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.
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.
The Regional Center, though vital to enabling foreign investors to obtain a green card, has less significance in deciding where to invest than most EB-5 investors believe. For one thing, many veteran EB-5 project management firms own multiple regional centers, and the one they use for any given project is usually dictated by geography more than by the individual regional center’s experience or track record. At the other end of the spectrum, there are several very fine EB-5 project management firms that do not own or operate a regional center at all. These management companies and developers search for good EB-5 projects in multiple geographic areas then “rent” a regional center in the geographic area where they wish to undertake the project, paying a fee or a share of profits to the regional center to use its structure to give green card benefits to its foreign investors. So, what matters is – who is the management company running the project the investor is considering, and how should that management company’s experience, or lack thereof, affect the investor’s decision to invest or not invest.
One often hears the advice that it is best to select a regional center project from among those offered by firms with a history of I-829 approvals. This sounds sensible, since such firms are likely to have substantial experience with the many unique job creation and regulatory compliance issues associated with EB-5 projects. I thought so myself when I started analyzing EB-5 projects about nine years ago (when I was a “mere” immigration attorney), but the more I learned about the industry the less importance I placed on a history of I-829 or even I-526 approvals. There are several reasons for this.
It’s All About the Project
A new project offered by an EB5-experienced management company can just as easily fail as one offered by a relatively new firm. There have been a handful of failures from the big EB-5 firms over the last several years, and most were due to poor decisions (often born of arrogance, in the author’s opinion) made by the owners of the “experienced” management company. Bear in mind that the businessmen who were in the EB-5 world prior to 2009 were just scraping by running small businesses. After the explosive growth in EB-5 numbers starting in 2010, these same individuals now find themselves running businesses 10 times the size they were ten years ago. Some owners have adapted well to growth. Others have not.
Experience is Held by Immigration Counsel as Well
The EB-5 project management firms that have been around the longest like to say that their history of approved I-829 petitions shows that they understand immigration and EB-5 job creation. But their knowledge is held in equal measure, and with greater command of the legal subtleties, by the firm’s immigration counsel, whose experience and services are available to any regional center or project developer that wishes to hire this same attorney. Another issue here is that some of the veteran businessman think they understand the EB-5 legal issues better than they actually do, which can lead them to plow forward with their project ideas without discussing them first with their immigration counsel. In one sense, a newer EB-5 project developer is preferable to an older one if they both have the same immigration counsel, because the newer developer is more likely to stay in close contact with, and pay heed to, his or her immigration counsel.
Statistics Can Be Misleading
The experienced EB-5 management companies have become adept at keeping some project failures out of their statistics and out of the public eye. In some cases, a federal lawsuit can keep potential I-829 denials out of the failure column while the regional center seeks a settlement with the USCIS that is short of an outright denial, but still keeps the investors in limbo. In other cases, projects have collapsed prior to USCIS adjudication because the developer partner of the regional center can’t fulfill its obligations, or because the partner simply withdraws. The EB-5 firm then moves the investors to a new project. Delays can last a year or more for the investors’ progress to a green card, but the EB-5 firm still claims that there was no denial.
In truth, there haven’t been a lot of cases like this, but it’s wise to be a bit skeptical of statistics, particularly when they are self-reported. Or, as Mark Twain famously quipped, “there are lies, damned lies, and statistics.”
Experienced Firms Don’t Have to Be Competitive
It’s almost a tautology that projects from the experienced firms will be less competitive simply because they don’t need to compete on the merits as strenuously as newer entrants. These firms know that they will attract large number of investors based simply on their statistics, so why take on more risk or give up more profit than necessary? As a result, they will often invest less of their own money, and hold onto the investors’ longer, and charge large management fees, etc. The younger EB-5 management firms, on the other hand, must offer more attractive terms to investors because they don’t have the statistics or the overseas agent networks or the network of referring U.S. attorneys to rely on to pull investors into their projects. This problem is greatly exacerbated by the fact that all EB-5 projects are private placement offerings, with SEC prohibitions against public advertising, and thus investors often must choose among projects based on a more limited set of information and disclosures than one finds with public offerings such as stocks or bonds.
Nobody’s Going to Get A Green Card if the Business Fails
The project you select could have an excellent legal structure and otherwise look great from a legal standpoint, but if the project encounters construction setbacks that put the project substantially behind schedule, enough jobs may not be created on time for the I-829 filings, resulting in denials. It is important to understand that legal compliance just establishes the theoretical basis for possible I-526 and I-829 approvals. Without faithful execution of the business plan, the legal superstructure will be worthless. Furthermore, the legal and financial issues are so closely intertwined when evaluating an EB-5 project that there are very few purely legal issues to evaluate. We find that the financial issues usually account for 90% or more of the project-critical variability between EB-5 projects when calculating likelihood of the project to produce the green card and to return investment principal. A business plan that is flawed in conception or execution is going to leave investors stranded no matter how EB-5 savvy the management company. To illustrate the point, let’s consider the following hypothetical case. There are two EB-5 project management firms, both headquartered in a major U.S. city on the East Coast of the U.S. One is relatively new to the EB-5 world and so has no I-829 approvals to brag about. This newer EB-5 firm, however, is one of the biggest and most successful real estate developers in its home city and it proposes to build a major commercial structure, let’s call it Project A, in its home town with EB-5 money. The other firm, whose main office is located just a few blocks away in the same East Coast city, can claim hundreds of successful I-829 petitions, virtually all that were based on commercial real estate construction in East Coast cities. But now, spreading its wings, the firm with I-829 approvals decides to invest in an alternate energy project (“Project B”, we’ll call it), on the West Coast of the U.S., where it has never operated before. If you follow the Golden Rule (or Golden Shibboleth?) of investing only in projects offered by management firms with I-829 approvals, you would pick Project B, but you would be wrong. Project B will fail when the West Coast partner withdraws from the deal, whereas Project A will succeed (this hypothetical is in fact based on a real case, slightly altered).
I am not at all suggesting here that a history of I-829 approvals is insignificant. Of course, it is very significant, up to a point. Everything else being equal, I’d pick the EB5-experienced firm, too. But the point of this article is that there are many, many other factors that must be evaluated if an investor is going to make a wise choice for his or her EB-5 Pilot Program investment. Reviewing projects from firms with I-829 approvals may be a wise place to start, but if you use it as an analytical shortcut for selecting a “reliable” investment vehicle, rather than conducting an informed and probing investigation of the options available for your capital, you may be giving yourself a false sense of security while at the same removing from your inquiry many highly attractive projects that are competitive if not better than the ones offered by the ancients in the industry.
And remember always – Past Performance is No Guarantee of Future Results!