Free EB-5 Project Evaluation

Structure Your Own Direct EB5 Project


Mike Schoenfeld:
Hi everyone. You have Mike Schoenfeld here. Thanks everyone for joining us. Today, we’re going to speak a little bit about direct EB-5 project investments and how to structure them to make them as strong as possible from both an immigration and a financial risk perspective. I’ll be joined today by Sam Silverman. He’s dialing in as we speak. Again, this is Mike Schoenfeld, one of the managing partners of EB5 Affiliate Network. So a little bit more about our company. EB5 Affiliate Network is one of the largest regional center operators in the country as well as an investment fund manager and has been operating in the EB-5 space for the past eight years. Additionally, we have a little bit more information on us and USCIS on the screen as well.

So now we’re showing a few of the reasons why many of our investors choose to go down this path and earn their Green Cards including employment flexibility, and the ability to work anywhere within the United States. Once you have a green card, you have the ability to go to universities within the United States on in-state tuition and receive higher acceptance rates to those universities. And there’s many other benefits of having a U.S. Green Card which is the primary driver of going through the EB-5 program. So a bit more on our company. As I mentioned, I’m one of the founders of EB-5 Affiliate Network. We launched the company in 2013 and now own and operate 14 approved regional centers that cover over 20 states. And we’ve worked on over 14 projects where we directly managed the funds that go into those projects and helped structure over a hundred EB-5 deals.

Some background on the founders and managers of the company. You can see my background in the middle. I used to work at the large private equity firm, AEA Investors, and at the Boston Consulting Group before that. If Sam’s on the line, I’ll let him give a little bit of information on himself and he’s on the left side of the screen.

Sam Silverman:
Yes, thank you, Mike. This is Sam Silverman, one of the managing partners. So along with Mike Schoenfeld, as Mike mentioned, we entered this space about eight years ago and found an industry that was in need of some additional protections for investors. We thought that we could bring an institutional lens to structuring and bringing EB-5 investments to market. So we started the company and have developed it successfully over the last eight years into one of the largest regional center operators and EB-5 consulting firms.

Mike:
One of the things that we’re most proud of as a company is that our investors come from over 60 different countries from around the world and consistently find value in the way that we structure our projects and bring our projects to market. The reason why we’re having a webinar today on the direct EB-5 program, as I’m sure many of you already know, on Wednesday, June 22nd, a judge ruled that the EB-5 modernization rules that have been in place since November 21, 2019 were actually illegal and invalid. What this did is it immediately reduced the EB-5 investment amount from $900,000 back to $500,000, which is where it had been from 1990 onwards up until 2019 and this created quite a frenzy in the market. EB-5 had really cooled down over the last few years, and that increase to $900,000 had made it unobtainable for many people and a lot less attractive. This rapid drop to $500,000 brought a lot of excitement to the market, but that excitement was only for a short period of time. Because even though the rule did roll back the regulations, the EB-5 Regional Center Program actually sunsetted on June 30th. So starting July 1st, there was no more regional center program. This is still going through Congress, and we anticipate that the regional center program will be re-instituted in the near future. But for now the regional center program has technically lapsed. The investment amount is at $500,000, but there is not a regional center program in place right now.

Sam:
What’s important to know with that is that the regional center program is a pilot program. Although it’s been renewed fairly consistently over the last 20 years, it is subject to legislative extension and renewal. So that’s the situation we are now currently in where Congress has failed to renew it. Prior to the last date of June 30th, this has happened a few times in the history of the program. So it’s not entirely uncommon, although it is a rare event. But we do believe that it will be reinstated when Congress gets back in session and an agreement is made to continue the program. In the meantime, the Direct EB-5 Program, which is not subject to any type of legislative renewal is still in place and active and now currently also at the $500,000 reduced minimum investment level.

Mike:
USCIS posted this on their website a couple of days ago. I think everybody was waiting for USCIS to acknowledge the judge’s ruling. They published the notice on their website saying that EB-5 investment amount is back to $500,000. So a lot of people were anxiously waiting for that and now it is officially on the USCIS site.

So why are we hosting this webinar now? Although the EB-5 program is in full force with the direct program at $500,000, we do anticipate that Congress will reauthorize the regional center program in the near to medium future. It’s unclear whether it will be a couple of weeks or a couple of months for that to happen. But when it does happen, there is a chance that in the legislation, they changed the rules either back to what the modernization rule did or increase the investment amount to a number above $500,000. We don’t know or have any control of that. This is why we’re seeing a large increase in demand right now for investors looking to move forward at the $500,000 level, even though it’s a direct program instead of the regional center program. There’s a lot of investors that are looking to move forward quickly to make their investment and create the ten true W-2 jobs that are needed under the direct program before anything is able to change. The investment amount would go back up to $900,000 or a different number, $500,000.

Stepping back a little, the EB-5 program, there’s two different pieces to it. One of them is the direct EB-5 program. This is what was in the actual legislation that was passed in 1990 and truly what the EB-5 program was legislated as, which was the requirement that any EB-5 investor needed to directly invest into a business enterprise and be an equity owner in that business and create ten full-time W-2 jobs for at least a period of two years. Now what happened at that program is that it is very difficult to use because the job creation is hard to track. It doesn’t leave much flexibility. And in 1993, USCIS or Congress put in place the regional center pilot program. What this did was allow for more pooled investments and the ability to count indirect and induced job creation as well, which has been the preferred way of job creation over time, because it’s much easier to show and track.

For example, under the regional center program, you can build a new high-rise hotel and count the construction jobs and the operation jobs and all of the spillover jobs towards the true job impact of the project. When under the direct program, the only jobs that you are able to count are the direct W-2 employees that would be employed by that hotel after it opened. So it’s a very limited scope of employees that count under the direct program, which is why the regional center program had been so much more popular. And in recent years, well over 95% of all EB-5 investment has been done through that regional center program but the regional center program expired on June 30th. So for now we are left with having direct as the only option right now to invest in EB-5 at the $500,000 level.

So what are the direct EB-5 job requirements? First the EB-5 investor has to invest their money in a new commercial enterprise that will actually create the jobs. In the regional center program, there’s often a separation between the investment vehicle, where the investor goes, and the entity that actually creates the jobs. The NCE, the new commercial enterprise, would often loan or contribute the money to a separate entity that would be creating the jobs. That doesn’t work in the direct program where the JCE and NCE are one in the same. Additionally, the NCE needs to be located within a targeted employment area for the $500,000 level and directly create those full-time positions. Many businesses that you would think could work, don’t. Let’s say a hotel. If they hire an outside management company and that outside management company has the employees on its payroll, then technically that hotel is not creating those jobs and doesn’t work with the direct program.

Now we’ll get into the meat of what is the difference between the EB-5 direct and the regional center program and what most people are familiar with and what nuances there are. First, and we’ve already discussed it, is the job creation methodology. So within the regional center program, you are able to use direct, indirect, and induced jobs where under direct EB-5, only true direct W-2 jobs that are created by that new commercial enterprise are allowed. Next, and this is one of the biggest differences in between the two, is the legal structuring that’s allowed. The job creation and the legal structuring are the two key items that are very different. Within the regional center program, EB-5 funds are invested in a new commercial enterprise, often a limited partnership or an LLC company, that then makes a loan or makes an equity investment into a completely separate company with completely separate operations and that company is called the JCE, the job creating entity and that is the entity that actually creates the jobs. Within direct EB-5, those two are collapsed and the jobs need to be created either directly at the NCE level or underneath a wholly owned subsidiary of that NCE. So EB-5 investors are true equity investors in the NCE in the direct program, when often in the regional center program, maybe five investors were more passive investors and could have been converted into debt investors by investing in the NCE and then making a loan into the JCE. So those are the main differences on the job creation and legal structuring. But what does that lead to? What that leads to is a different profile on the type of risk and how to structure the deal. On the immigration risk side, within the regional center program, it’s possible to know that those jobs are 100% created during the construction of the deal and operations do not matter on the immigration side.

Now that is very helpful when thinking of mitigating immigration risks. Within the direct program, construction and renovation doesn’t do the job of creating jobs. So you need to ensure that the business is actually going to be successful and operate and create those 10 W-2 jobs. This means that businesses that require a lot of labor are typically very good fits for the direct program. Restaurants are the ones that we see most often as well as some hotels and assisted living facilities which can also work. But with the way that the direct jobs are structured, often the amount of jobs created by a hotel are not enough to justify the EB-5 when you’re building the hotel from scratch, and there’s a large amount of construction cost. So it really just depends on the project, but the immigration risk is very critical to focus on. And within direct, you want to find a project that is very likely to actually create those jobs and keep those jobs over a period of time. On the financial risk side, it goes hand in hand with the immigration risk where typically in a direct program, you’re not going to be as focused on real estate development or construction. There’s not going to be as much EB-5 investment in buying land or building a building because those don’t create jobs. So the main focus of the EB-5 portion is going to be on the operational side of a business. Oftentimes with a new restaurant that’s being built, you’ll build the restaurant shell, and then a separate company actually comes in and leases the building and that’s it. The operational entity is the one that has a lease with the building and creates the jobs and that is where you would be investing as a direct EB-5 investor. When alternatively in the regional center program, it’s more likely that you would be investing in that under construction real estate project, which is a whole different mindset when choosing the type of project that works well for direct EB-5 versus the regional center. Within the EB-5 program itself, the regional center, technically as a pilot program, it had been extended until recently. It didn’t really lapse for a very long time, but now it has lapsed for the first time in a while. We expect it to be reinstated, but the direct EB-5 program is the legislative program and it does not lapse. It is the law. So that is consistently available. And now it’s available at the $500,000 level. The last thing is that with targeted employment areas or TEAs, it is the same requirements for regional centers and direct. These rules are back to the pre-November, 2019 rules, which means it is up to the states to designate what areas do qualify as targeted employment areas. So we are rolling back those regulations and having to go back to states again for those designations. I’ll pause for a second and let Sam add any other comments on the difference between the regional center and direct program.

Sam:
Thank you, Mike. As Mike pointed out, some of the major changes here, the major differences are primarily in the job creation. The way jobs are counted in the actual investment structure and how an investor will actually enter in and invest their capital into the project. Main difference being that the direct essentially requires that the investor come in as equity, whereas under the regional center, there’s more flexibility in the form of debt or equity investment with a loan, if that’s what is desired. So at the end of the day, the direct program is actually a little bit simpler in terms of legal structure and the way that money comes in and how everything is going to be administered. However, because the jobs have to be created at the entity level and must be W-2, it really narrows down the field of potential new enterprises that are going to qualify under the direct program. Not a lot of businesses hire a lot of employees and with the reduced investment amount now at $500,000, you’re really left with only a few industries that hire a lot of employees that don’t cost a lot of money per year to keep employed. So really operational businesses are what’s going to be the best fit for a direct project.

Mike:
Perfect. So now moving ahead, we want to discuss the two different ways that we’re currently partnering with clients on the direct program, because we’ve been getting many calls from both investors and from existing projects and new projects, seeing how we can partner together. So the first way that we’re working with some clients is documentation services. This is really where we have so many that reach out who are a business owner themselves or has a friend that wants to open a new franchise or something where the individual investor or a close relative will be directly operating that business and related to that business. They are looking to have us help them structure the deal, make sure it complies with all of the EB-5 directed requirements and they are going to own and operate that business. For example, if they start a new franchise of a restaurant, they will be directly in charge of running that, making sure that it does create the jobs, and actually operating it. That’s absolutely a way that we can work with some clients. As I mentioned, we’ve structured over one hundred EB-5 deals over time. We’ve worked with many, many different types of projects, typically underneath the regional center program. We believe that offered a lot more flexibility, but the direct program is similar in a lot of ways. Although there are some key differences which we mentioned, which do have to be taken into account.

The second way that we’ve partnered with some clients, including one client that we’re going to discuss a little bit later in the presentation is more of a full-service partnership. So we are looking for clients that have successful multi-unit businesses that are looking to grow, are already in the process of growing, and are decision-makers and are looking for attractive and flexible capital that the EB-5 program can provide for these types of partners. We actually act as we help structure the deal. We can put it together. We can help with the compliance, and we can help with placing the investors into the deal and really offer a true partnership with those groups that are, let’s say, building a new restaurant. We will truly be your partner in terms of our securing capital and helping with whatever’s needed on that side. So in either one of these situations where we are helping to structure the deal with documentation, or we are working together, our team does get into the weeds of the project and make sure it is structured appropriately for EB-5 direct and can move very quickly because we don’t know how long this is going to last.

When we’re looking for a client to do that full-service partnership, there’s a few key things that we need to make sure before we’re going to work together. Number one, and most important, is direct job creation. What EB-5 investors care most about with the direct is, the immigration risk. They want to know that the 10 W-2 jobs are going to be created for the sustainment period that’s needed, and that is much more difficult than the direct program. So it’s a lot more challenging to take a flyer on a new project when it’s a lot better to find something that is systematic, repeatable, and already proven. Next we’re looking for partners that are in a strong financial position that don’t need the EB-5 as an absolute to be able to move forward, but instead understand that the EB-5 capital can be flexible capital to help them expand their business or open a new unit more quickly. But there are already proven operators likely in the process of opening a new unit or two even without the EB-5 capital.

Next, we’re looking for proven concepts, ideally somewhere with a track record of success, either with franchises and multiple franchises that are all successful, expanding to new units, or potentially a proven restaurant concept that was shut down for a little while either due to COVID, has closed, or has changed ownership and instead is now going to be rerun and optimized in another way. But you already have the track record where you know that it was a profitable business, and you can be very comfortable that those ten jobs per investor are going to be created. Next and this goes hand in hand with the proven concept, we’re looking for experienced operators who know how to run that type of business, have successfully done it many times, and are going to be able to sustain that business throughout the investor’s immigration process. And lastly how the exit strategy of this is different from the regional center program, where there are no loans being made. This is an equity or a preferred equity investment in the business. How will the investor eventually get taken out after they complete their immigration process? These are the five key diligence criteria that we’re looking at whenever we’re evaluating a project. I’ll let Sam jump in with anything else that he wants to mention for the types of groups that we’re working with.

Sam:
Thank you, Mike. When we’re evaluating potential partners for investment, we really want to see an established track record within the industry and the geographic area where the current investment is located. So they’ve done it before successfully in the same or very similar area and concept and have significant capital skin in the game from the operator and adequate job cushion. Obviously at a minimum, you need to create the ten jobs, but things happen, people get sick, or maybe revenues aren’t exactly what we anticipated. So we want to make sure we have an adequate margin of safety so that our clients seeking green cards are going to be safe and are going to have at least the ten jobs that they need to make sure their immigration process goes smoothly. With those kind of core elements in mind, as Mike mentioned, if you do think you have a project or an opportunity that meets those requirements, please reach out to us. We’ve got a few different forms that you can complete, and we can learn a little bit more about the opportunity and see if it’s a good fit for EB-5 investment with us. Or if it’s still something that you want to pursue individually and you can sort the investors yourself, by all means we can help structure the project and you’d be responsible for going out and raising the capital directly.

Mike:
Thank you again for joining us. I’ll let Sam say any last words, but you can find the information about us on the last page. And for EB5AN, if you have any questions, please feel free to reach out if you have a project you think would be a good fit or if you have a project that you’d like documented, let us know how we can help. We know it’s going to be a crazy time over the next couple of weeks until the EB-5 Regional Center Program is reauthorized and we’re here to help.

Sam:
Thank you, Mike. And again, if you are interested in exploring structuring your own project, partnering with us, or doing it yourself, we’d be happy to help. So please reach out if you are interested and if you have any questions, we’ll be happy to try and address them.

Mike:
Perfect. Thanks everyone and feel free to reach out. Bye.