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Why a $750K Minimum Investment is Not Necessarily Bad for EB-5

 

As readers of this blog are likely aware by now, there is discussion takiEB 5 Investment Cost resized 600ng place which may result in the increasing of the minimum investment required for EB-5 investors from $500,000 to $750,000 in a TEA (Target Employment Area) project.  As the EB-5 program continues to increase in popularity, the first concern among regional centers is whether or not this will reduce the size of the investor pool and therefore make raising capital more difficult in the program.

It is our opinion that this change would not severely affect the program for 3 main reasons:

  1. (China) EB-5 demand is likely to stay high: Some leading economists are suggesting China may be in for a difficult economic period in the coming years.  I will refrain from restating the analyses that lead to this conclusion, however, it is an important thought.  In the event that this forecast comes to pass, it is suggested that many in China will perhaps have an increased sense of urgency with regard to developing the opportunity for US citizenship while they can.  Arguably tied to this point is the fact that many would also seek to make investments in other economies not facing similar difficulties.  Even in the event that this forecast does not turn out to be accurate, the implication would be a continued rise in Chinese prosperity thereby continuing to increase the number of individuals who would be capable of making an EB-5 investment.  Either way, in our opinion, we believe demand should remain high.
  2. Bigger impact of EB-5 marketing dollars:  EB-5 regional centers and/or project owners will have to recruit fewer investors in order to raise the same amount of money if the minimum is higher.  Less time spent overseas marketing projects and a quicker path to getting money in the door speaks for itself.
  3. Easier to meet job creation requirements:  With EB-5 regional centers and/or project owners able to raise more dollars per investor, the ultimate requirement for job creation will be reduced.  This means that regional centers will either have to create fewer jobs for the same amount of capital or in other cases they will be able to raise more capital for their projects because their project’s job creation capabilities will give them access to more capital from the same number of investors.

Ultimately, if this change comes to pass it is our opinion at Strategic Element that it will be a good thing for the EB-5 program and therefore a good thing for America.

Phil Cohen is the President of Strategic Element, a company focused on EB-5 business plans, EB-5 regional center development and custom ‘turnkey’ direct EB-5 investments for investors.  Phil Cohen is also the lead author of The EB-5 Definitive Guide to Raising Capital.

  Download Your Free Paper: 9 Things to Know Before Going Down The EB\u002D5 Road

Guest Expenditures in EB-5: A Double-edged Sword

 

One piece of very good news that came about from the February 26, 2014 stakeholder’s call EB-5 Investmentwith USCIS was that they clarified when indirect job creation could be attributed to guest expenditures.  This is good news primarily because guest expenditures were never allowed to be used before.  More specifically, USCIS stated that guest expenditures could be counted when a project:

  • is serving an unmet demand in its area,
  • is providing a differentiated product (i.e. a
    product that is not otherwise available in the area) targeted to a specific
    market segment,
  • is being developed in response to
    (and presumably to serve traffic resulting from) a new development in the community

Despite the title of this article, this is very good news for the EB-5 community, as guest expenditures can have a significant impact on indirect job creation figures.

The Downside

There is a downside, however.  As many have documented in the case of tenant
occupancy, it often proved to be very difficult to know exactly how USCIS would interpret various attempts to meet the standards, given that they are not very specific.  With approval times as long as they are today, the unknown is whether or not USCIS would accept given justifications on a case-by-case basis. Since guest expenditures could arguably have a big impact on job creation and therefore the amount of money that an EB-5 project could raise from EB-5 investors, this unknown could have an impact on the capital stack and project timing if there is a delay or considerable back and forth in dealing with USCIS in terms of justifying the use of guest expenditures.  To the extent that a project can afford the time or can otherwise be flexible in terms of their capital stack, attempting to use guest expenditures can have a significant upside.  Most, however, would find that it would be very challenging to have to change an anticipated capital stack according to whether or not the use of guest expenditures would be allowed.

Over time, it is anticipated that more clarity will come both from USCIS in terms of policy memoranda and from the EB-5 community as we see what is accepted and what is not and the  reasons for those decisions.

Investors would also do well to try to recognize when guest expenditures are part of the plan, especially in a case where a hypothetical plan was submitted.  Until there is more clarity on what will be acceptable in the eyes of USCIS, guest expenditures can add some additional potential risk or delay in relation to the investor's approval at the I-526 stage.

 Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

Canadian Immigrant Investors: Thinking About Moving To EB-5?

 

describe the imageOver the coming weeks I will be blogging about some specific issues that Canadian Immigrant Investors should be aware of if they are planning to switch to the EB-5 program and helping them to understand some of the important differences.

The EB-5 program is quickly proving itself to be a viable alternative for immigrant investors who have been pushed out of the Canadian Federal Investor Program.  Like the Canadian program, the EB-5 program allows foreign investors the opportunity to get a path to citizenship in the United States based on making a qualifying investment.  Unlike the EB-5 program,
however, the investment must be made in a qualifying business and must be 'at risk' (although this does not mean necessarily 'risky') and can therefore be a more risky proposition when compared to the Canadian program which is almost like buying a government bond (with no interest).

There are many differences between the two programs and the EB-5 program can be considerably more complicated for investors as compared with making investment in the Canadian program which was very similar to purchasing a government bond.  Some key points about the program:

  • The investment required is $500,000 as long as the business being invested in is located in what's called a Target Employment Area (most are)
  • The typical investment horizon is five years
    although some opportunities are for six years or seven years
  • The typical return to investors is in the range
    of 1% per year, but this varies widely from project to project

There are many other considerations involved in looking at the program and one should take good advice from legal counsel and/or from business consultants who may be able to help.

The EB-5 program has all kinds of businesses participating, some good and some not so good.  The key to mitigating risk in the program, in my opinion, is to work with a company
that carefully selects projects that it represents and does a significant amount of due diligence
(i.e. one in a position to know good from bad and one who is in a position to choose the best).  It also helps to see that the company that you work through does not take on more than one or two projects at a time, so that there is no conflict of interest in how it represents projects.

Those interested in taking advantage of the EB-5 program should be aware that the US government is intending to implement a 'Chinese visa retrogression,' whereby citizens of China may be put on hold while other countries get an opportunity to have access to the visa quota.  If other countries do not fill the quota then the program will be reopened to Chinese citizens.  This visa retrogression is expected to be applied on and off over the coming years,
although nothing is yet certain about how or when this will happen (based on the current trajectory many US immigration attorneys are projecting that it will be implemented as soon as this summer). 

For Chinese citizens especially, it is suggested that moving ahead sooner rather than later will
give them good placement in the lineup should the retrogression be implemented, thereby allowing them to avoid what may end up being a multi-year wait, such as the situation was in Canada.  It is expected that there will be an influx of investors from Canada who will no longer be able to apply to the Canadian program.

Still need help figuring it out?  Contact me.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

The Importance of a Buffer in EB-5 Job Creation

 

When starting an EB-5 regional center or EB-5 project, many look to the regulations as the Start EB 5 Buffer resized 600guideline to what is required to have a successful EB-5 offering.  The guidelines, however, are only the beginning.  Starting an EB-5 project requires thinking that will not only get USCIS approval but which will also win over investors.  To this end, it is wise to consider the job creation component with the inclusion of a buffer of extra jobs.

Why Have a Buffer at All?

Creating a buffer of more jobs than are actually required by the program has the benefit of added security to investors, which in turn means added security for the project in terms of its ability to win investor interest in the first place and ultimately to maintain a reputation for successfully delivering job creation to investors, the core measure of success to all future investors.

Having buffer jobs means that if things don't go to plan and not all the direct jobs that were originally planned can be created, investors will not lose the opportunity to have the conditions removed from their green cards at the I-829 stage.

Where indirect jobs are concerned, job creation counts will be dependent on fulfilling the inputs that the economist had used to develop the indirect job creation calculation.  Most business people will take a conservative approach to planning their businesses, which means guessing high on costs and guessing low on revenues.  If costs are over-estimated, however, and these costs were counted as the input of investment used by the economist in his or her calculation, this conservative approach can backfire.  While coming in under budget is certainly a respectable and desirable outcome in almost any business scenario, a lower investment input to the project can mean that the originally-calculated number of indirect jobs may have to be revised downward to match the revised input, thereby meaning less jobs to go around.

How Much is Enough?

A good rule of thumb for a job creation buffer is to plan to create 20% more jobs than needed, or a total of 12 jobs per investor.  This is not a hard and fast rule but certainly 15%-20% is  recommended for those newer to the space as a minimum in order to be competitive.  With proven experience and track record, more leeway can be taken in the fullness of time.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Download Your Free Paper: 9 Things to Know Before Going Down The EB\u002D5 Road

 

EB-5 Investors: Hard to Find 'Good' Deals

 

Many ChoicesBad EB 5 Deals resized 600

Over the last 2 years, the EB-5 program's popularity has grown exponentially.  As of February 1, 2014, USCIS had approved approximately 440 regional centers.  And yet, investors today are often complaining of a lack of "good" deals available to them.

What Makes a Good Deal?

There are many factors that make up a good deal.  Investors are first concerned with getting their green card, which in turn means that the business has to create the jobs successfully.   Depending on which economic model is used and whether direct and/or indirect jobs are being claimed by the regional center project, investors may have to look at different factors to determine the likelihood of job creation, as presented by the regional center.

Because investors are also concerned about the preservation of their initial investment capital, there must be either a strong collateral base or a very strong likelihood of the business's success (which is preferred over collateral).

Another key element to a good deal is not only the number of jobs to be created (with a sufficient buffer over the required amount) but the likelihood of being able to claim those jobs.  Recent updates to the program such as tenant occupancy and updates on using guest expenditures in economic modeling, mean that there are more jobs that can be claimed, but also mean that claiming those jobs can be technically difficult, in terms of meeting USCIS requirements.  Simpler is better.

There are a multitude of factors that come into play in what comprises a good deal.  Many of these factors would be sought by any investor, let alone an EB-5 investor, however, there are  unique deal elements sought solely by EB-5 investors.  Many of these factors play off against each other, making for a relatively complex dynamic which must be balanced by any regional center wishing to raise capital successfully.

How to Strike a Balance That Sells

The best way to establish a deal that will sell to investors is to make oneself aware of the various possible permutations that can be considered in terms of structuring a deal and finding a combination that fits the deal and also suits investors.  Players who are newer to the game will have to offer more favorable terms to investors, as compared with regional centers who are more established, who can offer deals that may not be as strong but which will still be preferred by investors simply because of the reputation of the regional center.

Those wishing to start an EB-5 regional center or EB-5 project would be well advised to check with their advisors or resources such as The EB-5 Definitive Guide regarding what kinds of factors play well with investors in order to develop the right mix.

Why go to the trouble and expense of setting up an EB-5 regional center and project if your deal will not resonate with EB-5 investors?  Take the appropriate steps to ensure that you are not one of the more than half of EB-5 regional centers who are inactive.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

 

An Update on Industry and Geographic Restrictions and Amendments

 

Until now, the practice in the EB-5 community has been to submit a formal amendment to USCIS in the event that a regional center wished to expand the industry codes in which it would be operating in order to comply with USCIS requirements.

In its EB-5 Policy Memorandum of May 30, 2013, USCIS put forward an important change to this requirement.  Moving forward, when an EB-5 regional center wishes to expand its industry codes, it may now do so with a given investor's I-526 submission.  With this change, the formal amendment process (and the very significant wait time that this implies) is no longer required as a separate action by the regional center.  The result is a considerably higher degree of flexibility afforded to regional centers who may wish to expand their sphere of focus.

There is still value, however, to the formal amendment process.  The main value is that investors can be more certain of the approval of the new areas of focus when a regional center has received approval of a formal amendment in advance of the investor submitting their I-526.

Ultimately, for the regional center, it is a judgment call whereby the 'saleability’ of a deal would need to be traded off against the delays involved in seeking a formal amendment.

USCIS has also provided some indication (although this appears not to be definitive in how it was presented) that a regional center’s geographic area of focus may also be expanded via an investor's I-526 petition.  In order to do so the geographic area must be contiguous with the existing regional center boundaries and would require a justification for expansion to the new boundaries.  Similar to what has been described above for expansion of industries of focus, investors will be taking a risk that the justification provided will be accepted by USCIS.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Closing of the Canadian Federal Investor Program and its Impact on EB-5

 

An article has been posted on EB5News.com about Canada's shutting down its Federal Investor Program and if/ how this might impact the EB-5 program.  The article provides some perspectives from several leading EB-5 practitioners including Strategic Element's Phil Cohen:

http://eb5news.com/categories/10-eb-5/posts/263-industry-reaction-to-the-cancellation-of-the-canadian-investment-visa-program

 Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

Can I Apply EB-5 Capital to Multiple Companies Under a Single Project?

 

Not every EB-5 project is a giant, multimillion dollar development.  In fact, today we see more andEB 5 Multiple companies more so-called 'direct' or 'stand-alone' EB-5 projects in the market.

One question that is commonly asked is whether EB-5 funds can be applied to more than one business under the same project.  The short answer to this question is yes.  USCIS recently clarified that this approach is possible, however in the May 30, 2013 memo some additional clarity was provided.

As a result of this memo, in conjunction with previous guidance, it can now be taken that in a direct or stand-alone project, EB-5 capital can be applied to a group or a portfolio of subsidiary companies, provided that these companies are wholly owned by the project company.

In the case of an EB-5 regional center, EB-5 money can be applied to a group of unrelated companies.  This, of course, is a very high-level statement.  The mechanics of developing an EB-5 project in this manner should be reviewed in close consultation with a qualified and experienced EB-5 attorney.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

Flexible Adjudication Saves Time on EB-5 Regional Center Applications

 

As readers of this blog are likely aware by now, the rules flexible resized 600
and processes involved in the development of an EB-5 regional center application are relatively complex and often subject to interpretation by the lawyers involved and also by the adjudicators. 

As a result, in anything but the most straightforward of cases, there is often the issue of whether the question has been properly answered or whether certain rules apply in particular ways or in particular unusual circumstances.

When facing these kinds of unknowns, developers of EB-5 regional centers and EB-5 projects are often in the position of putting their best foot forward and hoping for the best when it comes to the adjudication of their I-924 application (or the project plan itself).  In these circumstances some project or regional center founders might find themselves in a dilemma in terms of whether to submit their business plans as "hypothetical" or as "actual”/"exemplar" plans.  The reason for the dilemma is that a hypothetical plan requires less detail to be approved but if one can have their plan approved as an actual/exemplar plan then they can benefit from deference to this approval when their investors submit their I-526 petitions.

When unsure, there is the possibility of trying to get the maximum benefit of an actual/exemplar approval without losing time should USCIS determine that there is insufficient information to approve the plan as an actual/exemplar.  The way to go about this is to make a written request when the project is being submitted so the plan be adjudicated as an actual/exemplar, but if this is not possible to adjudicate the plan as a hypothetical.

In most cases, this will not hold up the process and allow the entrepreneur to move ahead with the project as quickly as possible should they not be able to get actual/exemplar approval right away.  Saving the step of a re-submission can also save some of the costs involved in doing so.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

Download Your Free Paper: 9 Things to Know Before Going Down The EB\u002D5 Road

'Reasonable Expectation' of Job Creation for EB5 Regional Centers?

 

describe the imageOne of the issues that causes some concern and confusion among EB-5 Regional Centers is how USCIS assesses what "reasonable" expectation of job creation means when looking at an investor's I-829 petition.

The Director's View (Not Official Policy)

On a December 2012 phone call with USCIS, one of the few bits of useful information that came about was stated, albeit peripherally, when one of the stakeholders asked what USCIS's view is on this issue.  When asking the question the stakeholder suggested that USCIS should evaluate what "reasonable" means on a case-by-case basis, and went further to suggest that in some cases "reasonable expectation" could even mean one year from the time of the I-829 petition.  While this does not mean it is policy, Director Mayorkas suggested that he was inclined to agree.

This new revelation is not definitive by any means, but at least gives founders of EB-5 regional centers some kind of hope that reasonable expectation of job creation can and should likely be treated by USCIS as something that can be justified given the right business case and reasonable industry standards in any given situation.  This clarification gives those who are starting EB-5 regional centers some welcome added breathing room when it comes to job creation.

Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans and custom 'direct' EB-5 projects for its clients.

 

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