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Proving Source of Funds Derived from a Loan Based on Assets During the EB-5 I-526 Petition Process

When applying for an EB-5 visa, the first step in the process is submitting Form I-526, Immigrant Petition by Alien Investor, to U.S. Citizenship and Immigration Services (USCIS). By submitting this petition, the investor proves to USCIS that they meet all the criteria of the EB-5 program—specifically, that they have invested the required amount in a new commercial enterprise (NCE) and that their investment will create 10 full-time, permanent jobs for U.S. workers.

While this process sounds simple based on the explanation above, providing relevant supporting documents complicates matters. To support projections related to job creation, the applicant should include a comprehensive business plan and a credible economic report. In addition to providing evidence such as bank statements and loan certificates to show that their capital is irrevocably committed to the investment, the investor must also prove that the investment capital was obtained legally.

The most common source of investor capital in the EB-5 visa program is asset-based loans. Loans are perfectly acceptable sources of funds, but investors must provide evidence that all assets and loans were obtained legally. If an investor borrows from an individual rather than an institution like a bank, the investor must also prove that the lender’s funds were obtained legally.

We’ve developed a case study that shows a strategy for proving that funds were legally obtained in a case involving a loan secured against an ownership stake in a hotel, with the loan funds derived from the payments an individual received from a company. We also provide a downloadable EB-5 source of funds example that shows how to present supporting documents to USCIS.

EB-5 Source-of-Funds Case Study: Funding an EB-5 Investment with a Loan Secured against an Asset

An investor—let’s call her Jane Smith—owns a 40% share in a hotel. Jane’s father had owned the hotel, and when he died, he left a 60% share to Jane’s mother and 20% each to Jane and her sister. In March 2020, Jane’s mother gifted Jane 20% of her ownership stake, leaving Jane with a 40% stake. In March 2020, the hotel was valued at $2,500,000. This implies that Jane’s 40% share is worth $1,000,000.

In April 2020, using her stake in the hotel as collateral, Jane received a loan of $900,000 from John Doe. The loan is secured by a mortgage deed on Jane’s collateral in the hotel and on a personal guaranty granted by Jane in favor of John, the lender. Jane then uses this $900,000 loan to invest in an EB-5 project in a targeted employment area (TEA).

Supporting Documents Needed to Prove the Loan Derives from Legal Sources of Funds

To meet USCIS requirements, Jane needs to prove that she owns the capital used for the EB-5 investment. Although “capital” can refer to cash, the USCIS definition in section A(1) of Volume 6, Chapter 2, of the Policy Manual is much broader:

Capital includes cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the immigrant investor, provided the immigrant investor is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.

Therefore, Jane needs to prove ownership of the collateral before providing documentary proof related to the loan.

  • 1. Proving ownership of the collateral

Jane’s I-526 petition should be accompanied by documents proving that she owns a share of a hotel that she partly inherited from her father and partly received as a gift from her mother. She also needs to provide proof that her share provides enough collateral to act as security for the loan.

To clearly explain the source of her collateral to USCIS, Jane should include the following exhibits in her cover letter:

  • Certificates of title for the hotel
  • Selection of online booking pages for the hotel (as proof that it exists and is in operation)
  • Her father’s death certificate
  • Her father’s will
  • Deed of donation showing that Jane’s mother gifted her shares in the hotel
  • Hotel valuation letter
  • 2. Proving the loan agreement is legal

Jane needs to prove that the loan funds were legally acquired. In other words, she needs to prove to USCIS that she entered into a legal loan agreement, with the loan secured against her collateral in the hotel. To prove the legality of the loan, Jane can provide the following documents:

  • Loan agreement
  • Note
  • Personal guaranty
  • Deed of mortgage
  • Monthly documentary stamp tax declaration return for the recording of the deed of mortgage
  • 3. Proving the funds used for the loan were obtained legally

Finally, Jane needs to provide evidence of the source of John Doe’s funds. Let’s say John is a managing member in a consulting business called XYZ Consulting, which was established with zero start-up capital. The funds he used to provide the loan derive from dividends disbursed by the company.

Jane should confirm John’s identity by providing copies of his passport and most recent tax returns. Next, she should provide a brief overview of John’s involvement in the business and of the business itself. To show that the company began with no start-up funding, Jane can include the company’s bank statement for its first year of operation.

To prove the company exists and is in good standing, Jane can provide the following supporting documents:

  • Certificate of Formation of XYZ Consulting
  • FEIN letter from IRS for XYZ Consulting
  • Operating agreement for XYZ Consulting

Jane can then provide a brief overview of the services provided by XYZ Consulting, relying on the operating agreement as documentary evidence. To show that the company’s income—and thus the dividends disbursed—derives from legal operations and that taxes have been paid on all earnings, Jane can include the following:

  • A selection of client invoices for 2018 (the previous fiscal year)
  • XYZ Consulting’s 2018 bank statements, with the payments relating to the invoices included highlighted for ease of reference
  • XYZ Consulting’s audited financial statements for 2018
  • XYZ Consulting’s tax return for 2018

The documents listed above include information about the dividends the company paid to its members. However, Jane still needs to show the amounts of the dividends to prove that John had the funds available to provide the loan. Jane should include the following:

  • All tax-related documents for XYZ Consulting
  • John’s personal tax documents showing income received from XYZ Consulting
  • John’s personal bank statements covering the period in which the dividends were paid
  • Letter from the company’s auditor explaining the dividends

Explaining the Source of Funds as Part of Your EB-5 I-526 Petition

The I-526 petition is accompanied by a cover letter that explains the significance of the evidence presented to USCIS that the petitioner’s investment complies with the regulations set out in the EB-5 program. It also lists the exhibits included as evidence of the petitioner’s claims.

To develop a clearer picture of how to present source-of-funds information and exhibits to USCIS, download our example I-526 source-of-funds cover letter section. This sample source-of-funds section describes how an investor can demonstrate the source of their EB-5 investment capital for funds obtained through a loan secured against real estate, with the loan funds derived from company profits or dividends.

Example I-526 Source-of-Funds Cover Letter Section

What makes proving the sources of EB-5 investment capital so challenging is that each investor has unique circumstances. Working with an EB-5 professional like EB5 Affiliate Network can greatly simplify the I-526 application process. Contact EB5AN today to learn how we can help you.