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How to Understand and Reduce EB-5 Project Redeployment Risk

How to Understand and Reduce EB-5 Project Redeployment Risk

Sam (01:13):
Hi everyone. This is Sam Silverman with EB5AN. Sorry we’re starting a few minutes later. We had a small technical issue that we wanted to make sure was fixed. So, I’m joined here today with my partner, Mike Schoenfeld. And today we’re going to discuss how an investor can effectively evaluate an EB-5 project and ask the right questions to make sure that they’re in a project that has low EB-5 redeployment risk. And we’re going to discuss exactly what is redeployment and how to think about it from an investor context and go through a sample structure of a project so you can understand exactly how redeployment fits in with a traditional EB-5 investment project. If you have any questions during the webinar, please write your question in the chat box, and at the end, we’ll take some time and go through any of the questions that we’ve received. Go ahead, Mike.

Mike (02:14):
Excellent. Thank you, Sam. This is Mike Schoenfeld, one of the managing partners of EB5AN. Thanks again for sticking with us as we had a little bit of technical difficulty before getting this kicked off, and I’m sure a lot of you are here to understand a little bit more about EB-5 redeployment. And this is a relatively new concept only over the last few years, because it primarily applies to investors that are coming from countries with a backlog. Historically, many projects never even took this into consideration, but as you are evaluating a project, it is absolutely critical to think about this risk and how to minimize it and what makes for a good redeployment strategy in a project.

Sam (03:00):
So as many of you know, the EB-5 program is going to undergo significant changes. At the end of November [2019], November 21, the investment amount will increase from $500,000 to $900,000. There will also be targeted employment area, or TEA, changes, which will reduce the number of projects that likely will qualify for the lower investment threshold. And there are some other changes as well related to priority date retention and some other minor clarification from USCIS. But the main items to be aware of are that to invest at the current $500,000 investment level, you need to get your application filed and received by November 21 at the absolute latest. So, a little bit about our company for context—we’re a national EB-5 regional center operator and fund manager. Across all 15 of our regional centers, we have about 1,185 investors from more than 40 different countries. And currently, we’re the fund manager for 10 different EB-5 investment projects.

Sam (04:22):
As I mentioned earlier, I’m Sam Silverman, on the left side here, Mike Schoenfeld in the middle and our third partner, who’s not with us today, Tim Shih. On the screen is some brief information about our backgrounds. The overarching kind of main point here is that we each come from traditional, institutional backgrounds in finance, corporate law, management consulting, and real estate, which is kind of a differentiating factor compared with some of the other EB-5 regional center operators and fund managers in this space.

Mike (04:59):
And one unique thing that our background allows us to do is to have insight into how to structure projects to maximize the benefits for both investors and for the developers and to make a true win-win. One thing that we saw about seven years ago, when we launched the company, was a lack of high-quality projects. And that’s why the three of us, all from more of institutional backgrounds, decided to get into that EB-5 space to help structure projects that were better and safer for EB-5 investors. So, a typical project can either be a loan or a preferred equity investment. Of course, there’s many different EB-5 structures out there, but we are going to talk about the structure where I’d say about three quarters of EB-5 projects fit into.

So, if you’re looking at this chart—I know it may look a little bit complex, but it’s important to understand all of the different pieces here. In the middle of the chart is a green box, which is the new EB-5 fund. This is the vehicle for which each EB-5 investor, which is represented by the blue box above, is going to join into this EB-5 project. Quite often, as you’re hearing about EB-5, the terminology used would be the “new commercial enterprise.” And this is interchangeable with the holding company where each EB-5 investor is going to make their investment and that, in turn, is going to actually invest into a real estate development project. The other key piece of this limited partnership is it’s typically managed by a general partner—that’s the blue or the purple box on the top left.

Mike (06:53):
One thing to note, and it’s unique with us, is that we are an independent fund manager. So, quite often, you will see a situation where that purple box on the top left is also the real estate developer. So, the developer is controlling that EB-5 fund themselves. And one risk there that you’ll see is that there’s a conflict of interest. It’s completely acceptable if that’s properly disclosed, but as an EB-5 investor, you should absolutely think about what’s the worst-case situation, and what happens if things don’t go exactly as planned, and who’s looking out for me? Additionally, on the top right of this chart is the regional center. And this is the entity that sponsors the project and reports to USCIS annually on how everything is moving along. So, now that you understand a bit on the top portion of this slide, how EB-5 investment is made into a project is the next step.

Mike (07:52):
So, that’s where this green box, that EB-5 fund, makes a loan into what we have in the bottom-left corner, which is Project 1, LLC. And the simplest way to think about that is each EB-5 investor is going to become a limited partner in the green box, and collectively—let’s say it’s 30 investors, or $15 million. This new commercial enterprise, or the green box, makes a loan into that blue box at the bottom, the project. And this is key because this is how the EB-5 funds flow actually into the project and where that legal document of the loan agreement actually governs this loan. The additional box has Developer 1, LLC, and Commercial Bank 1. These are typically the equity investor, the project sponsor, and the senior lender that go into the deal, and they’re more of the traditional side of how a real estate project gets done. So, as we’re thinking about redeployment, what you need to realize is that that green box making the loan into Project 1, LLC, is a loan. And when that loan gets repaid to the green box and an investor is not all the way through their immigration process, at that point is when redeployment kicks in. I don’t know if there’s anything else you want to add on this slide, Sam?

Sam (09:14):
Yep. So, one thing to keep in mind is that when you’re signing up for an EB-5 project, the project initially that’s going to make this loan is going to be the project that’s described in all of the documents. So, the PPN, the business plan, the job study—all of the documents are going to explain this project, this first project, where the loan is being made. However, once this first project is finished and the loan is repaid, or, you know, the project is refinanced and the money is repaid or sold and the money goes back to the green box, then where the money goes after this first project is done is going to be governed by the partnership agreement of the new commercial enterprise. And so, it’s very important to review the partnership agreement and look at those terms in those documents to understand exactly how the redeployment is going to work, right? So, you know, there are 15 different documents that go into an EB-5 filing, but when it comes to redeployment, after the repayment of alone, the only real document that matters is the partnership agreement and probably some sections of the offering memorandum or the PPN. So, the first thing to understand is, you know, first, “Where do I look to understand what happens in that scenario?” And so, that’s kind of where you want to be looking initially to understand what happens when there is a repayment and money needs to be redeployed.

Sam (11:06):
Okay. So, here on the left side, as we talked about on the previous slide, right, we had the same green box, the new commercial enterprise, or the partnership, making a loan—in this case, $10 million to Project 1, LLC, right? Let’s say that’s a hotel. So, Project 1, LLC, gets funded. Then, Project 1 is finished, right? Gets sold. Let’s say now the loan is repaid. So, the original loan to Project 1, LLC, gets repaid, and the money, the $10 million, goes back to the EB-5 fund limited partnership. Now that the money is back in the partnership. In order to meet EB-5 program criteria, EB-5 funds must remain invested until the investors complete their two-year conditional green card period. So, until investors have held a temporary green card for at least two years, they’re not yet eligible to get their $500,000 of principal investment capital returned.

Sam (12:15):
Right? So, assuming that that [holding a temporary green card for two years] hasn’t happened for any of these 25 investors representing the $10 million, now the group that’s in charge of the EB-5 fund, the NCE, now has to reinvest those funds to meet the EB-5 criteria. And so, that $10 million would get reinvested in a second project, let’s say Project 2, LLC, here in the darker gray box, “Redeployment Project.” And of course, the questions are, well, what project is that? What developer is involved and, you know, what other financing? In this case, you know, is there another senior loan involved? How much is the loan? How much equity is there? Where is this project? You know, all of those same questions are very relevant. And so, at this point, it’s very likely that the immigration requirements have been met from the first project. So, the required number of jobs has probably been created by EB-5 Fund, LP, in Project 1.

Sam (13:27):
So, immigration is okay—so investors will get their green card—but how safe is their money going to be when it’s been redeployed into this second project that was unknown at the beginning and is now being decided by the managers of the EB-5 Fund, LP, right? That’s kind of, in a nutshell, what the risk is when you’re looking at a project that has the potential for redeployment, right? And so, the requirements, the guidelines, for where that $10 million can be reinvested are going to be in the partnership agreement and probably in the offering memorandum of the project, describing exactly how the manager of the new commercial enterprise can redeploy the funds, right? What types of restrictions and requirements are there for that reinvestment? That’s really what you want to be looking for to understand, you know, and make sure that the funds are going to be safe, are going to be invested in something that is not only not going to lose money, but it’s also going to be something that is going to be liquid enough to repay the $500,000 to you once you’re eligible.

Sam (14:53):
So, once you complete that two-year temporary green card process, you know, of course you’re going to want to get the capital back sooner than later, right? So, it’s not just how safe is the money in the second project—it’s how safe is the money in the second project and when I’m eligible to actually get the money back, how quickly, how much liquidity is there in this second investment so that, you know, I won’t be waiting several years, many years, until I can actually get the money back after I become eligible and have held the green card for the two-year period? So, I’ll pause there. Mike, do you have anything else to add before we move on to the next slide?

Mike (15:39):
Sure. So, historically, a lot of people were not focused on the redeployment, and sometimes you’ll even hear a project sponsor talk about, “Well, I’m building a hotel. Your money is going to stay with this hotel.” Realistically, there are developers that will complete their project and sell their project and repay the loan and then redeploy. So, even if it’s not a condominium deal or a deal where it’s very clear that there’s going to be a redeployment, it is extremely likely that there will be a redeployment of some kind within your project with very few exceptions. So, it’s important to make sure that the project sponsor has thought about this and understands the risks, that the project manager and the EB-5 fund manager know what they are doing with redeployment and how to manage this, and also that incentives are aligned on the redeployment side. So, as an investor, you’re not getting put into a project that carries too much risk or, as Sam mentioned, a lack of liquidity in terms of you, as an investor, being able to get your funds back. So, one of the unique things that we’ve done as EB5AN is we looked at this many years ago and saw that due to long processing times at USCIS and due to the backlog in China specifically, it was critical to structure projects the right way for investors to minimize the redeployment risk. And that’s one of our specialties.

Sam (17:12):
So, so when you look at immigration and financial risk, those are the two major components to consider when investing in any EB-5 project, right?

Mike (18:45):
So, as you’re thinking about some of the key terms for redeployment and what to look at in either the loan agreement or the limited partnership agreement, there’s a few very simple checks you can do. And then there’s a few more complicated ones. First is, “What is the actual loan duration?” And this includes developer extensions. Does the loan start on the first I-526 approval? Did it start on a submission? Do you know when the actual end of the loan is? It’s pretty bad for you as an investor if you do not know when the loan ends. It’s better if you know exactly when it ends. Additionally, some developers, if they’re structuring it themselves, will build in a very large amount of extensions—one-, two-, or three-year extensions—where they’re able to keep the loan outstanding. A good situation is where, you know, maybe there’s one extension, maybe there’s two, but you do have a definitive end date for when the loan will be over.

Mike (19:41):
Additionally, in that loan duration, if you are able to find a loan where there’s mutual extensions, where if the investors are still in the immigration process and the developer agrees, the money can stay outstanding in that exact same loan. And that helps to minimize the risk of the money even moving into another loan and actually going through redeployment. Next, when you’re thinking of redeployment, what’s bad for investors would be what we call more of a “blind redeployment,” where your money is going back into the limited partnership. And as an investor, you don’t have any rights or any knowledge of exactly where it’s going to go and no rules governing how things are being redeployed.

Mike (20:41):
So, that could be that rather than repaying the loan and redeploying it instead, the developer or borrower keeps the funds even after the project is done and guarantees it with a parent company or with other collateral. And this makes it so that there are strong covenants there—you know exactly what the developer has to do to keep the loan in good standing, and it makes it very financially stable. A good loan is one where the covenants are being checked very frequently and they’re very strict so even in the case of a recession, the developer’s maintaining adequate collateral for the loan. Next, and finally, some project sponsors have not even thought about redeployment and can get investors in a very bad situation if they were allowed to pay the investors back prior to the investor completing the immigration process. As you likely know, an EB-5 investor is not allowed to be repaid back their $500,000 until they submit their I-829 petition.

Mike (21:42):
So, that means that an investor is going to submit their initial application—it may take about two years for that initial application, I-526, to be approved, then it’s time to convert it into the green card. And then you have to wait another two years before you are able to file your I-829, which complete your at-risk period. And at that point, you are able to get your funds back. If you’re from a non-retrogressed country, this can still be five+ years. If you are from a retrogressed country, by the time you file your I-829, you could be much longer down the road and past the actual loan duration. So, it’s really key to look at that piece of the loan.

Sam (22:33):
This is just a basic kind of EB-5 project timeline. And so, we won’t spend a lot of time talking about this in particular, but it’s just important to be aware of the different key steps, and where redeployment comes in, obviously, is prior to step four being completed. So, until you’ve reached that point where the I-829 can be filed, can be submitted, after the 21-month minimum, then the funds have to remain at risk, right? That’s kind of the most important thing related to the timeline and the context of redeployment. Now, when we evaluate that specific 24-month period, we first look at the ability to file for the removal of conditions. Once that form can be filed, then that’s the point here, the gray box here, where an investor is eligible for the repayment of their $500,000 principal invested capital, right?

Sam (23:46):
So, when you compare a good project with a bad project… in this case, what we have structured for all of our loan projects is automatic repayment within six months of eligibility here. So, as soon as an investor becomes eligible, meaning that they’ve completed that 21 months out of the 24-month conditional residence period, and they had held their green card for that period of time, that’s the trigger for repayment within six months. So, that clarity of knowing that once you are eligible to get the money back, it is going to happen within six months, is very good, very transparent, and clear for investors. And it’s going to vary—some investors will, you know… if an investor’s from Germany, let’s say that investor is going to get approved and, you know, likely will not face any additional waiting period. And so, they’re going to be able to be repaid sooner than an investor filing today from Vietnam, let’s say.

Sam (24:55):
So, the key is that regardless of what country an investor’s from, repayment is tied only to that individual investor’s potential eligibility for repayment and not contingent on any other factors—that is really important to understand. And so, you want to make sure you really have a grasp of what that term is and how it works in any EB-5 project that you’re considering. When you look at the other options, you know… what is a bad redeployment timing provision? It’s, you know, potentially on project completion. But then again, who knows how long this next project the money’s being redeployed into? Is on I-829 approval, at least there there’s a government process upon which it’s tied to, but even there, I-829 approval could take, you know, who knows how long—one year, two years—it’s unknown, right? Or other factors, the most common of which being that other investors, including you, as an investor in the project, all need to have completed some process, either completed the conditional residence period or, you know, submitted and gotten I-829 approval. So, of course, for those things to happen and to all be true are going to take significantly longer. And so, the money is not going to be returned to you for an even longer period of time. So, you always want to consider both the safety of the money and also actual repayment timing. Those are the two most important things to consider when you’re evaluating redeployment in the context of a project. Mike, you have anything else you want to add here?

Mike (26:44):
No, I think that’s exactly right. So, as an investor, the key thing to look at is when can you actually get paid back in a redeployment situation? If you’re investing from a retrogressive country—India, China, or Vietnam—this is the key provision for you, is how quickly once you file that I-526 will you get your money back? You want a very liquid, big entity to be guaranteeing or keeping that loan outstanding, and to make sure that you’re working with a partner that truly understands the needs of EB-5 investors and the fact that once they file their I-829 are eligible to be repaid. Investors should be repaid as quickly as possible because they’ve completed what they had to in the EB-5 process. It’s a key provision you should be looking at as an EB-5 investor, and we’re always happy to help look at other projects and let you know how the redeployment risks are.

Sam (27:42):
So, one thing that we’re very proud of as a company is that investors from a wide variety of backgrounds around the world have consistently found value in our approach to both EB-5 investments in general and specifically in the redeployment process. So, looking at… go ahead.

Mike (28:14):
So, if you’re looking at investing in an EB-5 project now, Sam earlier mentioned the changes coming to the EB-5 program. To reiterate, on November 21, 2019, the investment amount goes up to $900,000 instead of $500,000, and very few projects will still qualify as a targeted employment area. And then, those investments would actually be $1.8 million. So, right now, there is a lot of activity with investors looking for high-quality projects to invest prior to this November 21 deadline. So, as you’re looking on the screen, it’s important to know that it is not a fast process to invest in an EB-5 project. There’s multiple steps that have to take place before you’re able to file your I-526, which is what has to happen before November 21. So, as an investor, what you should be doing is speaking with project issuers.

Mike (29:16):
And as you’re going through that, in parallel, be speaking with an immigration attorney that will be representing you. Many projects have only one immigration attorney to work with. That’s not good. Instead, what you should have is an option of a few immigration attorneys that you speak with and find the one that you’re most comfortable with because they will be representing you along your immigration journey. That immigration attorney will be with you on your source-of-funds preparation. As you see on the screen, that’s actually the largest box, or can take the longest time, out of any of the steps in EB-5. So it’s extremely important to start that source of funds, the process, as early as you can, because it can be quite challenging to show where every dollar of that $500,000 has come from and going back to your tax records, bank statements, and all of the documentation needed to prove where the funds come from.

Mike (30:09):
Additionally, the transfer of funds, depending on where you’re transferring from, can take quite some time if there’s currency restrictions or other issues like that. So, as you’ll see, these go parallel—you’re reviewing the project, you’re choosing the project, you’re working with your immigration attorney. Then, when everything’s ready to go, you’ll complete the project’s subscription agreement, where you actually joined the project. And once your immigration attorney has given you sign-off on your source and path of funds and you’ve officially joined the project with the subscription agreement, at that point, you wire your funds into the project. Once the funds are wired, the immigration attorney is allowed to file the petition. That’s the last step on this timeline, that green triangle, where it says immigration “attorney files petition,” and to get to that point, all of these other items have to be completed. And all of this does need to be done before November 21 to lock in the $500,000 price. So, I’d strongly suggest starting to move as quickly as you can, if you’re an EB-5 investor, to go through that source-of-funds process and get ready for the deadline.

Sam (42:05):
So, one question we have is, “Are there geographical restrictions regarding redeployment? Do EB-5 funds need to be redeployed in the same regional center geography?” The answer to that is no. The only requirement is that EB-5 funds need to continue to meet the at-risk requirement, which means there needs to remain a potential for gain or loss related to the EB-5 investor’s principal $500,000 investment. All of the job creation and TEA requirements would have already been fulfilled through the initial investment. And so, there is no specific geographic requirement or TEA requirement following in a redeployment project. Only the at-risk requirement must continue to remain complied with until investors complete the immigration process. One other question we have—“If investments must remain at risk, will such a loan arrangement affect an investor’s immigration case?” Yeah, so the great aspect of this structure is that, of course, the original loan that’s been made does meet the at-risk requirements, right?

Sam (43:27):
Loan projects, thousands of EB-5 loan projects have been done successfully. And this is just one of those projects. The difference here is that instead of the money coming back and then being reloaded in another project, the loan still remains in place. The only difference is the collateral securing the repayment of the loan—it changes over the life of the loan. And so, of course, if the same loan is still in place, which it is, that obviously is going to continue to satisfy the at-risk requirement because the money has never been repaid. And so, it’s always been loaned and in control, you know, with the borrower of the funds. So, it will have obviously continued to have been at risk over the entire loan period until the money is repaid at the end.

Sam (46:06):
All right. I think that concludes the questions that we have. Thank you everyone for your time this afternoon. My direct phone number and email are listed on the screen, and we’d be happy to answer any other specific questions that you have. EB-5 project selection is a complicated process, and for someone who’s just doing it for the first time, you definitely want to take time to speak with a few different companies, read the documents, and really get comfortable with understanding what are the right questions. So, you know, taking an initial step and kind of listening to us today is definitely going to help put you on the right path to get you the best EB-5 outcome that you can hope to obtain. So, thank you again—any questions, please reach out to us. Thank you.