This is the wrong question! You should be trying to determine what is the best project for your investment, not the best regional center. The regional center that is managing the project is a relevant focus for your examination, particularly since regional centers very greatly in the amount of experience they have with the often-difficult immigration aspects of making a successful EB-5 project. But there are good regional centers (generally speaking) that have launched bad projects (one of the largest and most respected regional centers just received a denial of I-526 petitions for recent project), just as there are new centers that have launched very good projects. Plus, in about a third of cases, the regional center is not even managing the project, but instead has entered a profit-sharing arrangement with an outside developer or investment banker that will be managing the project.
What Is The Best Regional Center?
Investor Beware: Chose Your Advisors Wisely
When selecting a regional center project for investment, do not follow the advice of unlicensed EB-5 “due diligence consultants.” If you want to know why, try asking one of these firms to show you the research that they claim to have done on the center they are presenting to you. Most likely they won’t have any research, and you will realize they are sending you not to the best centers but rather to the centers that are paying them the highest fees. Following the advice of such firms is especially dangerous because they are showing you only the regional centers that are willing to commit a securities law violation to obtain investor referrals. This means that someday the SEC could come knocking on the regional center’s door and shut down the entire operation while it conducts an investigation (see http://www.eb5fullservice.com/blog/1033/ for a discussion of the consequences of securities law violations). In such a scenario, the project you are investing in is not likely to be concluded in time, if at all, and the necessary jobs will not be created for all investors. I’ll note also, that the most reputable regional centers do not do business with such firms.
For further reading on this subject, see http://www.eb5fullservice.com/blog/1354/.
President Obama Signs Bill Authorizing Three Year Extension of EB-5 Pilot Program
President Barack Obama today signed into law a three-year extension of the EB-5 Pilot Program. The official White House Press Press Release below:
THE WHITE HOUSE
Office of the Press Secretary
FOR IMMEDIATE RELEASE
September 28, 2012
Statement by the Press Secretary on H.J. Res. 117, S. 3245 and S. 3552
On Friday, September 28, 2012, the President signed into law:
H.J. Res. 117, which provides fiscal year 2013 appropriations for continuing projects and activities of the Federal Government through Wednesday, March 27, 2013;
S. 3245, which extends to September 30, 2015, the expiration dates of key requirements of four immigration programs administered by the Department of Homeland Security: the EB-5 Regional Center Program; the E-Verify Program; the Special Immigrant Non-Minister Religious Worker Program; and the Conrad State 30 J-1 Visa Waiver Program; and
S. 3552, the “Pesticide Registration Improvement Extension Act of 2012,” which reauthorizes and modifies fee collection provisions and related authorities in the Federal Insecticide, Fungicide, and Rodenticide Act and the Federal Food, Drug, and Cosmetic Act.
U.S. House of Representatives Approves 3 Year Extension of EB-5 Pilot (Regional Center) Program
The U.S. House of Representatives today passed S. 3245 (412-3) – which includes a three year re-authorization of the EB-5 Regional Center Program through September 2015. Having passed by the Senate on August 2, the bill is now on its way to President Obama for signature , which is likely to occur later his week, or early next week.
Pilot Program Reauthorization This Week?
On August 2, 2012 the U.S. Senate passed S. 3245 approving an extension of the EB-5 Pilot Program for another three years. The U.S. House of Representatives is now back in session, and its weekly legislative calendar shows hat it will take up the extension of the Pilot Program this week. The House is widely expected to approve the extension, perhaps by unanimous vote. Once the House approves, the bill goes to the desk of the President, who is expected to sign without delay.
TOP TWENTY QUESTIONS EVERY EB-5 INVESTOR SHOULD ASK REGIONAL CENTERS
The purpose of this post is to provide EB-5 investors with a startup list for evaluating EB-5 regional center projects. Our belief is that smarter investors will lead to better regional center projects, which in turn will lead to greater success for the industry as a whole.
Please note in advance the following caveats and qualifications:
- This post (and following commentary) is a collaborative effort. In fact, we are calling it the “TWENTY QUESTIONS Project.” We will be seeking the input of other professionals in the EB-5 industry in order to refine and improve the list.
- The list is deliberately not exhaustive, for the following reasons:
- We wish to discourage the notion among investors that any list of questions, no matter how long, with be sufficient for performing a thorough analysis of a private placement financial investment. Every question on the list can provoke additional questions, and every project has some unique elements, so no list can anticipate every question that must be asked.
- We wish to encourage participation by experienced professionals in the industry who might be concerned that an investor who loses money might later complain “you forgot this question, that’s why I lost all my money.” So, again, its just a “startup list.”
- We believe that long lists are intimidating and, generally speaking, remain unread. The questionnaire we send to regional centers is 318 questions long, and growing. Want to see it? We doubt it.
- We have left out questions investors and their financial advisors are capable of determining without the aid of an EB-5 specialist, e.g. what is the minimum investment, what is projected return on investment, what have been the past returns, will funds be held in escrow until spent, will principal plus application be refunded if I-526 denied. etc.?
- We admit to a bias toward legal issues. This is because -
- There has been a thin field of EB-5 project due diligence analysts so far, with EB-5 attorneys filling the void to a great extent.
- Legal questions are where investors most need help. Many standard financial questions, like “patent on technology” will occur to investors or their advisors and are more or less universal / international in nature.
OK, here’s our “Top 20” list (not in any particular order):
- When will the investor receive his or her money back and how will the amount of capital returned be determined?
- How many I-526 approvals/withdrawals/denials (even if later appealed and overturned) to date, and reasons?
- How many I-829 approvals/withdrawals/denials (even if later appealed and overturned) to date, and reasons?
- How many project-based RFEs on I-526s during the past two years, and how many of the RFEs have been successfully resolved?
- How much money has the Center returned to investors to date?
- Do the RC principals or project general partners have any history of financial misconduct or a history of criminal convictions?
- Does the Center pay success-based referral fees to unlicensed brokers or finders operating in he U.S.? If so, how does the Center’s securities attorney defend this practice?
- Who are the RCs economist, immigration attorney, and securities attorney and what are these experts’ experience with the EB-5 program, what is their reputation and history of risk-tolerance? How closely does the center consult with its attorneys and other experts during project development?
- Does the Regional Center provide regular reporting of the status of the investment and fulfillment of job-creation goals to the investors? At what intervals?
- Is there a surplus or buffer in the jobs creation projections such that, even if all the milestones in the economist’s report are not met, sufficient jobs will be created for all immigrant investors?
- How will the Center allocate jobs in the event of a shortfall at the I-829 stage? How might additional jobs be created?
- Is the regional center affiliated with any government entity? Does the project have federal, municipal or state support?
- Does the TEA designation rely on the use of contiguous census tracts? If so, does the selection of tracts for aggregation appear to be designed to artificially lower the average unemployment for the targeted employment area?
- Does EB-5 project have non-immigrant investors who are investing in the project strictly for financial reasons? If so, who are these investors and how risk- tolerant or averse are they?
- What is the possibility, based on the developer’s past history and the structure of the current project, that the project will deviate from the plan as stated in the I-526 petitions such that the USCIS might decide that the project has undergone a “material change”
- Where do investors stand in the queue of other investors and creditors with regard to return on investment and return on capital?
- Has any Regional Center project lost money? Been in default? Investors lost money?
- How many years of experience does the general partner or principal in the investment project have in working with EB-5 immigrant investor programs?
- Will the project rely on bridge financing until EB-5 funds are transferred?
- Are the jobs direct, indirect, induced or a combination?
Each person who wishes to propose a question for inclusion on the list (please don’t forget it’s a “Top 20” list, and not a list of all important questions) should state the question they think merits inclusion, then explain why it should be a “Top 20″ question, and then nominate one current question for removal, explaining why that question should be demoted from the list.
We look forward to reading your comments.
What is a “Reasonable Investigation” of a Regional Center Project?
As a registered representative of a broker/dealer firm, I am obligated to follow the Financial Industry Regulatory Association’s (“FINRA”) guidance when investigating private placement offerings such as those offered by EB-5 Regional centers. A “reasonable investigation” is defined in FINRA Regulatory Notice 10-22. My checklist for compliance with this rule appears at EB-5 Analytics Checklist for Compliance with FINRA Regulatory Notice 10-22, and in text version below.
A. Antifraud Provisions and FINRA Rules
____ Disclosed lack of essential information as well as the risks that arise from lack of information
____ Exercised a high degree of care in investigating and independently verifying an issuer’s representations and claims
____ Regarding new speculative ventures, was particularly careful in verifying the issuer’s obviously self-serving statements
B. FINRA Suitability Obligations
___ Had reasonable grounds to believe that a recommendation to purchase, sell or exchange a security is suitable for the customer
____ Conducted a suitability analysis when recommending securities to both accredited and non- accredited investors that will take into account the investors’ knowledge and experience
____ Made reasonable efforts to gather and analyze information about the customer’s other holdings, financial situation and needs, tax status, investment objectives and such other information that would enable the firm to make its suitability determination
____ Is satisfied that the customer fully understands the risks involved and is able to take those risks
Conducted, at a minimum, a reasonable investigation concerning:
____ the issuer and its management;
____ the business prospects of the issuer;
____ the assets held by or to be acquired by the issuer;
____ the claims being made; and
____ the intended use of proceeds of the offering.
____ Conducted a reasonable investigation in connection with each offering, notwithstanding that a subsequent offering may be for the same issuer
C. Specific Issues Related to a BD’s Responsibilities
____ Identified and conducted independent investigation of any red flags
____ Identified and conducted further, independent investigation of substantial adverse information about the issuer
____ Disclosed adverse information about issuer
____ Disclosed conflicts of interest where present between broker/dealer and customer
___ Carefully reviewed the qualifications and competency of counsel or experts retained to perform an investigation on its behalf
___ Separately addressed all gaps or omissions in the investigation by counsel or experts
___ Conducted further investigation of issues and concerns identified in the counsel’s or expert’s report
Firm ensured that the firm’s personnel, including its registered representatives:
___ Engaged in an inquiry that is sufficiently rigorous to comply with their legal and regulatory requirements
___ Performed the analysis required by NASD Rule 2310
___ Qualified their customers as eligible to purchase securities offered pursuant to Regulation D
___ Did not violate the antifraud provisions of the federal securities laws or FINRA rules in connection with their preparation or distribution of offering documents or sales literature
E. Documentation of Reasonable Investigation
Descriptions of the meetings that were conducted in the course of the investigation, including meetings with the issuer or other parties, showing:
___ tasks performed the documents and other information reviewed
___ results of such reviews,
___ date such events occurred
___ individuals who attended the meetings or conducted the reviews.
Reasonable Investigation Practices
A. Issuer and Management
___ Examined the issuer’s governing documents, including any charter, bylaws and partnership agreement, noting particularly the amount of its authorized stock and any restriction on its activities. If the issuer is a corporation, a broker/dealer might determine whether it has perpetual existence
___ Examined historical financial statements of the issuer and its affiliates, with particular focus, if available, on financial statements that have been audited by an independent certified public accountant and auditor letters to management
___ Looked for any trends indicated by the financial statements
___ Inquired about the business of affiliates of the issuer and the extent to which any cash needs or other expectations for the affiliate might affect the business prospects of the issuer
___ Inquired about internal audit controls of the issuer
___ Contacted customers and suppliers regarding their dealing with the issuer
___ Reviewed the issuer’s contracts, leases, mortgages, financing arrangements, contractual arrangements between the issuer and its management, employment agreements and stock option plans
___ Inquired about past securities offerings by the issuer and the degree of their success while keeping in mind that simply because a certain product or sponsor historically met obligations to investors, there are no guarantees that it will continue to do so, particularly if the issuer has been dependent on continuously raising new capital
___ Inquired about pending litigation of the issuer or its affiliates
____ Inquired about previous or potential regulatory or disciplinary problems of the issuer
____ Requested credit check of the issuer
Made reasonable inquiries concerning the issuer’s management, including:
___ Expertise of management for the issuer’s business
___ The extent to which management has changed or is expected to change
___ Any regulatory or disciplinary history on the part of management
___ Any loans or other transactions between the issuer or its affiliates and members of management that might be inappropriate or might otherwise affect the issuer’s business
___ Inquired about the forms and amount of management compensation, who determines the compensation and the extent to which the forms of compensation could present serious conflicts of interest
___ Inquiring about the length of time that the issuer has been in business and whether the focus of its business is expected to change
B. Issuer’s Business Prospects
Reasonable investigations of the issuer’s business prospects, and the relationship of those prospects to the proposed price of the securities being offered, might include:
___ Inquired about the viability of any patent or other intellectual property rights held by the issuer
___ Inquired about the industry in which the issuer conducts its business, the prospects for that industry, any existing or potential regulatory restrictions on that business and the competitive position of the issuer
___ Requested any business plan, business model or other description of the business intentions of the issuer and its management and their expectations for the business
___ Analyzed management’s assumptions upon which any business forecast is based
___ Tested models with information from representative assets to validate projected returns, break-even points and similar information provided to investor
___ Requested financial models used to generate projections or targeted returns
___ Maintained in the BD’s files a summary of the analysis that was performed on financial models provided by the issuer that detailed the results of any stress tests performed on the issuer’s assumptions and projections
C. Issuer’s Assets
___ Visited and inspected a sample of the issuer’s assets and facilities
___ Determined whether the value of assets reflected in the financial statements are reasonable
___ Determined that management’s assertions concerning the condition of the issuer’s physical plants and the adequacy of its equipment are accurate
___ Carefully examined any geological, land use, engineering or other reports by third-party experts that may raise red flags
___ Obtained, with respect to energy development and exploration programs, expert opinions from engineers, geologists and others are necessary as a basis for determining the suitability of the investment prior to recommending the security to investors
___ Adopted practices specifically tailored to current offering to ensure adequate investigation
Report from Jay Peak Resort
Rapid USA Visas, the former marketing agent for Jay Peak Resort’s EB-5 visa projects (offered through the Vermont Regional Center), announced on February 28, 2012 that it was severing ties to Jay Peak Resort, because it “no longer has confidence in the accuracy of representations made by Jay Peak, Inc. or in the financial status of and disclosures made by the various limited partnership [sic]…”. The startling news was sent as an email to over 100 immigration attorneys who had previously filed I-526 petitions for immigrant clients investing in one of Jay Peak Resort’s projects. The text of the email appeared almost immediately on a popular EB-5 news blog, and spread throughout the EB-5 community, worrying immigration attorneys, investors, and virtually everyone else in the EB-5 industry since Jay Peak President Bill Stenger has been an eloquent champion of the EB-5 program before Congress and the public generally (see, for example, Jay Peak Resort CEO Bill Stenger Testifying Before Senate Judiciary Committee chaired by Senator Patrick Leahy (D-Vermont) on December 8, 2011).
My initial position in this controversy was that Rapid USA’s email announcement on its face was too broad and too vague to draw any firm conclusions. Further, Rapid USA Visas’ CEO, Douglas Hulme, has consistently refused to specify just what the questionable Jay Peak financial representations were, or what his claimed concerns were (I called him twice, and he didn’t reply to my voice mail messages).
Still, there was cause for concern given the fact that Rapid USA was willing to sever what had been a very profitable relationship with Jay Peak Resort. Why did they do it? Was there fire under the smoke?
I traveled to Jay Peak on the weekend of March 23 to 25 along with my wife and 7-year-old son to inspect the resort and to meet with long-time Jay Peak Resort President Bill Stenger. I had an in-depth discussion with Mr. Stenger of Jay Peak’s EB-5 projects on Saturday, March 24, 2012 that lasted two hours. On Sunday morning, I met with James Candido, Economic Development Specialist, Vermont Department of Economic Development, and a principal overseer of EB-5 projects for the State of Vermont. Mr. Candido and I met separately from Mr. Stenger, and our discussion lasted approximately one and one-half hours. Both Mr. Stenger and Mr. Candido spoke freely, with only two items discussed off the record, which were asked and offered for background purposes, and were not essential to an understanding of the current controversy. Mr. Stenger complied with every document and data request I made while at Jay Peak and later while preparing this blog article.
My trip to Jay Peak had been planned before the current controversy began. Indeed, one reason I was skeptical about reports that Jay Peak might be in financial trouble was that I had originally asked to visit Jay Peak in February, but had been advised that there were no vacancies at the resort until late March.
Driving up to Jay Peak I was reminded of one EB-5 project issue that has bedeviled some EB-5 projects, and which is most certainly not a problem with Jay Peak projects, and that is targeted designated area (”TEA”) status. Some projects have had their TEA designations challenged by the USCIS when they have relied on census tract aggregation (or “gerrymandering,” as the CIS has more pejoratively describes it) or questionable TEA designations by state officials eager to create jobs anywhere and everywhere in their state, leading to controversy both within and without the EB-5 community (see, for example, December 2011 NY Times article and editorial). Jay Peak is located in one of the poorest and least densely populated parts of Vermont, and there is no suggestion (and particularly not from a New York boy like me) that it is anything but a RURAL area.
The first thing one notices upon entering the Jay Peak Resort is the build quality of the construction. My wife observed several times that the facilities reminded her of Disneyland: everything inside and out was sturdy and of high quality, but with no traces of waste or extravagance (her words, I’m not that eloquent). The Tram Haus Lodge, where I stayed with my family, is equivalent in quality of accommodations to a four star hotel.
Another thing my wife noticed right away was that practically everything in our room was marked “Made in Vermont.” This included the wood table in the living room (as well as virtually all the furniture), the wool blanket on the bed (we had passed the manufacturer, the Johnson Mill Company, on the way up), the soap in the bathroom, the steel vases, the concrete inlays of tabletops, etc.
Job creation is, of course, one of the central concerns in any due diligence evaluation of an EB-5 regional center project. Every EB-5 Pilot Program investor’s principal ($500,000, or $1,000,00 for non-TEA projects) must generate at least 10 direct or indirect full-time jobs (to persons lawfully in the U.S., by the way). Persons hired by Jay Peak Resort as a result of the EB-5 project, whether they be receptionists or maids or ski instructors, are examples of “direct” jobs. Persons hired by Johnson’s Mill Company as a result of Jay Peak’s increased demand for wool blankets are “indirect” jobs. The conventional wisdom among immigration attorneys has been that it is better for an EB-5 project to rely entirely or predominantly on indirect jobs, because this allows the regional center to avoid the legal and administrative burden of identifying actual workers with W-2 forms or pay stubs at the time of I-829 filing. Because indirect jobs depend on an economist’s projections of jobs created using a government approved (or, at least, tolerated) input-output model such as RIMS II or IMPLAN, the regional center can claim to investors “all we have to do is spend the money according to the economist’s assumptions, and the USCIS will agree that your jobs have been created.” As we have seen recently with the “tenant occupancy” dispute, however, the government may change the rules in the middle of the game, and announce that it will no longer count certain jobs based on an economist’s projections, even though it had done so in the past. Relying on direct jobs in whole or in part certainly carries an extra administrative burden for the project managers, as well as the risk that the jobs do not materialize in sufficient numbers when I-829s are being filed, but a project that successfully creates large numbers of its own (not tenants’) jobs is bound to have fewer job creation questions at the I-829 stage of USCIS review, thus increasing the likelihood that its investors’ I-829 petitions will be approved.
In this regard, Jay Peak is on solid ground, since its Phase I project did not seek to include indirect jobs in the job creation calculation, and all its Phase I investors whose cases have been adjudicated thus far (35 of 36) have been approved based entirely on direct jobs created by the project. Later projects have relied on both direct and indirect jobs.
I have in the past noticed vulnerability in Jay Peak’s job-creation strategy, however: the job creation plan rarely includes a substantial buffer of excess jobs to be created above the number of jobs needed for all investors in the project. This is not a problem as long as the project proceeds apace, but if the project runs into substantial delays there might not be enough total jobs to go around for all investors at the I-829 stage. The financial and legal issues are inherently connected here (as is often the case in EB-5 project due diligence analyses), as even the best legal strategy can be undermined if financial or management problems result in failure to meet milestones upon which the economist’s job creation projections were predicated. So far, Jay Peak Resort has a very good record of meeting or exceeding project plans, and has often added the Resort’s own funds to exceed project goals. The decision by the Resort to spend an additional one million dollars of its own money on a retractable roof for the waterpark is just one example.
Bill Stenger admitted to a “small problem” in current project development, however, as environment permits for construction planned for this summer were taking longer than expected. With only a three to four month construction window in northern Vermont, an entire year could be lost if permit problems extend into the summer. Mr. Stenger noted that Vermont state leadership had “engaged with the problem lately,” and Stenger was optimistic, if still concerned, that construction will start on time in the early part of summer 2012. It’s definitely an issue to watch.
The weekend we were in Jay Peak Resort the weather was unseasonably warm, with temperatures hovering in the 50s (this past week, though, temperatures were in the 30s again). The 2011/2012-winter season was short, with temperatures higher and snowfall down around 35% (although Jay Peak compensated somewhat by anticipating the warmer weather and producing 20% more manufactured snow), which led some to speculate that Jay Peak Resort was experiencing financial difficulties due to the warm winter, and this was what led Rapid USA Visas to jump ship.
I regard it as fortuitous that I visited Jay Peak Resort during such a warm weekend, because it would be a test of Jay Peak’s primary strategic goal of using EB-5 money to create an all-season resort that did not depend entirely on skiing. On the weekend I was at Jay Peak, only 17 of the Jay Peak’s total of 76 ski trails were open. On a good “powder day”, March 10 of this year, for example, Jay Peak’s records show 4750 skiers and 2200 people in the waterpark, with 100% room occupancy. There were only 2140 skiers at the resort on March 24, a Saturday, when I was there, but the rest of the place – the waterpark, the ice rink, the restaurants, the bar, the arcade, etc. were jumping with activity. The waterpark is particularly impressive.
It has features and attractions geared to various age groups, and a retractable roof – on one day it was so warm, we saw it in action – and was packed or nearly packed all three times I visited it (so much so, that I didn’t elect to try it in the flesh, although my wife and son spent several hours in the pool, slides, simulated surf wave, and the AquaLoop). I was struck by the number of families, including families with young children, that were at the resort. My 7-year-old son learned both to ski and to ice skate for the first time while at Jay Peak, and he was one of the older children taking instruction.
There were also, many, many Canadians at the resort (an advantage Jay Peak has when compared to it’s more southerly competitors in Vermont such as Stowe and Sugarbush). Montreal is just 90 miles away, and its residents are big users of Jay Peak Resort and are expected to be important consumers of fractional shares in residences created with EB-5 money once these go to market later this year.
Other examples of diversification include birthday parties (there were several in evidence when we were there), weddings (44 booked already for this year), the new conference room and the Jay Peak Championship Gold Course (twice voted the best public course in Vermont by Golf Week magazine). This week the Women’s National Hockey Teams of Canada, Sweden and Slovakia will be training at Jay Peak Resort’s Ice Haus for the Women’s World Hockey Championships to be held in Burlington in April.
Jay Peak Resorts Sales and Labor report for 1Q2012 compared with 1Q2011 shows Jay Peak Resort’s Skier Visits up 14.25%, Rental Room Occupancy up 12.5%. It also shows 110,916 paid visits to the waterpark, which was not yet open in 1Q2011.
Total Resort Sales for the 1st Quarter increased from $9,689,484 to $14,651,589.05 in 1Q2012, for an increase of 51.21%. Labor costs increased from $1,847,201.32 to $2,712,499.83, due primarily to new hiring. Total Expenses in 1Q2012 were $3,377,416.63. For the comparable period in 2011, expenses were $2,330,109.03.
The data also show sales of $890,540 for the week of March 18 through 24 compared to $589,335 in revenue a year ago, when Jay Peak had far more snow but fewer “beds” and no waterpark.
Jay Peak Resort’s internal documents predict for the current fiscal year, the first with the Hotel Jay phase amenities and suites open, that revenue will exceed $30 million.
Bill Stenger stated during his interview that the Resort is currently in the planning stage of an audit of the Resort’s finances by an independent accounting firm. A likely completion and release date was not available at the time of our discussion.
It was very clear during my stay at Jay Peak Resort that Bill Stenger is a very hands-on owner/operator. I spotted him before our first meeting darting into the kitchen of one of the Resort’s restaurants to solve a problem. While touring the facilities, he would address every worker by first name (he apparently interviews every new hire, from what a ski instructor told my wife), check operations, issue orders or suggestions, and even pause at one point to gather and throw out empty plastic cups that a bartender hadn’t yet cleared. It’s plain from conversations with the Resort’s staff that morale is high and that Mr. Stenger is held in high esteem. Worker attrition is not a problem.
One concern I had now that Rapid USA has left the picture is whether Jay Peak, Inc. will be able to effectively market EB-5 projects and manage investor relations. Stenger’s response was that the Resort already has a nucleus of “good people who are well experienced in the EB-5 program” and that the Resort will be hiring additional in-house help. I was surprised to find out that there was little in the way of an overseas network of agents that Rapid USA Visas might take away with it. Most referrals to Jay Peak projects apparently come from U.S. immigration attorneys, according to Stenger.
I’ve always been concerned about Jay Peak’s exit strategy. Loan-based EB-5 investments have a clear exit point when the loan is repaid by the borrower, whereupon the general partner returns investment principal to the immigrant investors. Equity-based investments don’t have the same fixed point for exit, but in virtually every project the general partner enters the project with the intention to sell the project equity in its entirety once the property becomes profitable and a market develops for resale. Jay Peak is different. The plan is for investors to sell fractional shares in the part of the resort that was developed with their money. Bill Stenger predicts that Phase I investors will be able to sell shares and secure return of their investment principal starting in September of this year. I asked Mr. Stenger if he could point to any fractional shares of comparable properties on the market now to give investors a sense that there will in fact be a market for fractional sales in Jay Peak residences, and, if so, what the market value will likely be. Stenger had to admit that there were no good comparables on the market now, mostly because, in his opinion, other ski resorts in Vermont are not readily compared to Jay Peak due to the differences in location and facilities and the fact that the other resorts do not have Jay Peak’s sizable Canada market to draw from. Jay Peak currently has only 4 properties for sale. I spoke to a Jay Peak Real Estate agent who quoted me a purchase price of $365,000 for a 3 bedroom lodge, but this residence, along with the others for sale, are older residences of lower quality than the properties built with EB-5 money. Stenger claims that there is a waiting list for fractional sales for the new properties (fractional shares have not been previously offered by Jay Peak). He also claimed that local banks will provide mortgages for fractional shares for Jay Peak residences, a vital component of any future sales effort. I called two banks in northern Vermont, Union Bank and TD Bank, and both said that they offered mortgages on fractional shares in Vermont ski resorts such as the Trapp Family Lodge at Stowe, Vermont, and at Smuggler’s Notch in Lamoille, Vermont.
As it happens, the exit strategy issue may be a moot point as regards Phase I investors. Stenger volunteered during our discussions that the revenue trends on Phase I residences are looking so good “that we are seriously considering buying out the Phase I investors ourselves.” It remains to be seen whether Jay Peak Resort will have the funds and desire to purchase back properties funded by later phases of the development project.
The State of Vermont Regional Center functions differently from most other regional centers in one sense. Although the Regional Center controls and supervises each individual project, the projects themselves are managed by different teams of owners and managers. Jay Peak, as with all projects under Vermont’s supervision, is a standalone EB-5 project, not the Regional Center itself, and is not associated with Sugarbush Resort, Seldon Technologies Clean Water Products, or any other EB-5 project in Vermont.
James Candido, the principal overseer of State of Vermont EB-5 projects, stated to me that he inspects Jay Peak’s financial records at least four times per year and that he has not seen any financial irregularities or problems in Jay Peak’s finances. He noted that Jay Peak Resort was selected as the first Vermont EB-5 project because of Bill Stenger’s “30 years of demonstrated business acumen.” He emphasized that the State of Vermont is particularly careful in overseeing Jay Peak projects because it is hoping to leverage Jay Peak Resort’s success with development and job creation into promoting additional EB-5 projects in Vermont, several of which are in development or already online. Candido noted that the State turns down or discourages 95% of Vermont businessmen pitching projects to the Vermont Regional Center.
—end of article text—-
I welcome any and all comments, critiques and additional information from the EB-5 community and readers of this blog.
PLEASE NOTE: Although I perform due diligence evaluations for EB-5 projects for my clients and for other immigration attorney’s clients, this article is not to be regarded as a comprehensive due diligence project review, or equivalent, and should not be relied upon for investment decisions.
John Roth 31 March 2012
Beware of Unlicensed “Which Regional Center” Consultants
If you see an unlicensed “due diligence” or “regional center selection” firm on the internet promising to help you select the best regional center for free, or for a fee they will later rebate to you after they receive a referral fee from the regional center, you can be virtually certain that the firm can not fall within the “finder’s exception” to broker/dealer registration, and therefore the firm is violating U.S. securities laws. There may be some disagreement among securities attorneys about the size of the finder’s exception in securities law, but you won’t find a securities attorney in the entire U.S. who’d say that a firm 1) soliciting EB-5 clients in the U.S., and 2) providing investment advice about which center to select, and 3) accepting finder’s fees from the issuer (regional centers) may do so lawfully without first obtaining a Series 7 or Series 79 license and becoming registered as a broker-dealer, or representative of a broker-dealer firm.
So what does it mean your advisor is not licensed? Simply, the multiple protections of the securities laws to ensure that brokers are both competent and honest are not in place to protect you. The first thing to understand about the securities law of the U.S. is that they are designed to protect the investor. Recognizing that investors may be misled by incompetent of dishonest sellers of securities, U.S. securities laws, combined with the rules of the financial industry’s self-governing organization FINRA, ensure that sellers of securities (including investments such as those offered by EB-5 regional centers) have been tested and are periodically re-tested to demonstrate the appropriate competency in financial matters, that they have disclosed relevant background information such as the seller’s employment history, criminal history, history of investment related complaints, fines, and sanctions, that they have submitted to strict oversight of their professional activities and that they must conform with FINRA and securities law rules which include, among many others, prohibitions against -
- Engaging in any manipulative, deceptive or fraudulent behavior
- Making an untrue statement of a material fact, or even fail to state a material fact necessary in order to make the statement made not misleading
- Guaranteeing a result
- Engaging in behavior that constitutes a conflict of interest with the client/customer
If your advisor is unlicensed, you basically just have to trust the advisor to do the right thing.
You can easily check to see if a finder is registered on FINRA’s BrokerCheck.
The EB-5 Pilot Program is particularly susceptible to abuse because the referral fees that regional centers pay to finders vary from center to center, with some centers refusing categorically to pay finder’s fees to unlicensed consultants, while other centers paying fees that are far higher than the standard. Given the powerful incentive for the advisor to steer the client to the center offering the advisor the highest financial reward, unregulated advisors can be a source of abuse in the EB-5 field.
Another problem is that unlicensed finders naturally send their clients only to regional centers that are willing to pay them, despite the securities law violation. This subjects the center to the risk of an SEC enforcements action or rescission action in state court by an investor that can have dire consequences for the center’s ability to carry its projects forward. When you consider that it’s not just you money at stake in one of these projects, but also the future of your family, you can see why a cautious approach with such firms is strongly recommended.
How Many Approved Regional Centers Are There?
The USCIS’ web site seems to indicate that as of today there are 214 regional centers (and I have recently heard several top people in the EB-5 field quote similar numbers in excess of 200), and yet the statistics published today by the USCIS indicate that there are only 194 approved centers. The reason for the confusion is that the USCIS’ List of Immigrant Investor Regional Centers shows the total number of “entries” on the list, not the number of centers. The two numbers are different because regional centers which are approved to operate in multiple states have an entry on the list for each state in which they may operate. You can see this for yourself by clicking on the [Printer Friendly] icon above the list, and then clicking on the “Regional Center” heading above the second column. This will sort the centers alphabetically, and you will see that some centers appear more than once. If you eliminate the duplicates from the list, there are 194 centers as of today, January 23, 2012.
Experienced Regional Centers Always the Best?
If given a choice, virtually all immigrant investors select a regional center that has a track record of successful I-526 petition approvals. It’s even better if the center has I-829 approvals and has returned investors’ principal, either in whole or in part. Indeed, such centers have very significant pluses:
- The management team has proven itself capable of managing complex issues like job creation methodology, targeted employment area designation, “at risk” nature of investment, etc.
- Dozens if not hundreds of previous investors and their financial advisors have already vetted the center
- The regional center management team members have demonstrated the ability to work together in an effective team over an extended period of time
It is essential for investors to understand, however, that a regional center is nothing but an umbrella organization that provides the legal foundation for EB-5 projects. Indeed, some projects are not even run by the regional center itself, but instead are managed by outside developers, with the outside firm and the regional center sharing the profits. In every instance it is the project that makes the actual investment and creates the U.S. jobs, and it is the project that is being scrutinized when the investor’s I-526 and I-829 petitions are being reviewed by the USCIS. A regional center may have multiple projects available for investors at a given time, or none (the situation now with most established centers, who sold out faster than expected due to high demand from investors in recent months). The projects managed by a given center may vary significantly in character as well. One project might be an equity-based project, in which the center has long experience, and another might be the first loan-based project offered by the center.
Even though regional center designation would seem to remove issues like targeted employment area status, job creation methodologies, etc. from the table during petition review, the manner in which the individual project uses the regional center’s approval in these areas may cause problems for the I-526 or I-829 petitions. We recently reviewed a project offered by one of the most experienced regional center management teams that resulted in a Request for Additional Evidence on five separate project-based issues ranging from documenting “at risk” nature of the investment, to targeted employment area status (the USCIS questioned the unemployment figures used), to adequacy of the business plan.
And we haven’t even discussed the varying financial risks a regional center might be taking from project to project, which can be even more significant.
So, the moral is, yes, start by looking for a good regional center, but do a very, very careful due diligence on the project under consideration as well.