Free EB-5 Project Evaluation

5 Things That Matter Most: EB-5 Project Investment Framework

Sam (00:06):
Hi everyone. This is Sam Silverman, managing partner of EB5 Affiliate Network. Thank you for taking some time out of your day to join us on today’s webinar today. We’re going to be talking about the five things that matter most for EB-5 investors when selecting an investment project, and we’ve broken down those five items into different categories here. And we’re going to talk through each category and discuss some of the most common questions that investors should be asking with respect to each of those categories. Today’s webinar is going to be recorded. So if there’s something that you didn’t quite follow, or you want to go back and review some of the information, you can look for a recording of it on our YouTube channel in a few days. And if you want to get a copy of the PDF PowerPoint slides, just send us an email at info@EB5AN.com at the front page here.

Sam (01:01):
And then, if you have any questions during the webinar, please use the chat box to submit those, and we’ll try and cover as many of those questions at the end of today’s webinar, all at one time at the end. So, we’ll get started first and go over a quick overview of what we’re going to try to cover today and what those five different major components of the investment framework are. So, first, we’ll start with a little bit of background about EB5 Affiliate Network, or EB5AN for short. We’ll talk about the first component, which is USCIS I-924 exemplar approval. Then, we’ll talk about job creation. Then we’ll talk about a properly structured capital stack. Then, we’ll go into a credible or feasible exit strategy for the project. And then, we’ll finish up with the guarantees and protections that are becoming more common for projects in the market today. And then, we’ll open it up for questions at the end. So, first, a little bit more background about EB5 Affiliate Network. As I mentioned earlier, I’m Sam Silverman, one of the three managing partners. My background is on the left-hand side of the screen here, and I’ll let my partner Mike Schoenfeld, who’s also with us today, jump in and introduce himself.

Mike (02:35):
Hi everyone. Thanks for taking some time to join us today to run through the five key things to focus on when you’re selecting an EB-5 project. As you can see on the screen, my background is focused more on the institutional side of finance. I used to work at a large private equity firm focused on leveraged buyouts, and Sam and I worked together at the Boston Consulting Group before that. So what we’ve tried to do as a team is bring more of that institutional knowledge into the EB-5 industry to create a better product offering and more transparency within the market.

Sam (03:15):
So, a little bit more background about our company. So we’re a consulting company, a regional center operator, and a fund manager. So, we’re involved in all stages of the EB-5 project life cycle. We’ve been lucky to have many USCIS regional centers approved, covering more than 20 states, and many historic projects approved as well over many, many different sub-regions of the country in different industrial categories as well. This is a quick overview of some of our regional center coverage—so we can sponsor projects in many different places around the country without any delay in bringing a project to market. And then, our investors come from a wide variety of countries all around the world. And most importantly, investors from a wide variety of backgrounds have consistently found value in our investment approach under the EB-5 visa program.

Mike (04:26):
So as a framework, when you’re thinking about making an investment in an EB-5 project or evaluating the EB-5 project, I think that one of the most helpful ways to look at it is in two key categories of risk. First is immigration risk—so the risk of getting the green card, and with that it’s “Is the project approvable?” and “Is the project going to create enough jobs to ensure that all the investors are able to secure their permanent green cards?” That’s the first bucket of risk that you need to focus on. The second area of risk is financial risk. At the end of the day, your EB-5 investment is an investment in a new commercial enterprise. Quite often, it’s a real estate development deal, but it could be other deals. And you need to evaluate this project from that lens of seeing how feasible the investment is, how likely it is for you to be paid back, and what the likely outcome is. So all of the five key portions of the focus of the framework do line up with these two categories.

San (05:36):
And so, now we’re going to jump in and kind of talk about the first category, which is the exemplar approval. And that one is going to fall squarely under the immigration side of the equation in terms of the two major buckets of immigration and financial risk.

Mike (05:56):
Exactly. So, what is an I-924 exemplar? This is when you file the project-side of the petition to the government ahead of time. So, if you’re structuring a new hotel deal, you’re able to submit a full template of the project to USCIS before raising any capital and have them start adjudicating that. Historically, this was much more common, and it was because the processing timelines were relatively short. At this point in time, it takes well over a year, sometimes over two years for USCIS to adjudicate an I-924 petition. So, if a project does have this pre-approval, that is great because you’ve taken the risk of the project being denied off the table. So, as an investor, when you’re applying for EB-5, you submit an I-526 form. Within your form, there’s two different portions.

Mike (06:53):
One is the project itself. And the second half is about you, the investor, and your source of funds. If the project has this I-924 exemplar approval, and that means that the project is pre-approved, then you’ve taken all of the risk away on the application from the project side. And the primary thing that the government’s going to focus on is you personally in your petition, in your source of funds. So some of the key benefits that you get with investing in an exemplar project is that USCIS has already reviewed this project, so they know it’s compliant, and they should defer to that prior approval when looking at your application, which quite often means that it will be a faster processing time because the government is not reviewing the project. They’re only looking at you as the individual investor. So it’s not a guarantee that the processing time will be faster, but it is helpful to know that the government has already pre-approved the project, so they’re only looking at you individually. So, to reiterate, it’s definitely not a requirement to have filed the I-924. Now, fewer and fewer projects have I-924 exemplars. And at the $900,000 level, very few projects have had an exemplar approved, but there are some projects that were structured at the $500,000 level which may already have an exemplar approval on the project, which is a good indication the project will continue to qualify and be approvable at the $900,000 level.

Sam (08:31):
Great. Now we’ll shift gears a little bit and talk about job creation, which also is going to fall under the immigration side of the equation. So, when you’re making an EB-5 investment, high level, the goal of the program is an requirement that every new investor has to create a minimum of 10 new jobs in order for the investor to receive a permanent green card. So, the way it works, initially, is the investor files their I-526, and in that filing, they include information about the project, which shows how their investment of $900,000 is going to create those 10 jobs and basically telling the government, here’s my plan, here’s my money, approve me. And then, once they’re approved, later on at the end of the process, when they have to file their I-829, they need to show that that plan actually came to fruition and the 10 jobs—at least 10—that they anticipated creating at the beginning when they filed the I-526 petition were actually created in real life.

Sam (09:40):
And therefore, that investor’s met the requirements of the program, and the government should now make their green card permanent because they did what they said they were going to do and did, in fact, create the 10 or more required jobs, right? So that’s kind of, mechanically, how it happens for most projects—jobs are created based on the construction budget and anticipated revenue. So, regional center–sponsored projects, job creation is going to be based on how much money is spent on steel, concrete glass, et cetera. And then, if it’s an operating business like a hotel or an apartment building, the revenue generated by that building, once it’s completed, is also going to create jobs that can count toward the required 10 number of jobs. So that’s kind of, mechanically, how the creation works. So, in terms of reducing the risk, what investors should be looking for are projects where the development of the project is already well underway, because then you know, that, you know, there aren’t any other barriers to, you know, money starting to be spent or developments starting to happen.

Sam (10:55):
And so, you know, you want to be in a project where construction is well underway. And ideally, it’s a project where, you know, there’s enough construction spending already that’s happened so that enough jobs have been created so that you know that, when you sign up, there’s basically enough jobs for you to be allocated at least 10 jobs going in. And so, the way that mechanically works is that projects that are already under construction, they’ve already spent a significant amount of money. Let’s say it’s a hotel building, and it’s a 20-story tower, and they’re already on the eighth story, right? And enough money’s already been spent at that point so that all the investors in the project have the 10 jobs that they need. So, if you invest as a new investor at that point, you’re already credited for all of those jobs that were created building floors one through eight.

Sam (11:58):
So, there’s this specific USCIS regulation around bridge financing. And so, if the project’s been structured correctly, then it’s going to be able to count jobs from the very beginning through the entire term of the project. And so, conceivably, there’s already enough jobs there the day you sign up. And so, it basically becomes impossible for an investor to not have the 10 jobs that they need because that money cannot be unspent, right? It’s already been spent, the building’s there, you can’t unspend it. And the jobs are just created once the money has been spent. And so, you know, when evaluating projects in various stages of development, some of the major questions you want to ask, of course, are, you know, what’s the status of construction? Are any other permits required? Is the senior bank in place? Has the loan been signed? How many jobs are coming from construction? How many jobs are coming from revenue? How many jobs have already been created? What’s the status with, kind of, the development and capital expenditure of the project? Because that’s going to determine what the risk is, if any remaining risk is present for meeting the required number of jobs for the project.

Sam (13:24):
And, again, this is what I mentioned earlier—bridge financing. So essentially, USCIS, several years ago, adjusted their policy and provided more information on this. And basically, what happens here is that developers say, “Okay, we’re building this hotel, it’s going to cost $10 million. We’re going to put in $4 million of equity, we’re going to take $6 million of senior debt. So four plus six is 10. And then, you know, we’re going to start construction. And, you know, we’re hoping to bring in $2 million of EB-5 funds to reduce, you know, part of the senior loan and maybe part of the equity. But, you know, we don’t know exactly when EB-5 is going to come in. And so, we’re just going to fund the four and the six initially, and EB-5 is going to come in, you know, at some point during construction and just reduce some of the other two sources of capital.”

Sam (14:19):
And so, USCIS has basically said that if that’s the case, then all of the jobs created through spending from the day one, from the very beginning of that project, are going to count toward the job creation. That can be applied for any investors who come in, even if the investor comes in, you know, toward the end of construction. As long as it’s still under development, it’s still going, then that investor can come in and get the job credit, even though a lot of the money has been spent earlier, before that investor came. And so, that’s how to think about job creation with respect to an ongoing project. Now we’ll shift gears and, Michael, share some information about thinking about the project from the financial perspective. And, again, these next three—the capital stack, exit strategy, and guarantees and protection—these are gonna fall on the financial risk side of the equation.

Mike (15:20):
Exactly. So, when you’re thinking about the project from the financial side, the first thing that should come to mind is the capital structure. Where is all the money coming from to complete the project? What you don’t want to get into is a situation where you have a project that’s conceptually there, but there’s no actual financing in place. So, in terms of the capital stack, you can be very creative with capital stacks and real estate development projects and other projects that qualify for EB-5. But typically, it’s a combination of senior financing, EB-5, debt financing, equity of some kind… maybe there’s preferred equity and common equity. Additionally, you can hit the tax incentives in other government public–private partnership–type funding that fits into the deal. So, lots of different ways that a deal can be structured, and it all has to fit together to make the capital stack.

Mike (16:16):
And when we refer to a capital stack, we mean if the project costs $100 million dollars, where is all $100 million of that project coming from? You need it to be a fully complete capital stack where you have a line of sight on all the different types of financing that are needed to actually build that project. So, the key things I would look for as risks when you’re evaluating a project from a financial aspect is where there could be holes in that capital stack. So, if there’s not a committed senior loan, maybe the market will change and you won’t be able to find that senior loan later on. If the developer says there’s going to be $10 million of equity but nobody’s actually committed any equity, then there’s no way for you to know whether equity is available. That’s a potential red flag. You need to know where the equity in the deal would be coming from.

Mike (17:04):
And one other thing we’ve seen is in a project where the developer ends up not leaving any capital in the deal at all. They just use senior financing and EB-5 for the rest of the deal, and they don’t have any actual skin in the game. So if anything goes wrong, they might just walk away. So really analyzing that capital stack is critical to understand how secure the investment is from a financial perspective. And if you’re thinking of the benefits of choosing a project that’s properly structured… I mean, first, you’re investing in a project that’s actually going to be built, which will lead to the job creation occurring and you getting the permanent green card. Additionally, if a project can get constructed and it’s properly structured, and there’s a feasibility study and the project makes sense economically, there could be many exit opportunities so that you can sell the project at the end of the term and when needed to be able to repay the EB-5 investors.

Mike (18:04):
So some of the questions that it’s worth asking if you’re an EB-5 investor are… so, just generally, what is the capital stack of the project? What is it composed of? How secure is each portion of that capital stack? Next you may ask if the senior loan has been drawn, and if it’s not drawn, has it actually been executed in security and can it be drawn on? Next, how much developer equity has been committed to the deal, and how much is actually already in the deal? And those are the types of things you should be thinking about and asking when analyzing the capital stack of the project.

Sam (18:43):
And a lot of that information will be provided by the project sponsor and will be included in the business plan of the project and in the offering documents. And so, you know, you want to make sure that you’re looking for that information and, you know, have all the supporting information. And if something is unclear or if it’s not listed, you should reach out and ask the sponsor to, you know, to provide it, whether that’s a copy of a loan agreement or, you know, a copy of bank statements, et cetera, to make you feel more comfortable that the project does have sufficient capital to be completed on time.

Sam (19:25):
So now we’ll shift over and talk about a feasible exit strategy and how that plays a role in the development and selection of a project. So, as you can probably guess, the exit strategy is how is the investor going to get repaid at the end, right? So, most projects that are out there are structured as real estate projects. Real estate development has assets as collateral, and it’s fairly easy to understand their exit strategy. You know, typically the exit strategy for a real estate project means, you know, the building’s going to get built. And then, you know, it’s going to get leased up and stabilized, and then it’ll either be eventually sold or refinanced. And, you know, those liquidity events will provide capital that could be used to repay investors that came in earlier in the project. There are some EB-5 projects that are not real estate, some manufacturing projects and some tech and venture capital investments as well, although they’re not usually as safe because there’s no clear exit strategy for a project like that upon completion.

Sam (20:45):
And so, again, you know, from an investor’s perspective, you know, you want to make sure that the investment strategy and the exit strategy is realistic, right? So, you know, there’s hundreds and hundreds of thousands of hotels that have been built, and they stabilize, and then they’re refinanced or sold, right? That’s been done many, many times—the same with apartment buildings and the same with condominium buildings. Like, those are known strategies. So, it’s not so much a question of “is this strategy even possible.” It’s more of, you know, is it realistic under, you know, basic economic principles, right? You’re going to build the building for $80. And then, once it’s done and stabilized and finished, you’re going to turn around and sell it for $100, right? That’s typically how these projects, you know, happen. And so, some of the major questions you want to understand, you know, [are] what is the plan?

Sam (21:48):
Is it going to be a refinancing sale or just cashflow that’s going to result in the repayment to the investors? Has the developer, you know, done this before? That’s really the critical one—have they executed a similar type of investment successfully in the past, or is this their first time, you know, building this type of project and seeking this return? That’s really important from an execution and credibility perspective. So those are the main questions to ask when you’re thinking about what’s the likelihood that the capital’s going to be returned in full and, you know, in a timely manner. All right. And now we’ll switch gears and, Michael, talk a little bit more about guarantees and protections.

Mike (22:47):
So, many EB-5 projects have certain guarantees built in. Now, when you make any EB-5 investment, it does have to be at risk, and USCIS has the definition of that, but that does not mean that it has to be extremely risky. So, there can’t be a guarantee of repayment as in the cash just sits there, but there’s a lot of things that can be put in place to help with the security of that investment, and a few of those things… one that’s typical in high-quality projects is an I-526 refund guarantee. So what this is, is in the event that an investor’s petition is denied, they’ll immediately be repaid, and they won’t be invested in the loan anymore. And we think that this is important because if the EB-5 investor’s not getting their benefits that they were looking for from the green card, they’re able to quickly get their money back. And it’s important to check who’s providing that guarantee, how much liquidity is there, how likely is it to be enforceable. Next is a completion guarantee or a construction completion guarantee.

Mike (23:56):
Anytime that a project is being built with a senior lender, typically the developer would have to provide this anyway and have the project either bonded or have a construction completion guarantee in place there. So, it’s helpful if you can piggyback on that and also get an EB-5 version of that, where the developer confirms that the project is going to be built and completed as anticipated. And that’s important both from an immigration standpoint of knowing that the jobs will be created and also from a repayment standpoint, because a completed project is much easier to exit than a project that hasn’t been finished yet. And next is about the repayment of the investment, whether it’s a loan or an equity investment, is making sure there’s a clear path to getting the money back and how it’s described in the OM and what that looks like.

Mike (24:47):
There’s nothing wrong with having a longer duration deal. Some deals take a long time to complete, and to be able to refinance, the deals are shorter, like a condominium project. You may be able to build and sell the units within three or four years. So either type can work. It’s just important to know what those loan terms are and to look at what it looks like to have repayment. So, just generally, various guarantees can be put in place in the project to help minimize and reduce the risk of EB-5 investors, although the EB-5 investment does have to be at risk to meet USCIS requirements.

Mike (25:29):
Okay. So, as an investor, some of the things you can ask to the project sponsor are, first, does the project fully refund the EB-5 investor? If there is an I-526 denial, and you can follow up with that, for what reasons would a refund occurred? Is it only if the project’s denied, or is it also if the source of funds is denied? Next, and this is a simple question—does the project have a completion guarantee in place? And if so, you can check on who’s making that guarantee. And then you can dive into some of the repayment terms of what is the loan term, the repayment term, and what the end mechanism is. Historically there have been some projects that converted the EB-5 investments from debt into equity in the deal, and that was allowed for in the documents, but it’s definitely worth checking to make sure that that isn’t the case if you want to ensure that there’s a definitive timeline for repayment. And then you can also ask the project sponsor what other guarantees are there and what other sort of benefits have been put in on behalf of the EB-5 investors.

Sam (32:04):
Thank you, Mike. So that completes the formal part of that presentation. So, we’re now going to open up for some questions. So, let’s see… so one question we got was about doing a conversion from EB-5. The short answer to that is it’s possible, but it’s going to have to be future investments. So, you’re looking at new capital invested in the future, not capital that’s already been invested, you know, years before, and it’ll be more complicated if it’s a business that’s ongoing. So we can connect offline more about that if, if that’s of interest. One other question we got is about understanding the loan security for a project. So, the question is how… like, what’s good security for a loan versus bad security. So, Mike, do you want to take that?

Mike (33:06):
Yeah, so I would say when you’re looking at the security of a loan… so if there’s a senior loan in place, then chances are that EB-5 is going to be junior to the senior loan. That’s not necessarily a bad thing, but I would look at what the total leverage in the deal is. So, if you’re building a new hotel for $100 million dollars, and there’s a $50 million senior loan, and maybe EB-5 is $20 million, then in total, there’s about a 70% loan-to-cost leverage ratio. So that’s one way to see how good is the security. Is there plenty of coverage in terms of the value of the building and the total amount of debt in the project? Additionally, I’d suggest looking at any appraisals, feasibility studies, to see if the project is likely to succeed in terms of, sort of, the financial aspect of it.

Mike (33:57):
And then also digging into the actual mechanisms of what is the loan secured by, or if you’re putting an equity, how does the waterfall flow? If you’re not experienced in evaluating investments, it could be worth hiring an investment advisor to assist with this, or if you’re comfortable with making these types of decisions and evaluating, you can dive into the documents yourself, and everything should be very clearly laid out in the private placement memo or the offering memo, where it shows how the project works. If it’s not very clear how things are working, that could be a potential issue. And the fact that it’s not structured too well and documented too well after you can’t figure many of those things out.

Sam (34:39):
Yep. Very good. One other question we got is, you know, other than the minimum investment amount, what other costs and filing fees, government fees are involved in making the investment? So, high level, at the beginning of the process, every investor that joins one of our projects or joins any project will hire their own immigration attorney. We work with hundreds of different attorneys. And so, based on personal circumstances, languages, and geographic factors, we would introduce you to a few different immigration attorneys who would, you know, work together with you to determine what the most appropriate source-of-funds documentation would be for your investments. So, as part of the initial filing, you have to demonstrate that the $900,000 is from a legal source. And so, the attorney you would work with would help gather the documents, bank statements, records showing how that capital is legal and has come into your possession when you make the investment.

Sam (35:47):
So, hiring the immigration attorney is a cost. There’s also a cost filing the initial application with USCIS of a few thousand dollars. And then, once approved, there’s some small consular processing fees and other small fees based on the number of family members that are gonna all receive the green card at the same time. And then there’s also an administrative fee that’s paid to the project sponsor separate from the $900,000. And that’s going to vary by project sponsor. So, the main expenses are going to be $900,000 plus some administrative fee that will vary by project plus the cost to engage an immigration attorney and then some government filing fees at the beginning and then, at each stage of the investment process. One one other question that we got is related to the job creation aspects of a project. And so, you know, how, basically, how are you getting credit for jobs from revenue? Um, like, cost is fine. Understand that, but why revenue, Mike, do you want to try to address that?

Mike (37:06):
Sure. So, when job creation is looked at, USCIS allows for the use of the economic multipliers if you’re underneath the regional center, which means that you get to count direct, indirect, and induced jobs. So, the way to think about it is that if I’m building a new hospital, we’re going to build a hospital and there’s going to be jobs created from the actual construction of the hospital. And then, you’re going to have the hospital that’s open and operational, and there’s going to be doctors and nurses and support staff working in that hospital. Even on top of that, the restaurants nearby are going to get more business, hotels are going to get more stays, and there is additional spillover to the creation of that hospital. So, with economic methodologies, you’re able to use both the cost of construction of the project and the operational revenues to get to a final amount of direct, indirect, and induced jobs. And all of these are eligible for the EB-5 program for the 10 jobs that have to be created per investor.

Sam:
So with that, we’ll wrap it up. And again, this webinar, a recording of it will be available on our YouTube channel. And if you’re interested in getting a copy of the slides, please email us at info@eb5an.com, and we’ll be happy to answer any questions. So, thank you for tuning in and, yeah, we look forward to connecting with you in the future. Thanks, everyone.