Free EB-5 Project Evaluation

How to Structure an EB-5 Project

How to Structure an EB-5 Project

Sam (00:07):
Hi everyone. This is Sam Silverman, managing partner of EB5AN. I’m joined by my partner, Mike Schoenfeld, who’s also going to be with us on the webinar today. Today we’re going to cover the basics on how to structure an EB-5 project, going over some of the most commonly used structures to bring in EB-5 investors into a real estate development project. So, as we continue through the webinar, if you have questions, please use the box on your screen to submit questions. And then, at the end of the webinar, we’ll have a few minutes, and we’ll address questions that have come up over the course of the webinar.

Mike (00:55):
Great. Thanks, Sam. This is Mike Schoenfeld, one of the managing partners of EB5AN. And as you can see on the screen now, one of the reasons that we’ve decided to host this webinar is because relatively recently, on July 24 [2019], the Department of Homeland Security announced that there would be significant changes to the program. There have been rules in motion for several years, and they finally published them. And now, we have an exact date of November 21 [2019] when there will be changes to the program. The two key things that are changing as you’re thinking about structuring an EB-5 deal are that the minimum investment amount will increase from $500,000 in a targeted employment area up to $900,000 and in non-TEAs from $1 million up to $1.8 million. Almost all projects are currently done at that $500,000 level. So, this is a very significant increase to the program.

Mike (01:54):
And there have not been any price increases in the program since it was started back in 1990. So, what we’re seeing is a lot of interest from investors right now in terms of moving forward quickly to ensure they get into a project and get grandfathered in at the current rate. Additionally, after November 21, the way that targeted employment areas are designated—that’s going to be changing. So, currently, each state gets to choose what areas qualify as a TEA, as long as certain math metrics are met. And it’s up to the state to designate. This has led to some TEAs using many census tracts, gerrymandering areas together, and creating things that the government might not view as a true targeted employment area of high unemployment. In the future, there’s very strict requirements of what falls into a TEA. So, many projects that currently are TEA will not be, which will increase the investments in those projects from $500,000 up to $1.8 million. The combination of these changes is making it so many investors and projects right now are quickly working to get documented and then to invest in projects to stay at that $500,000 level. There’ve been a few other changes in the program that are proposed that are going into effect—those aren’t going to affect the project structuring as much and are not quite as important as these large changes on the investment amount and the definition of a targeted employment area.

Sam (03:27):
But first, a little bit of background about the three managing partners in the company. As I mentioned earlier, I’m Sam Silverman on the left there, Mike Schoenfeld in the middle, and our third partner, Tim Shih, on the right. Just overall, we have a unique combination of institutional consulting, private equity, finance, and corporate law experience. So, that’s just something to keep in mind when you’re looking at identifying a potential team to help structure and document an EB-5 project. A little bit of background on our company—as a regional center and fund manager, we have 15 approved regional centers covering 27 full states. We were started in 2013. So, across all of our regional centers, we have about 1100 EB-5 investors from more than 40 countries. And so, across all of those regional centers, 15 licenses covering 27 states, we work extensively with real estate developers and project sponsors to help structure and provide sponsorship under our network of approved regional centers.

Mike (04:50):
Additionally, we’re recognized in the industry as one of the leading consulting firms. NES Financial is the leading escrow administrator in financial services company in the industry, and we are uniquely positioned as their only medallion solution partner. What that means is that NES looked at how we operate our regional centers and thought that we were best in class, and they designated us as their only regional center medallion solution partner. Additionally, we’ve been named in EB5 Investors as a “top 10 business plan writer.” We’ve been very active in different industry organizations, such as IIUSA, and are very frequently speakers on panels at EB-5 events, both domestically and abroad. So, just overall, we’re very well known in the industry and have an extremely strong reputation in terms of providing high-quality service to our clients.

Sam (05:48):
Additionally, one thing we’ve tried to really focus on as a company is to bring more transparency to the EB-5 industry. And we’ve been able to that by developing internally a number of proprietary EB-5 project tools that help a developer identify whether or not a project is going to qualify as a targeted employment area and also what types of job creation eligible for EB-5 the project is going to create with our job calculator. And then, on the investor side, you know, how to evaluate a project from both an immigration and financial risk perspective. And then, again, on the developer side, how to identify a potential regional center that could sponsor your EB-5 project. So, the whole idea here is that, you know, the EB-5 industry five, six years ago was unfortunately not as user-friendly for developers and for investors. And so, we’ve tried to bring these free tools to market, all available on our website,, to help investors and developers reduce the friction between identifying a project and then actually making it a reality.

Mike (07:09):
So, as you’re thinking about structuring your project, what investors should be thinking about are two key areas of risk. The first risk is immigration risk. This is the investor getting approved for their initial I-526 application and then taking that initial approval, proving the job creation, and having a successful outcome at the I-829 stage, which is the final petition the investor makes, which is when the green card becomes permanent. The way that you minimize the immigration risk in a project is you have a project that, you know, is going to move forward with or without EB-5 funding, and you’re able to use the EB-5 in a way where the investors can be very comfortable that their money is going to be invested in the project and the jobs are going to be created so they end up getting their permanent green card, as that is the primary motivation of the EB-5 investment.

Mike (08:06):
The second priority for investors is the financial safety of getting their $500,000 back at the end of the project and whatever return the deal is structured for. For that, it’s same as underwriting any other project, where the focus needs to be on the financial liability of the project, having the right structure, where EB-5 comes into the deal is relatively protected. And it’s a strong, overall financial story on the project, whether or not it was being positioned for EB-5 capital. So, when you put those two together— the immigration safety and the financial safety—you can structure an EB-5 deal to be a win-win in both having the investors know that they’re going to get exactly what they bargained for with their green card and their money back, and the developer getting access to this below-market capital while making it an investment that makes sense for the EB-5 investors.

Mike (09:02):
So, those are the two key things to keep in mind. And what you probably noticed that I didn’t mention is the rate of return. So, an EB-5 investment is typically going to be a below-market investment. It’s not going to be exactly on market terms as if you were an equity investor or investing from the US and that same type of security. So, because of that, you are able to build in these other immigration and financial safety features because there’s a big cost savings on the rate-of-return side. So, as a developer, when you’re thinking about this, the top priority for investors is “get my green card with no problems.” The second priority is “get my money back,” and the third and far-down priority is, “What’s my return going to be on this investment?”

Sam (09:54):
So, when you look at the flow of funds and how an EB-5 project is typically structured, the way it works is the U.S. government issues the regional center license to a regional center entity, which tracks indirect and induced job creation happening in the project. And then, once the investor receives their permanent green card—or, sorry, before that, they’re filing the I-829 petition, which is going to document and show exactly how the 10 required jobs were created. And so, that job creation happens under the regional center and is then provided back to the USCIS, which then makes the green card permanent for the investors.

Mike (10:46):
If you think of a traditional capital structure—and this is one illustrative example of how can fit in. The beauty of EB-5, stepping back, before we look at the slide, is that EB-5 is very flexible capital, depending on your deal. You can usually find a way to fit EB-5 in where it’s a win-win situation with both the developer and the investor on the left here of this slide. What we’re showing is a typical mezzanine debt–style EB-5 investment. So, this is one where there’s a senior lender, in this case for 50% of the overall project—if this is $100 million project, the senior’s $50 million, there’s $25 million of EB-5 in mezzanine debt and $25 million of developer equity. So, where the mezzanine debt fits in here is what you would think of as typically big gap in project financing in between the equity and where the senior lender is.

Mike (11:43):
So, this capital structure obviously can change depending on the project. The EB-5 can come in as preferred equity. We’ve seen it sometimes as senior debt, although that’s not as common. We’ve also seen EB-5 as common equity. So, there’s many different ways that you can structure it. And we’ve worked on deals that fit into each category and can help advise on which makes the most sense for what you’re trying to achieve. But overall, typically, EB-5 is filling this gap position. And when we discuss your deal in more detail, then we’d be able to let you know how it fits in. But the main thing to take away is it’s flexible capital, although it cannot be 100% of your deal—that’s a bad EB-5 project. It can be 25% to 40% of your overall project.

Sam (12:32):
Great. And so, now to just quickly walk through a standard EB-5 loan structure—this is not the only structure that’s available, but it is one of the most commonly employed structures where EB-5 investors are joining a particular project and coming in as a loan. So, a structure where investors are getting a fixed interest-only return that’s going to be decided by the general partner, the manager of the EB-5 funds, typically a five-year loan term—investors come in, they get a fixed amount of interest only returned per year. And then, at the end of the loan term, they get their $500,000 principal investment back. So, when we look at this structure, you know, starting at the top one and two and three, you’ve got the new EB-5 new commercial enterprise, or in this case, the hotel fund acting as the new commercial enterprise. So, that is managed by the general partner—each EB-5 investor joins that partnership as a limited partner, contributing $500,000 in investment capital.

Sam (13:38):
And then, that partnership makes an EB-5 loan to an upstream borrower, typically an LLC. And then, that borrower entity contributes to capital down into the development company or the job-creating enterprise, JCE, to develop the project. The key thing to remember here is the reason that there’s an upstream borrower entity in the middle there is because a lot of traditional banks, commercial banks—on this slide, number six—a lot of those banks do not like to see another loan coming directly to the project company entity. They want to know that they’re the only lender that’s loaning directly to, in this case, Hotel Development, LLC. And so, the way to satisfy that requirement is to have an entity in the middle—in this case, Hotel Upstream Borrower, that’s acting as the borrower and then is contributing the capital down into the project company subsequent to the loan being made, right? And then, in Hotel Development, LLC, you have that $25 million coming from EB-5 and the traditional senior loan. That would be like Wells Fargo or PNC Bank. And then, equity, you know, coming from the development company that’s building the project. So, again, this is not a one size fits all, but of the loan-structured projects that we currently work on, this is probably, you know… eight out of 10 projects for loans are using this style of the structure.

Mike (15:23):
And as you’re thinking about what type of documentation you need for an EB-5 project, some of the terms that are commonly used are an I-924 exemplar or an I-526 template. These are both very similar sets of documents. Each one is meant to highlight everything to USCIS on the business side of what the investment is going to be for the EB-5 investor. And the two main documents for that are numbers one and two here—the Matter of Ho–compliant business plan and the economic impact report, which shows all of the job creation. And you can think of that as USCIS-style documents. The other documents—and there’s going to be many more than just the other three shown—are the legal documents. At the end of the day, this is a securities offering, and a securities attorney will be putting together many legal documents on the project.

Mike (16:17):
And this typically is an offering memorandum or private placement memo which highlights the key details of the deal. There’s a subscription agreement, the loan agreement, or if it’s an equity deal, a stock purchase agreement, and typically 10 to 15 other exhibits in different pieces of documentation that go into the package. At the end of successfully documenting a project, you’ll have a single-folder structure where there’s a cover letter explaining the project and what the investors are going to be doing and all of the backup documentation—this can be 500 to 700 pages—and this will be the same package that’s used for each and every investor. So, as an investor files their petitions, you can think of it as an individual investor is filing their I-562—that’s their application for EB-5. And as they file that, three-quarters of that package is project-related. It’s all of the things that you put together showing how the EB-5 investment and project is going to work. And then, the other portion is about them personally—who they are, their family, and their source of funds, where their $500,000 has come from. So, what we do in our full documentation package is help to put together all of the EB-5 documents you need on an I-526 or the I-924 exemplar. And we can talk a little bit more about the difference as well on that.

Sam (17:51):
So, when an investor is considering an EB-5 investment at the high level, there’s kind of two different paths that investor can take. One path is acting in an active capacity where the investor is going to structure their own project. That would be something like opening up a new gas station where a single investor wants to put in his or her $500,000, and they want to build and develop and own the gas station and manage it themselves. That type of a structure is not as common, although we are seeing it more and more now. The difference between that type of a structure versus a passive structure, meaning that an EB-5 investor is coming in, like we saw previously in the loan structure where the investor is coming in as one of many EB-5 investors, one of 10 or 20 or 30 investors, and is coming in in a passive capacity where they’re coming in as a passive limited partner and just contributing to capital but not taking any responsibility in the development management of the project.

Sam (19:03):
When you look at those two different structures, active versus passive, you know, in the pros and cons—obviously on the pro side, for an active investment, the investor is in full control of their business, and they’re the one making the decisions. In a passive project, you know, the advantage there is an investor doesn’t have to have specific management experience, and they’re just acting as a limited partner. All right, on the con side, for an active project, the investor is really responsible for creating those 10 jobs and then making the business a success. On the passive side, you know, the investor is not managing the business—instead, that responsibility is being taken on by the EB-5 project sponsor and developer. And so, as a result, investors typically get a lower return potential on their capital, but they’re not having to contribute actively to the management, and they don’t have to have any specific experience, either. So, you know, there are many types, many investors in the market that fall into each of these two categories. We work with a lot of developers and investors who are interested in both paths. So, either one, you know, we’re able to help advise investors and developers to help, you know, structure a project that meets their personal investment and risk criteria.

Mike (20:39):
So, in terms of what we’re looking at with this November deadline, this has caused quite a flurry of activity over the last month or so, after the changes were announced. So, where we are today, toward the end of August—if we look at the timeline, it typically takes about five to six weeks for a full set of project documents to be put together. But that’s anticipating that all of the data that’s needed to do that is readily available. Sometimes it can drag out a little bit longer. So, it’s absolutely critical for the developer to be well organized at the start of this process. The way to think about it is everything that you would need if you’re going to a senior bank for a loan would be helpful in terms of putting together that EB-5 document. Additionally, early on in the process, we also need to work together to decide on the structure that makes sense in terms of how you want the EB-5 investors to come in, what the rate of return is, the different features of the EB-5 investment.

Mike (21:37):
And then, the securities attorney can help incorporate all of those different items into the full project documentation package. So, as you’re working on that, let’s say it takes about six weeks—after a few weeks into that, you’ll have the key things locked down, and you would begin to start discussing the investment with investors. Some of you may already have investors lined up that are interested in investing, and others may be taking the project to the market, structuring it for outside investors that you have not identified yet. You will absolutely want to do those in parallel because it does take investors some time to diligence the project, to go through their personal source-of-funds process, and then to eventually wire and file their petition, which will need to be done by November 21. So, we still have about three months here for investors to go through this entire process, which sounds like a good amount of time, but it’s going to go very quickly, as project documentation takes time and investor diligence takes time as well. So, I would suggest, if you have a project you want to get into the market and have investors ready before the price increases, you should start as soon as you can to make sure that everything can be done in parallel and investors can be filed and your project can join our regional center before the deadline.

Sam (23:01):
The way it works in terms of joining one of our USCIS-approved regional centers—we have regional centers, 15 of them, covering 27 different states. The way it works is once the documentation piece is completed—the I-526 template set of documents that Mike touched on earlier in the webinar—once that is completed, then the project is able to join a regional center. And so, the way that we approach that is there’s an upfront fee to join the license and then a per-investor fee as each investor actually files their I-526 to invest into a specific project that’s under the regional center license. Great. So that concludes the remarks. I’m now going to pull up some questions, and I’ll let Mike jump in and add any final comments. Anything else?

Mike (24:01):
Sure. Yeah, we really appreciate you all paying attention. One of the questions—that we got a few times, actually—was, “Is there still enough time to start the process and have investors filed before November 21?” And the answer to that is yes, as long as you move quickly—if you wait for a few more months, no, obviously there’s not time, but as long as you have everything pretty well organized or you can get that organized in the next few weeks, yes. There is time to document the project and to get it into market and to get investors to file. You will need to move quickly and be very efficient with providing this information, and also on the marketing side and having that conversation with investors and getting them to move through their personal source-of-funds process quickly to meet this November deadline.

Sam (24:46):
Yeah. One other question we got was, “Who’s taking care of this source of funds for investors?” So, each EB-5 investor in a project will hire their own immigration attorney to help them document where the $500,000 is from to show that it was legally earned. And so, we work with many different immigration attorneys, and we can provide suggestions on a number of immigration attorneys that you can introduce to investors who are interested in signing up for your specific project.

Sam (25:23):
And one other question we got is about TEA letter issuance. So, how long does it typically take to get a tea letter? The answer is that varies a little bit by state. Some states, like Florida and New Jersey, it’s usually just a few business days. In other states, like Texas, it can be two to three weeks, depending on the location or municipality where the project is located. But all of these state offices—they’re all aware of the TEA requirements changing. And so, you know, they know that these letters are going to be needed well before the 21 of November. And so, you know, we haven’t seen any issues in not being able to get TEA letters within a reasonable amount of time, but that is something that you want to plan for and get the process started earlier than later.

Sam (26:18):
Great. I think that’s all the questions we’ve gotten so far. So, at this point, if other questions do come up, please reach out to us. I put my email address and a U.S. cell phone number on the screen there. So, if any questions come up about a specific investor or whether a particular project will qualify as an EB-5 investment at the %500,000 level, please reach out to us. And yeah, we’re happy to help. And we look forward to working with you in the future.

Mike (26:53):
Thanks, everyone.