This is Sam Silverman, managing partner at EB5AN. I’m joined by my partner, Michael Schoenfeld, and Reed Thomas of NES Financial. So, thank you for taking a few minutes out of your day to join us today. And today, we’re going to be discussing the five things that matter when you’re considering an EB-5 project investment. Having reviewed hundreds of EB-5 projects over the last seven years, we’ve distilled our experience down into five key items to consider when evaluating a project from an investor’s perspective for investment. And so, today, we’re going to try and cover that overview. So, to begin, we’ll share a little bit about our company, EB5AN, and NES Financial. And then, we’ll jump into these five items listed here on the table of contents, numbers two through six.
So, before we jump into the individual items in our framework, we wanted to share a little bit about the current timeline and process for EB-5 investment, given the upcoming changes that have been announced going into effect at the end of November, November 21. So, as many of you know, there have been recently announced changes—most importantly, an increase in the minimum investment amount from $500,000 to $900,000, which will be going into effect on November 21, 2019. And so, today, approximately mid-September, this chart lays out the rough order of operations that you would want to follow in terms of a process for identifying an EB-5 project for investment—selecting an immigration attorney to help you assemble your source of funds for the project, and then, working with that attorney to fill out all of the documents related to the project, and then, the final step being to invest the $500,000 into the project itself.
And then, post-investment, the attorney would then immediately file the I-526 petition with USCIS, which just needs to occur, at the absolute latest, by November 21 to remain qualified for the lower current $500,000 investment amount. And so, the next slide here is just a brief summary of these investment changes. And so, again, the most important aspect of these changes is the increase in minimum investment amount from $500,000 to $900,000. The other change is related to TEA areas, and other minor clarifications are not really that relevant to investors currently before November 21. The main thing you want to understand is that if you want to invest at the $500,000 level, the money has to be invested and the I-526 petition has to be printed out and submitted and received by USCIS by November 21, 2019.
There’s a little bit of confusion in the industry, where some people are believing that a project will be grandfathered in. And that is not the case—only individual investors who filed their petition before November 21 are grandfathered. And so, if you’re an investor and considering investing in EB-5, it’s very prudent to get that process moving as quickly as possible when you’re sure that you can invest prior to that November 21 deadline.
And as we mentioned earlier, the purpose of this webinar is to provide a framework drawing on years of experience in reviewing projects to help EB-5 investors who are not as familiar with diligencing real estate investments in their day-to-day life with a basic framework of easy-to-ask questions that are, you know, relatively straightforward to determine how to evaluate a project under the two key risk categories—the immigration risk of the project, the risk of getting the I-526 approved and actually receiving the green card and having the green card become permanent, and then the financial risk of receiving the promised financial return and a return on the principal investment capital, the $500,000, back in the future. Those are the two areas that we’re going to discuss today. And the five different framework points will each address either one or both of those risks—immigration or financial risk.
And as I mentioned earlier, this webinar is brought to you by EB5AN—we’re a national regional center operator and consulting firm—and NES Financial. And I’ll let Reed jump in in the next slide or to discuss NES as well. But first, as quick background for EB5AN, I’m Sam, managing partner. My background and some degrees and things are on the left-hand side there, and I’m joined by my partner, Michael Schoenfeld, who’s on the call as well. And Tim Shih, our third partner, is not with us today, but you can see a quick summary of his biography there on the right-hand side. And so, as a quick summary, go ahead, Mike.
Okay. Thanks, Sam. So, yeah, this is Mike Schoenfeld. Really appreciate everyone taking the time today to join us and run through this. And as you can see from the backgrounds here, all three of us with EB5AN come from more of an institutional background of either management consulting at the Boston Consulting Group, private equity, big law. And we believed that the EB-5 industry needed more institutional knowledge, and that was about seven years ago. And since then, we’ve become one of the leading firms within the EB-5 industry.
And I’ll let Reed jump in and share a little bit about NES Financial and about his particular path to the EB-5 space.
Thanks, guys. It’s a pleasure to be here. The EB-5 industry is an area that NES specializes in. More broadly, we focus on what we like to call “specialty financial administration.” So, these are private equity investment funds that are really created with the intention of doing good, and EB-5 certainly falls into that category. It’s the only job creation program in the United States that creates jobs in targeted employment areas at no cost to the U.S. taxpayer. And at the same time, it provides foreign investors with an opportunity to pursue their American dream through legal immigration. So, it’s clearly a program that’s intended to do good, but it’s got a lot of complexity associated with it. And NES looks to provide security, transparency, and compliance into these programs, picking up on what Mike talked about in terms of institutional experience being brought to the space.
What NES really tries to do is help make this program successful by providing purpose-built technology that does the administration and tracking necessary to make sure and help investors maintain security over their investment and ultimately have a successful immigration result, but also help issuers and regional centers like EB5AN meet their compliance obligations. I run this aspect of our business at NES Financial. We’ve focused on EB-5 for the last almost 10 years now. We got into it in 2010, and today, we are the largest provider in the EB-5 space, having been engaged on over 700 EB-5 projects, which, when fully funded, would represent about $20 billion worth of EB-5 capital. Back to you guys.
Great. Thank you, Reed. So, as additional context for EB5AN, or EB5AN, we’re a national EB-5 regional center operator and fund manager. We were established in 2013. We have 15 USCIS-approved EB-5 regional centers covering 27 states. We have 100% approval history on USCIS-adjudicated petitions. About 1100 EB-5 investors from more than 40 countries have chosen to invest in projects under our regional centers.
Geographically, our regional centers cover most of the coastal areas in the United States. And unlike some other EB-5 companies that you’ll see, all of the regional centers that we own are 100% owned and controlled by EB5AN. This is a quick map showing just a select number of the countries that we have current EB-5 investors from—it’s a fairly diverse group. And one of the things that we’re most proud of as a company is that investors from a wide variety of backgrounds and cultures around the world have consistently found value in our company’s approach to diligencing and managing EB-5 investment projects. Great. So now, to jump into the first key item of our framework, the USCIS I-925 exemplar approval.
Mike, do you want to jump in here?
Sure. So, to provide a little bit of feedback of what the I-924 exemplar is, as an EB-5 investor, when you’re filing your individual petition, it’s called an I-526 petition. There’s two pieces to an I-526. First is the project side—this is all of the documents related to the EB-5 project. And it specifically looks at, how are you going to create the jobs that you say you’re going to create, the 10 [jobs] per investor?
How was the project structured? And all of the key details that USCIS needs to see to know that the plan is credible. What you are allowed to do is file this portion of the application separately to the U.S. government and have them approve an I-924A exemplar petition. You could think of this as a pre-approval of the project. It typically takes about a year and a half for the government to actually review the project by itself. So, for very select projects that are patient and can wait, you’re actually able to submit the project ahead of time and wait for the government to approve it before you accept investors. And in projects like this, you’re able to virtually eliminate the immigration risk of the project not being approved, because it is approved. And then, if the project is already ongoing, that I-924A exemplar actually takes care of that immigration side of the project.
So then, as an investor, the main thing that you need to show is your personal source of funds. So, if you select a pre-approval project, the two main benefits are first, you know, that the immigration risk is lower because the project is approved, and second, we’ve seen faster processing times on individual I-526s because the government is not looking at the project anymore. They are only looking at your individual source of funds. So, you can’t guarantee a processing time. But if the government’s only looking at a small portion of what they would be if you’d applied with a non-exemplar-approved project, you can expect a faster adjudication.
And to add to that, as Mike mentioned, the exemplar approval is not a requirement. It’s not something that a project has to do, but it’s widely viewed as a best practice in the industry. And additionally, you know, as an EB-5 investor, again, on the right side, the key question is simply, does the project currently, or a previous phase, have a USCIS exemplar approval, right? It’s a simple question. If the answer is yes, then the company can easily provide a copy of that approval, which is just a letter from USCIS that references this specific project and states that the project has been reviewed adjudicated and been pre-approved.
And Reed, I know that many times with NES Financial, part of the escrow release conditions can be an I-924 exemplar approval on the project. So, can you highlight a little bit on why you would make that one of the escrow release conditions and what you see as the best practice in terms of exemplar filings?
Yeah, good question. So, an I-526, simply put, really consists of two parts. There’s a part of the I-526 petition that has to do with the project and the details associated with the project. The other part has to do with the individual investor’s source of funds and information pertaining to that individual. And so, every I-526 associated with a project has the same project part, obviously. So, if there’s something wrong with that project part of the petition filing, then by definition, every one of the investors would have that same problem and may be denied. So, what happens a lot of times when folks do escrow release is they make a pledge to the investor to repay the investor’s $500,000 amount in the event that the investor’s petition is denied. So, in the event, obviously, that the petition is denied for project reasons, that would mean every one of those investors would be denied. And therefore, there needs to be a comprehensive plan in place to cover that scenario and repay the investors. So, a best practice, clearly, is to have that project approval out of the way so that the investors understand that the remaining reason for denial would only be associated with their individual petition. And the likelihood that all investors are denied is extremely remote.
Great. Thank you, Reed. So, now moving onto the next factor of the framework—sufficient job creation. So, why does sufficient job creation matter? One of the requirements for the investor’s green card to become permanent is the creation of at least 10 new jobs. Once that requirement has been met for each investor, then each investor in the project will receive their permanent green card. The proof for that 10 jobs happens at the submission of the I-829 petition. For most real estate projects, which are the most common type of EB-5 project, this job creation is based on the construction costs and revenue generation of the project. So, how much money is spent on building the building, and how much revenue, let’s say if the building is a hotel, is generated once the building is open? So, in most cases, job creation is estimated based on the cost and revenue. And so, the way to reduce the risk is to join a project where construction is already well underway and there’s already been sufficient money spent on construction, on steel, concrete, wood, et cetera, such that there have already been enough EB-5 jobs created for each EB-5 investor in the project to each receive their permanent green card.
So, again, to summarize and put this in a little bit easier words, to understand, projects where construction has already begun have already spent typically a significant amount of capital. And so, if we know a project, when finished, creates 30 jobs for each investor, well, we know that once the project is at least one-third built, at least one-third of the amount of money has already been spent to build it, then we know that the 10 jobs needed for each investor have already been created. There is no additional benefit for creating more than 10 jobs. Once it’s 10.1 jobs, then you’ve satisfied the requirement, and the investor would then receive his or her permanent green card, right? So, it’s a fairly simple question. First, again, on the right side here, has the project even started construction, right? If the answer is no, then obviously no jobs will have been created.
If it is under construction, then how many jobs have already been created to date, right? Then, what percentage of the jobs come from construction, right? As long as the building’s built or partially built—you want a project like that because then you’re not waiting around to see how much revenue will actually happen. The other thing to consider here is that EB-5 projects are allowed to count all of the job creation from the very beginning of construction through the end of the construction period, regardless of when each investor joins the project. So, the safest type of project is one where construction has already been well underway for, you know, one to two years already and the investor is now coming in while construction is still ongoing, but closer to the end of the construction period of the project, such that more than the 10 jobs that are required for every single investor in the project have already been created. And the investor would know that the day they sign up for the project, even though those jobs would not need to be shown until years later, when the I-829 petition is submitted. The investor would know the day they joined the project that there already is sufficient job creation for them individually to be allocated the 10 or more jobs that are needed for their permanent green card to be approved. That’s really important, too.
Exactly. And if you combine an I-924A exemplar where the project’s approved and a project that’s far along construction, where all of the jobs have already been created, you have done everything you can to mitigate immigration risk on both the I-526 and the I-829. So, as long as your source of funds meets USCIS criteria, you will end up going through the process, and the I-526 and the I-829 are already approvable, which is very rare to find in a project. And if you can find a project like that, you’ve done everything you can to mitigate the risks.
Thank you, Mike. And as I mentioned earlier, construction costs from the very beginning of the project count toward job creation, even though the investor is joining the project at a later date. This is specifically called bridge financing. And USCIS has issued a memo specifically approving this type of interim financing. And as Mike just mentioned at the end here, projects that do have the exemplar approval and all jobs created at the time an investor joins the project are the absolute safest projects from an immigration perspective for investors to join the initial I-526 approval. The risk is mitigated there because the exemplar has been approved. And the second step of the green card, becoming permanent, is mitigated by having at least the 10 jobs already created. So, that’s what you want to look for for any project, from an immigration perspective, to reduce the risk down as low as possible.
Great. So, moving on to the third item of our framework—a properly structured capital stack. I’ll let Mike jump in and start with this one.
Sure. So, when you think about a capital stack for an EB-5 project, the goal of a project—let’s say it’s a hotel that’s going to cost $100 million—is that you need to have access to all $100 million. If you only have access to $80 million, that hotel will not be built. So, when you’re thinking about what makes for a good capital stack, you want to look for pieces of the capital stack that are already committed, a developer that has committed their equity or secured all of the equity needed in the deal, a senior loan in place, or one that is nearly in place and ready to be drawn on, or potentially even drawn on. And then, the EB-5 portion—that contingency plan in case the EB-5 does not all materialize. As you’re looking at where we are in the timeline of coming up to November 21, where the rules will change. There are going to be many projects that get halfway up the hill.
They’re looking for $20 million of EB-5, and they count $10 before the rules change. Then, what happens, the best case is the project can still be completed. So, you need to see what the contingency plan is on the EB-5. The other piece is looking at the developer equity. You want a developer that has skin in the game. So, the more developer equity in, the more actual cash they’re putting into the deal, the better. And I’ll actually let Reed jump in here because as NES reviews projects, I know one of the key things they look at on the capital stack side is how everything fits together, and this drastically impacts the escrow structure they allow on the project. So, Reed, if you can please let us know a little bit about the best practices in terms of the capital stack, what you’ve seen, and what you think of for the EB-5 capital.
Right, because when it comes to escrow, you know, the important thing really here is that the escrow is structured such that it provides that level of protection for the investors in the event that the I-526 petition is denied. In this day and age, with the popularity of the program, the processing times by USCIS for I-526 approvals are very long and exceed the practical limit for what a developer can accommodate because the project has construction schedules and timelines that must be met. So, inevitably, some portion or all of the EB-5 investment money, the $500,000, ends up being advanced to the project prior to the petition being approved or being adjudicated. And so, that creates a scenario whereby it’s really, really important to make sure that there’s enough capital in place to at least finish the project because as an investor, when your capital’s advanced prior to the petition being approved… imagine the scenario where all that money’s in the project, and for some reason, the individual petition ends up being denied. At least if the capital stack’s in place, there’s a very strong likelihood that the project will get complete and the capital will ultimately be returned. So, it’s one of the things when we do due diligence on a project, we really focus on sort of the robustness of the capital stack and making sure all the pieces are in place. So, you mentioned bridge financing—so, that’s an excellent tool to look for because the project in those cases can get underway while EB-5 capital is still being raised.
Great, thank you very much, Reed. Moving on to our fourth item—a feasible exit strategy for the project. So, why does this matter? A realistic exit strategy that defines exactly how the project will make money sufficiently enough to pay back EB-5 investment capital. So, as many of you know, most EB-5 projects are structured as real estate projects. And so, typically, what that means is there’s usually either a sale of the real estate, or there’s a refinancing once the real estate has been completed. So, it’s really important to understand, you know, once the building, hotel, apartment building, you know, community of single-family homes, et cetera, whatever the asset is, what is the realistic source of revenue that’s going to be available to repay EB-5 investors once the term of the investment has been completed? Mike, do you want to jump in and comment on this as well?
Sure. And one other portion that we didn’t mention on the exit strategy is that in EB-5, part of what you have to do is keep the funds at risk. So, as an EB-5 investor, you need for your EB-5 investment to stay in the project or redeployed until you can file your I-829, which, due to current processing times, is four or five, maybe even six years or longer away. So, one of the key items to look at on the exit strategy is not just the first project—which it is absolutely critical to have a project that makes financial sense and that is economically viable without EB-5—but then, what is the strategy for keeping this money at risk after completion of the project? And I know that NES has been looking at this for a long time with redeployment and EB5AN.
What we’ve done is when we structure a project is that we look for the long term of what happens if we have, and when we have, a successful first project—how do we make sure that we keep the investors’ funds at risk to USCIS standards, but in the most conservative way possible? And we structure all of our deals with this two-step process in mind of first having a successful exit from the initial real estate asset, by having a financially viable project, and second ensuring that we keep the investors’ funds in USCIS compliance of that risk but in the safest way possible. And these are two key pieces to the same portion of having a good exit strategy, both for the project itself and for the investors at the end of their immigration process, having an exit strategy for them.
Great. Thank you, Mike. So, moving on to the last point in our framework here—what guarantees and additional protections are in place for EB-5 investors in the project?
So, why does it matter? All of these items, additional guarantees and repayment terms, these are items that are all not specifically defined or required by USCIS. These are all items that are what you would call above and beyond the base requirements of the EB-5 program that are put in place by some projects, a small number of projects, to provide better safety and better transparency for EB-5 investors as an incentive, and as a best practice, for investors to join a particular project over another project. So, the main thing to understand is these are not required, but having them in place dramatically improves the odds of the investor having a successful EB-5 investment, completing the immigration process, getting that green card successfully, and getting a prompt return of their EB-5 capital. So, the first item to discuss here is the I-526 refund guarantee.
Essentially what this says is that if an investor’s initial I-526 petition, which, when approved, grants the [right to apply for a] temporary green card—if that petition is denied, then the investor would get repaid within a short period of time. Without this type of a guarantee in place, if an investor got denied, this could mean that the investor’s $500,000 could still have to remain invested for several years without any green card benefit at all, right? So, obviously, if the main goal is not achieved, of getting the green card, then the investor doesn’t want to have their money restricted and remain invested without getting that key benefit that they’re looking for. The second item here is a completion guarantee. And what this means is that it guarantees that the developer building the project will fund any additional project costs that come up above the budgeted amount of the project.
This is a very common type of guarantee that’s in place that is typically given to the senior bank of a project so that the bank knows that, okay, if the project runs over budget a little bit, the developer’s going to fund any difference and make sure that the project gets completed no matter what. The last main item here to consider are the repayment terms. And this is probably the most important of the three. So, the key here is that there’s no specific requirement as to when EB-5 capital must be returned to investors. The only thing the USCIS specifically says is that the earliest that funds can be returned to an investor are after the green card, the temporary green card, has been held for a minimum of 24 months. That’s the earliest time an investor is eligible for repayment. However, many projects will structure their investments so that the repayment happens significantly after that period of time.
And so, what you want to avoid here is a situation where you could get the money back, let’s say in year six per the USCIS rule, but the money is forced to remain invested given the terms in that particular project set by the sponsor, until your I-829, right? So, that’s what you want to look for in terms of the repayment. Again, the lowest-risk project here is one that requires prompt repayment within a specific period of time. Once an investor has filed his or her I-829 petition, which occurs at the end of that two-year temporary green card process.
And Reed, as you’re looking at the escrow on deals in NES, what does a construction guarantee and a repayment guarantee allow you to do within the escrow structures, and why are these best practice in NES?
Yeah, thanks, Mike. Both of those are helpful to provide comfort so that funds could be released from escrow prior to I-526 adjudication. I think the key thing in particular on the I-526 repayment guarantee, though, is to really look—I encourage investors to, or their advisors—to really look at the source of that guarantee. This gets back to the point I think Mike and Sam were making earlier about the importance of a I-924 exemplar. Very few developers or issuers will have the financial capacity to repay I-526s in the event of an entire project denial. And so, we don’t see a lot of those kinds of guarantees where there’s enough capacity from the developer to actually make them good. So, I caution investors and their advisors to really look into that on the individual denial side—it’s much more plausible that those kinds of guarantees can be made. So, I encourage people to look into that carefully.
Thank you. Thank you, Reed. And again, just to summarize here, these additional guarantees and protections are all for the investor’s benefit. And so, projects that, you know, you don’t have these types of guarantees in place are a good kind of red flag for higher immigration and financial risks. And on the right-hand side here, again, this is just a short list of questions that you’ll want to ask an EB-5 project to really understand exactly what additional protections and guarantees are in place for the benefit of investors in the project.
Excellent. Right. So, we have built a purpose-built solution that provides additional security, transparency, and compliance for all the stakeholders involved [in an EB-5 project]. So, from a regional center perspective, we become a third-party administrator that helps the regional center with all the appropriate tracking of all the information and the movement of the money to make sure that the monies are getting spent on the job-creating activities that they’re intended to. In addition, we provide all of the tracking and storage to create a comprehensive audit trail that will help the investors in their I-829 filing and hopefully achieve immigration success, as well as providing online portal access so that the investors know exactly where all things are at all times. As I mentioned upfront, we’re the largest provider of these kinds of services in the industry, and we have worked with many of the different banks to help make sure that funds are safely held. It does say on the slide we are, as it says, we’re active in various organizations, the leading industry organizations, and are regular speakers and authors on various EB-5 topics. Go to the next slide, Sam.
To help investors identify projects that embrace best practices, we thought it was important to provide some kind of recognition that would facilitate that, you know. Sam and Mike talked extensively about very important due diligence aspects that investors and their advisors should consider when looking into which projects make good EB-5 investments. And I think all of those things are right on the money. There’s another important consideration, though, which really has to do with some of the unique characteristics of EB-5. And this gets into what I was talking about—there’s a whole tracking and compliance component that investors are motivated by and their immigration success depends on. And so, just like it is sometimes found in traditional private equity investments, it’s very, very important in EB-5 to look at how an issuer, regional center, conducts their back office work and what kinds of controls and procedures they have in place to ensure that the investment objectives and compliance objectives of the unique characteristics of EB-5 program are met.
And to that end, we think that embracing practices that third-party administration like NES provides meet that standard. And so, what we’ve been doing is awarding projects that embrace these best practices with a medallion, a platinum medallion being the highest standard, where a project has embraced the concept of third-party administration and proper financial controls from the very beginning of the investment period until, ultimately, capital is returned. So, especially with the pressure now to get investments in by November 21 of this year , investors don’t have a lot of time to do due diligence.
So, I encourage everybody to really look for the platinum medallion at a project level, as well as a medallion partner, a medallion recognizing the people and the team involved with the project.
Great, thank you very much, Reed.
So now, before we wrap up, we’ll address a few questions that have come up.
One question that we got is, what happens if the I-526 is denied and it’s due to a personal reason? Is the guarantee still covering you personally for a personal reason, or is it only for project-related reasons? So, that’s a good question that is going to vary by project. So, again, these are guarantees where there’s no specific requirements set by USCIS. So, one project could say that you’re getting a refund only if it’s a project issue. Another one could say, “You’re only getting it if it’s only a personal issue.” The way we do it in our projects is that for any reason, personal or project-related, you’re getting the $500,000 back promptly within 90 days, right? So, that’s the answer for that specifically, but again, that is going to vary by project.
So, you want to make sure that you understand exactly how that capital is going to be repaid, what entity is going to repay it. As Reed discussed earlier, it’s really important to understand what entity is making that promise. And then, the timing of the repayment, right? Is it going to be repaid within days, or is it going to take, you know, a year, right? So, really understanding and getting the information is important. And the final question that we received is, you know, how do I get comfortable with the loan structure of a project, right? And the answer to that is to, you know, ask the issuer what the structure is of the loan, how long the initial term is, are there any extensions? And what’s the collateral? What’s the security for the loan itself, right? In order for a loan to be valid, there has to be some security that’s attached to it which is safeguarding the EB-5 investors’ repayment of capital.
So, looking at the security and making sure, again, that the person that’s borrowing the money, you know, has a rock-solid track record of repaying loans without a single default. You know, there’s no way to 100% eliminate the risk of repayment. But the fact that that track record is in place creates a very strong incentive for all of the EB-5 capital to be promptly repaid under the loans for each project. So, with that, I’ll thank Mike and Reed for taking some time out of their day to join us. And again, any questions related to these projects or other projects that are of interest, please reach out to us at the information listed here, and we’ll be happy to answer questions about these projects or other EB-5-related questions that come up. So, thank you, again, for joining us, and look forward to hearing from you. Excellent. Thanks, everyone.