: After USCIS has approved a project under the EB-5 Program and has accepted investors’ I-526 petitions, the project must create at least 10 jobs per EB-5 investor in order for each investor to receive his or her permanent Green Card. I-526 approval grants an investor a temporary Green Card, but in order for temporary residency to become permanent, the investor must file Form I-829 two years after I-526 approval. The I-829 petition must demonstrate that an investor’s investment has resulted in 10 jobs as required by the EB-5 Program. For real estate projects sponsored by regional centers, the number of EB-5 eligible jobs created is based on construction expenditures and revenue generation—not on the number of individual W-2 employees. Regional Economic Multipliers are assigned for each $1 million of investment capital spent on construction costs or $1 million of new revenue creation. Therefore, the estimated amount of EB-5 jobs created by the project and assigned to EB-5 investors is calculated using the project’s construction budget and estimated revenues. If a real estate project is in the early stages of development and has not created all of the required EB-5 jobs at the time of the EB-5 investor’s investment, the investor faces greater immigration risk because the project might lack sufficient capital, face delays in expending that capital, or fail to create revenue as expected—any of which might result in a failure to create the number of EB-5 jobs required to ensure all EB-5 investors receive their permanent Green Cards.
Note regarding bridge financing: Due to the long wait times associated with the EB-5 process, reputable and experienced project sponsors often use bridge financing for projects while raising EB-5 capital. Access to bridge financing is a positive indicator that the project sponsor has the financial means to fund the project without raising all or any of the EB-5 capital. This approach benefits EB-5 investors because all jobs created by bridge financing count toward the EB-5 job requirement. Through bridge financing, some—or even all—of the required jobs can be created before any EB-5 investors make investments. In such cases, if the project also receives exemplar approval, EB-5 investors can be assured that the project has already created all jobs and met all requirements for their permanent Green Cards even before making their investments.
Investor benefit: Projects that are under construction and have spent significant amounts of capital—including the use of bridge financing—have already created a pool of jobs for potential EB-5 investors. Such projects offer the security of advanced project completion and ensure that the required number of jobs will be created for EB-5 investors to receive their permanent Green Cards.
Questions to ask:
- Has the project started construction? Investors should be cautious about projects not yet under construction. Many developers are dependent on EB-5 capital and will not break ground before securing these investments. In such cases, if the project fails to raise the EB-5 capital, the project will fail.
- Have enough jobs been created for all EB-5 investors in the project? The safest projects will have not only started construction, but will be far enough along in construction to create the required jobs for all of the EB-5 investors. Such projects effectively have eliminated the immigration risk.
- What percentage of the required EB-5 jobs come from construction alone, not revenue creation? The more a project depends on construction spending alone for EB-5 job creation, the greater the certainty that a sufficient number of EB-5 jobs will be created. If EB-5 job creation depends on future revenues, the immigration risk to EB-5 investors is higher because not only must the project’s construction spending match its budget, but the project’s revenues must meet expectations. Revenues are projected years into the future and may not adequately account for changes to the market or other factors.
- If the project is already under construction, is sufficient capital available to complete the project and create the total number of projected jobs? Investors should be wary of projects that are delayed or have been “under construction” for long periods. Appropriate construction timelines vary based on asset type, size, and location.
(3) Properly Structured Capital Stack
Why it matters: A project’s capital stack is the combined sources of its financing. For EB-5 real estate projects, the capital stack is usually divided into senior loan financing from a bank, EB-5 project financing, usually in the second position as mezzanine debt or preferred equity, and equity financing from the developer. Understanding how the capital stack is structured and how much of the funding is already committed offers insight into the financial risk of a project. The primary risks are as follows:
- No bank financing has been drawn. Certain projects may have only secured a commitment letter or may lack bank financing for other reasons. In such cases, the EB-5 investors bear the risk that the bank will not finance the project. Without bank financing, which is often the majority of the capital for the deal, the project will likely fail.
- No developer equity is committed. Certain project developers may not commit equity until the EB-5 capital is fully raised and committed. This may indicate that the developer is wary of the project risks and will only take chances with other people’s money or that the developer doesn’t have alternatives and can’t complete the project without EB-5 capital.
- Developer equity amount is too small. Working with project developers that contribute only a nominal amount of capital to a project—such as 5% of the total cost—may increase both immigration risk and financial risk to EB-5 investors. Such developers have not taken on enough risk to attempt to mitigate and reduce the project’s overall risk. We recommend seeking projects with a minimum of 10% committed developer equity.
Investor benefit: Investing in a properly structured project that is partially or fully financed by a reputable and well-capitalized developer will increase the likelihood that investors will receive their permanent Green Cards. It also increases the likelihood that investors’ capital will ultimately be repaid at the end of the loan or investment period. Exit opportunities are available for completed projects, but incomplete or stalled projects do not have favorable exits for EB-5 investors.
Questions to ask:
- What is the capital stack for the EB-5 project? The capital stack is typically reflected in both percentages and hard numbers. For example, for a project that costs $100 million, a typical capital stack may have 65% senior financing ($65 million), 15% EB-5 mezzanine financing ($15 million), and 20% developer equity ($20 million). In general, EB-5 investors should strongly avoid projects with more than 50% EB-5 financing in the capital stack and projects that do not utilize third-party bank financing.
- Has a senior loan been secured and, if so, how much has been drawn? Be aware that commitment letters and letters of intent are not binding. Investors should ensure that a senior loan agreement has been executed with a reputable financial institution. Depending on asset class, some developers may have strong relationships with lenders and only secure the loan later in the process if they have a sufficient balance sheet.
- Has developer equity been committed? Investors should request a copy of the equity commitment letter from the developer and other evidence that the developer has committed the stated equity to the project. If the land is purchased and construction has started prior to EB-5 investment, this is a strong signal equity is committed.
- Is the developer equity amount too small? Generally, developer equity amounts of less than 10% indicate that the developer has not incurred enough risk to mitigate project risk.
(4) Feasible Exit Strategy
Why it matters: A project’s exit strategy is how the project will ultimately make money—specifically, enough money to pay back all EB-5 investment capital. Many EB-5 projects are structured as real estate projects because real estate projects have hard assets as collateral and a relatively easy-to-understand exit strategy in a well-known and mature market. While emerging, venture capital, and speculative investments may qualify for the EB-5 Program, they typically are not a good fit because of the greater financial risk associated with such investments. Gambling on speculative investments makes sense for those chasing a high return, but such investments do not make sense for EB-5 investors who want to ensure that they obtain Green Cards and safeguard the return of their capital in a defined time period.
Investor benefit: A clearly defined and feasible exit strategy is critical to the return of the EB-5 investor’s capital. A reputable developer with a track record of repayment and exits increases the likelihood the EB-5 investor’s investment capital will ultimately be returned.
Questions to ask:
- What is the exit strategy for the EB-5 project and EB-5 Investors? Real estate projects typically employ two primary types of exit strategies: selling the project or refinancing the asset after operations are stabilized. In the first case, investors need to determine the likelihood, timing, and price for the completed project to sell. For a refinance, investors need to determine the likelihood that the project will be well-operated and generate enough value.
- If the exit strategy is from unit sales, what is the third-party appraised sales value for the project upon completion? Reputable project sponsors obtain third-party appraisals for projects intended for sale upon completion.
- Additionally, what is the plan for redeploying the capital after the unit sales? Redeployment is an important topic, especially now, because of the long wait times due to visa retrogression, so having a clear plan in place is critical to ensuring Green Card safety.
- If the exit strategy is from refinancing from operations, what are the projected revenues and costs? Reputable project developers have financial projections and pro-formas regarding expected revenues and costs that are backed up by third-party appraisals and data.
- Has the developer or project sponsor previously sold or re-financed similar projects in the past, and have these past projects met their anticipated financial targets? Reputable project developers have successfully executed on similar projects in the past with conservative financial assumptions that were either met or exceeded in terms of sale price or exit strategy assumptions.
(5) Guarantees and Protections
Why it matters: Well-structured projects typically feature certain guarantees and protections for investors that limit immigration and financial risk. The following are some common guarantees and protections:
- An I-526 refund guarantee ensures that if an EB-5 investor’s I-526 petition is denied, his or her money will be refunded. Without this guarantee, a denial could mean that an investor’s capital remains invested for an extended period with no Green Card benefit and little or no return. An I-526 refund guarantee should be from a strong, well-capitalized entity, which helps ensure that an investor will be able to receive his or capital back promptly in the case of an I-526 denial.
- A completion guarantee ensures that the developer will fund any project costs in excess of the budgeted amount. Developers securing senior bank financing should always have this type of guarantee. Without it, any costs over budget could result in a delayed or incomplete project.
- Repayment terms ensure repayment within a set timeframe. Projects typically have loan terms, but they may allow extensions for long periods, or even indefinitely. They may also have equity conversion options. In such cases, the project sponsor may be able to keep EB-5 capital invested even after investors have received permanent Green Cards. Well-structured projects usually require repayment within a certain period once an EB-5 investor has received his or her permanent Green Card or, even better, once each investor has filed his or her I-829 petition.
Investor benefit: Guarantees and protections are all for the investor’s benefit. Their absence may raise concerns or indicate high immigration or financial risk.
Questions to ask:
- Does the project fully refund EB-5 investor capital if an I-526 petition is denied? Strong EB-5 projects have a clear plan to repay investors in the case of an I-526 petition denial.
- Does the project have a completion guarantee? A completion guarantee reduces the job creation and financial risk since a fully constructed project is worth substantially more than a partially completed project and all construction jobs will be created if the project completes construction.
- What are the repayment terms? Strong EB-5 projects have a clearly defined term of investment with minimal flexibility for the project developer to extend / delay repayment of EB-5 investor capital.
- What is the loan term? The loan term should be clearly defined and meet USCIS requirements for keeping the EB-5 investment capital at risk.
- Is there any option or ability for the loan to be converted to equity without EB-5 investor consent? Some projects have this type of a loan conversion option which can be highly misleading for potential EB-5 investors. Investors should be cautious and confirm if this type of conversion option is present.
- What other guarantees or protections does the project offer? Strong projects offer multiple guarantees and other similar protections for EB-5 investors to reduce both immigration and financial risk.
Note regarding principal repayment guarantees: Certain projects may guarantee the repayment of EB-5 investors’ investment principal. Such guarantees are likely to result in increased scrutiny from USCIS and even denials because such guarantees are in direct conflict with the “at-risk” requirement of the EB-5 Program. EB-5 investors should carefully examine how such repayment guarantees are worded and whether they are likely to be accepted by USCIS. Generally, we do not recommend investing in projects with repayment guarantees.
Note regarding EB-5 capital repayment with a real estate asset: Certain projects may repay investors by giving them houses or condominium units. Once again, USCIS is generally against this type of repayment because it conflicts with the at-risk requirements of the program. While such projects might have been approved in the past through clever structuring that slipped past USCIS scrutiny, USCIS is now much more vigilant in striking down such Green-Card-for-real-estate schemes. Additionally, in many cases, the actual value of any house or condominium the EB-5 investor receives may be less than his or her investment capital, which means such investor risks obtaining a Green Card for an asset worth less than the original investment amount. We do not recommend investing in projects that promise a real estate asset as EB-5 capital repayment.