Bridge financing is the use of a short-term loan or equity infusion to advance a development project until the project can secure permanent financing to carry the project to completion. In the EB-5 context, a senior construction loan has been typically been secured by the time the EB-5 capital raise has begun, but construction cannot begin because the EB-5 funds are needed to begin construction. The project managers therefore “bridge” the period from the beginning of the the EB-5 raise to the commencement of construction by obtaining a short-term loan or contribution of equity to move the project forward. This allows projects to significantly de-risk the construction by advancing construction beyond the early phases of construction where historically most construction delays occur (permitting problems, financing problems, labor problems, material problems, etc.). Under the 5/30/2015 EB-5 Adjudications Policy Memorandum (since updated by the USCIS Policy Manual), the USCIS stated that EB-5 funds can be used to replace bridge financing long after construction has begun, and the EB-5 investors will get credit for all jobs created by the bridge financing.
Advancing construction while awaiting EB-5 funding allows EB-5 project managers to substantially de-risk the project by limiting to the time duration and scope of the future risk scenario. This is because most problems that stop or slow down a project occur in the design and drawing phase or in the very early stages of construction (there may be permitting, zoning, labor, material or financial problems yet to deal with). Most EB-5 projects are offered to investors during the design phase. Other projects use bridge or equity financing to advance project construction and thereby reduce risk to investors. Another advantage is that the financial analyst doesn’t have to look as far into the future when projecting future cash flows from the project. It’s a lot easier to estimate cash flows for a project that will be operational in six months than it is to assess likely cash flows two years down the road. A lot can happen in those two years!
An I-924 “exemplar petition” is often filed by the regional center at the very beginning of the project offering. It is essentially an early I-526 petition without a petitioner. Only the project documents for a petition are sent to the USCIS with the hope that the Service approves the exemplar. If the USCIS approves the exemplar, then the project is approved for all subsequent I-526 petitions UNLESS the project managers make a “material change” to the project and/or its documentation. So, an I-526 petitioner filing based on an investment in an exemplar-approved project can only see his I-526 petition denied if 1) the project undergoes a material change (this is rare), or 2) there is a defect or deficiency in the petitioner’s source and path of funds part of the petition.
Congress today passed and the President signed a short-term spending package that includes an extension of the EB-5 Pilot Program until March 23, 2018. The two-year deal for defense and other government spending does not affect the EB-5 extension. They are separate items in the same bill.
Congress now has six weeks to pass a bill. If they don’t, the USCIS will likely raise the minimum amount to $1.35 million through a change in regulations.
A client of EB-5 Analytics recently sent me an email expressing grave concern about fraud being common in EB-5 investments, which was making him very hesitant about investing. I share my reply to the client below, in the hope that others will be able to see the larger picture that has been obscured lately by the Jay Peak scandal.
I can well understand how the EB-5 project universe looks to you like a “dark forest” with wolves and snakes and dragons lurking behind every tree. But it’s really not nearly so bad considering that we are helping you. Let me make a few points.
First, we have never reviewed a project that turned out to be fraudulent (with one possible exception; see below). This is in part due to self-selection by the regional centers. We periodically send questionnaires to all active regional centers and only about 50% of them reply. It’s odd, because we could potentially provide them with the most valuable commodity in the EB-5 field – a new investor. But I think these projects don’t want us asking a lot of probing questions about their project. This is not to say that the non-responding 50% are all fraudulent. Maybe they are uncompetitive, and they don’t see the point of trying to fit into our business model which is designed to show investors only the Top Five lowest-risk projects. In any event, this helps us avoid projects that might be fraudulent.
Second, the vast, vast majority of defrauded investors have been Chinese. This is because the Chinese do not have a tradition of reaching out to independent experts. They strongly prefer to obtain advice from within their circle of friends and acquaintances, or at least talk to someone local so they can complain in person if the investment doesn’t work out. Thus, the Chinese market is monopolized by local emigration agents who recruit investors by the barrelful while under no regulatory regime that would check their honesty, and then they sell the investors to the highest bidding regional center. We’ve been over there trying to sell our independent due diligence to emigration agents and we had no takers. Not one emigration agent was willing to pay as little as $5000 for us to do work due diligence report.
Third, we are doing extensive due diligence analysis of the project to evaluate all potential risks. This analysis often takes three weeks or more to conclude. I want to suggest that you have a conversation with my main financial analyst. Let me know if you want to do this and I’ll connect you two guys and arrange for a discussion.
Of course, the Jay Peak scandal is spooking everyone. There were a lot of non-Chinese investors in Jay Peak projects. How did they get there? Immigration attorneys were sending Jay Peak most of its investors and illegally receiving finder fees from Jay Peak. Of course, these attorneys did not have the training to undertake a due diligence investigation. They were acting like the Chinese emigration agents – selling investors to Jay Peak.
I’ve known about Jay Peak since early 2008 when I started in EB-5. We only put one investor in a Jay Peak project since EB5 Analytics started. This occurred in 2011 when a very wealthy Taiwanese investor told us that he didn’t care about getting his money back (we were discouraging investors from investing in Jay Peak because of the uncertainty about getting one’s principal out), he just wanted us to evaluate projects based on likelihood of obtaining the green card (he obtained his permanent green card last year).
Thereafter, Bill Stenger of Jay Peak tried for many months to convince us that the AnC Bio project was a worthwhile investment, but we could see multiple glaring flaws in the business plan and its execution (or, more accurately, its non-execution), so we never showed it to our clients. Nor did we ever again even consider showing a Jay Peak project to one of our clients. Jay Peak had plainly gone “off the rails.”
I would be happy to have a conversation with you with our main financial analyst also on the line. Let me know what day and time might be good for you.