Escrow accounts play a key role in the movement of funds in the EB-5 regional center model, traditionally facilitating the release of funds to a project upon adjudication of an investor’s I-526 petition for conditional permanent residence. These escrow accounts typically hold the entire EB-5 investment pool, and capital contributions are credited to investors once their I-526 petitions are approved. However, recent increases in wait times for adjudication, especially for Chinese investors, who make up the vast majority of applicants under the EB-5 Program, have encouraged regional centers to explore other escrow models and legal mechanisms to allow for projects to receive essential funding while still making a refund of the investment possible in the event that an I-526 petition is denied.
Changing trends in the structure of escrow agreements reflect two conflicting viewpoints: while investors prefer to maintain a conservative fund release agreement to guard against the possibility of petition denial, project developers seek to access the investment capital and move forward with projects as soon as possible using more aggressive release terms. Regional centers have adopted more dynamic escrow agreements in an effort to accommodate the latter, resulting in a new escrow landscape for investors. This article discusses recent trends in this regard and details strategies regional centers can implement when negotiating escrow agreements to take into account the concerns of all parties.
Changing Demands in the EB-5 Market
The move away from escrow agreements conditioned on the approval of I-526 petitions is an attempt by regional centers to adapt to changing demands in the EB-5 market. More complex fund release mechanisms allow projects to move forward on schedule, reducing the possibility for the advent of contingencies which would otherwise affect the viability of the project and therefore approval of investors’ I-526 petitions. This possibility is illustrated through the example scenario of a regional center that has raised all capital necessary for the construction and operation of a hotel but must wait for adjudication of the investors’ petitions before moving forward with the project.
In this case, multiple aspects of the project might hinge on the release of escrow funds. For example, the purchase of the hotel property still needs to be finalized, as do contracts with local service providers. The potential for changes in the local real estate and business markets to affect project costs rises the longer funds are held in escrow, risking the success of the project. In this scenario, the purpose of the escrow account is to safeguard funds in the event of a petition denial, but the withholding of funds itself may very well result in the failure of the project and a denial of all associated I-526 petitions.
A regional center finding itself in such a situation may request that investors amend the existing escrow agreement to allow for an earlier release of the investment funds. However, such an ad hoc approach may not be well received by investors, who wish to safeguard the investment funds until such time as approval of the I-526 petition is assured. Additionally, because United States Citizenship and Immigration Services (USCIS) evaluates project documents during the I-526 approval stage to ensure investors will be able to meet the requirements of the EB-5 Program with the proposed project, investors may be hesitant to move forward unless this question has been answered. As such, regional centers may find that investors are unwilling to agree to early release amendments, or such a proposition may raise red flags and cause investors to withdraw their funding altogether.
The solution to this dilemma may lie in presenting investors at the outset with escrow agreements that account for the early release of funds without assurance of I-526 approval if necessary. While approval of the I-526 petition may be included as a trigger, new escrow agreements also include other conditions under which investment funds would be released to the project. These might include USCIS approval of an exemplar petition for the project or of a certain number of initial I-526 petitions, both of which would signify a likelihood that additional petitions associated with the project will be approved. Nonetheless, such agreements are riskier for investors than the traditional model is.
Strategies for Regional Centers
The role of escrow has evolved, meaning investors must now review and negotiate the terms of their investments carefully. As described above, escrow agreements may no longer safeguard the investment funds by default until approval of the I-526 petition and may instead provide for a more pragmatic release of funds to the project as needed to maintain the schedule in the project offering. In a scenario where release is triggered by USCIS approval of a certain number of petitions associated with the project, later investors would thus submit their investments to escrow with the release condition already having been met, meaning there would in effect be no escrow period for such investors despite the signing of an escrow agreement. For this reason and others, the changing escrow landscape should encourage investors to carefully review all project documents with the assistance of a qualified professional.
The following are three strategies regional centers have adopted to facilitate the early release of funds from escrow.
- Release funds upon filing of the I-526 petition.
Rather than conditioning fund release upon acceptance of the petition, some regional centers have opted to use filing as the trigger condition. This shortens the escrow period from its original length, beginning from the time funds are wired to the regional center and ending when USCIS approves the I-526 petition, to the earlier date on which the investor simply files the petition. This poses a significant risk to investors, as denial of the I-526 petition would potentially occur months or years after funds have been released.
- Seek replacement investors in the event of an I-526 denial.
In an effort to facilitate the transfer of funds to projects while assuring investors of a refund in the event that an I-526 petition is denied, regional centers have begun to include in escrow agreements the provision that in the event of a petition denial, the center will make reasonable efforts to source replacement funds and thereby allow a refund of the investment amount to the denied investor. Some centers have additionally attempted to keep a certain amount of funds in escrow to refund denied investors, though centers adopting this strategy must ensure, as always, that each investor’s full investment amount, when released, is applied to job creation rather than to refunding other investors.
- Hold funds in overseas escrow accounts.
USCIS has not prohibited the use of overseas escrow accounts for EB-5 projects on the condition that funds are transferred to the new commercial enterprise in the United States once the investor is granted permanent residence. The opportunity for an investor to work with an escrow account in his or her country of origin may ease concerns, though U.S. escrow accounts pose fewer problems in terms of exchange rates and potential restrictions on the export of capital.
Regional centers have increasingly adopted more complex escrow models in response to changing conditions within the EB-5 Program, namely lengthier wait times for approval of I-526 petitions. However, these agreements do create more risks for investors, who must consequently ensure they review escrow terms thoroughly with the assistance of qualified financial and legal professionals.