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The Birth of The EB-5 Financier

 

Well it has finally happened and will  likely prove to be a welcome development for those who eb-5 financiers can help to raise capitalwant to find new sources of capital for their development projects without wishing to navigate the often-choppy waters of EB-5.

Strategic Element has become aware of a few experienced financiers who are adding EB-5 capital to their lineup of options for raising capital for their developer clients.  These financiers will essentially take care of everything EB-5 for their clients, while offering them the opportunity to access capital from EB-5 investors.  These EB-5 financiers will make capital available to their clients in a manner that is akin to financing models that adhere to common industry standards.

A New Twist

EB-5 financiers have already been in existence in a de-facto sort of way in the form of already-approved EB-5 regional centers who make their centers available to project developers for a fee, saving them the need to set up their own regional center. These EB-5 regional centers will offer varying levels of service ranging from simply offering developers a regional center ‘shell’ to work under, all the way to complete project management of the application process and getting the investors.  This approach, however, still leaves developers with a considerable amount of work and challenge in that they must often manage the approval of the project itself and it often leaves the developers to go and find their own investors overseas.  This might work for some, but others might prefer to have everything managed by another party in a way that is consistent, reliable and readily available for all projects.

Considerations when looking to submit a project under an existing regional center:

  • The developer has to find the ‘right’ regional center with the right approvals for industry and geography

  • The developer must do their due diligence on the regional center and its operators

  • Developers are still subject to the potential reputation impact on the regional center should another of their ‘sponsored’ projects fail

  • Each deal must be negotiated on a case-by-case basis, with each regional center manager wanting to approach things in a different way and offering differing levels of service

  • The main advantage is maintaining a certain amount of control of the fundraising process while removing the need (and time and expense) of attaining a regional center approval

Benefits of the EB-5 financier approach:

  • Bypassing the management of the often-tricky I-924 process

  • Developers can work with experienced financiers, who will properly vet projects according to industry standards

  • Developers can work with a financing model familiar to them

  • Developers benefit from not having to raise their own funds from individuals overseas (arguably the hardest part), instead relying upon the financier's already-existing network with overseas investors

When considering starting an EB-5 regional center, developers who do not wish to be distracted by the process may do well to consider this new option.

If you have a regional center that you would like to make available to investors, call or email me to let me know, so I can add you to my list. Similarly, if you are a project developer looking for an EB-5 financier or just a regional center to work under call or email me to let me know.

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

Do Construction Jobs Count for EB-5 Regional Center Job Creation?

 

Do Construction Jobs Count?construction resized 600

When starting an EB-5 regional center many want to know if direct construction jobs can be counted.  The applicable rule for counting construction jobs in an EB-5 regional center project is that the construction time for the project must be two years in duration, from start to finish.

How is 2 Years Defined?

There is some question as to when the construction period starts; is it when demolition or digging begins or is it when concrete is poured (i.e. the beginning of vertical construction)?  USCIS does not have a definitive guideline on this point, however, we do try to encourage clients to try to focus on vertical construction in order to mitigate the risk that USCIS may not view demolition or digging as construction.

3rd Party Verification

Of course, as soon as this construction allowance was declared, there were many who started to say, "we can make it last two years."  Unfortunately it's not that easy.  USCIS has taken steps to prevent people from exaggerating construction timelines by asking for third party verification of estimated construction times from independent experts. 

Doing it Right

The ability to count construction jobs is a huge benefit to the EB-5 program, because they are easy to document and they are relatively easy to fulfill.  Be sure, however, that if your regional center is planning to count construction jobs that it does so in a calculated and realistic way.  Remember too that if you are calculating construction jobs based on expenditure estimates, you should be careful about using conservative expenditure estimates.  While conservative estimates are desirable at most any other time, if your estimates are guessing high on expenses, and you come in under budget, the applicable construction job calculation for your investors at the I-829 stage (when they are seeking to get conditions removed from their green card) will be based on the actual funds expended.  This point is true of course for all expenditure-based job creation estimations.

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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.

Some Deeper Implications of Chinese EB-5 Visa Retrogression

 

Long line for Chinese EB-5 InvestorsOn Saturday, August 23, 2014, the Department of State announced that the maximum number of EB-5 visas available for use by individuals born in mainland China had been reached for the 2014 fiscal year.  It should be noted that the unavailability of ‘space’ under the current quota for Chinese investors only applies until September 30, so as of October 1, 2014 space will again be available as the quota is reset for the new fiscal year.  While this impact might seem minimal (and it is for this year), there are several deeper implications to the fact that the retrogression has officially started to impact Chinese investors, who make up about 80% of all EB-5 investors:

A Saturated Marketplace

Unless the government increases the EB-5 quota, the market is saturated at its current level with too many deals in the market for available investors and likely too many marketers and agents as well; and the market is likely about to become oversaturated, with more and more regional centers and projects being approved every day.   This means that all the stakeholders in the EB-5 value chain will face increasing competitive pressure.

EB-5 is About to Grow Up

As a result of market saturation, we might well see the beginning of more competitive EB-5 offerings and more competitive behavior among Chinese agents including possible fee reductions and more aggressive selling behavior.  EB-5 offerings will also have to have increasingly experienced teams and proven track records and we may even start to see better deal terms offered to investors overall, including the possibility of higher returns to investors.  Over the medium term, we anticipate that the quality of EB-5 offerings will increase as supply of available investments increasingly exceeds demand and investors ‘cherry-pick’ the best deals.

Longer Wait Times for Projects to get Money in the Door

The logical extension of the onset of retrogression is that once a lineup of investors starts to form to the point where the backlog does not get cleared quickly in the subsequent fiscal year, there will be longer and longer wait times for projects to get their money from EB-5 investors.  Initially (and hopefully) this longer wait time will be offset by promised quicker processing times by USCIS, but over time the inevitable impact of delayed access to EB-5 investor dollars will become a factor, forcing projects to possibly change deal terms, make broader use of bridge financing or, in other cases, to reconsider whether EB-5 is a viable route to fundraising at all.

A (Temporary) Silver Lining

The silver lining for EB-5 projects, slim as it may be, is that investors will probably feel more pressure than previously not to put off moving forward with an EB-5 investment. Over the next year or two we anticipate the penalty for delay will be up to 6 or even 12 months in processing time.  If the retrogression causes anxiety to Chinese investors, we may start to see that the lineup of investors will start to increase relatively quickly.  In the early days of the 2014/ 2015 fiscal years this may be a good thing for deals already in the marketplace as investor activity would be brisk.

Over time, however,  should the backlog begin to grow one need only look at what happened in Canada, where the Federal Investor program backlog eventually grew to nearly 60,000 applicants who were willing to wait up to an estimated 7 years to get processed (based on average processing throughput). The government recently closed the program and those who were waiting to 'get in' all lost their opportunity to participate in the program, which will likely cause a fear among Chinese investors of something similar happening in the U.S.   Chinese investors are likely far more aware of this than project owners are as Canada is and has been a popular choice for investment-based immigration.  Furthermore, with the recent cancellation of the Canadian program, many EB-5 investors likely came to the EB-5 market after being ‘cancelled out’ of the Canadian program.  With the start of retrogression, any investor paying attention will start to feel some pressure to make a move sooner rather than later so as not to get caught up in the backlog.

Be Ready

EB-5 project founders beware; the market is likely about to change considerably over the next one or two years; consider your positioning and offering in light of recent changes and sharpen your pencils in order to be ready to win in this changing marketplace.

Phil Cohen is the founder and president of Strategic Element Consulting (www.strategicelementconsulting.com) and author of the EB-5 Definitive Guide (www.starteb5.com).  Strategic Element helps clients with the development of regional centers and projects. 

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 June 2, 2014, USCIS had approved approximately 579 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.

 

 

Risk and Reward for EB-5 Investors

 

Risk and Reward

While EB-5 capital is commonly used for mezzanine capital by the companies raising funds, the investors essentially face a venture capital-level risk profile. When considered in this way, the return in dollars to an EB-5 investor is considerably below market for this risk profile.  This is no secret and it is the model that the industry has settled into, for the most part.  This model appears to make sense for all concerned since the investors get the added benefit of a path to US citizenship if the businesses create the requisite jobs, giving them enormous perceived value for their investment, while at the same time the project developer faces additional risk, time and cost in setting up a project to fit the EB-5 program.

With this view in mind, one should remember that venture investment is inherently risky, ask any venture capitalist.  Even better, have a look at venture capital funding lists to see the kinds of businesses that get funded every day by seasoned investors, some very odd and seemingly risky businesses indeed.  According to a September 2012 Washington Post article, “About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School”.  By comparison projects that I’ve seen available via the EB-5 program today would seem to be far less risky than that, on the whole.

This is not to say that some deals in the EB-5 marketplace do not, in some cases, exaggerate their prospects or put forward aggressive projections and/or assumptions, but this is true of many businesses seeking funding, using EB-5 capital or not. Like for any business investment, investors must thoroughly investigate the business plan, claims being made, the team and even the companies who are representing the deals.  This can be done in part by feasibility studies or by other consultants who specialize in project reviews, feasibility studies or the like.

 

Managing Risk

Are there people with bad intentions in EB-5?  Find me someone who says that this has never been nor will it ever be the case and I will show you a fool.  There is no doubt that there are people out there who might come to think that investors will be blinded by the possibility of attaining a green card and will fall for a bad deal without looking at it too closely.  While this is not true for the great majority of EB-5 deals that this author has seen, nobody can say that it hasn't happened.

Should an investor be careful in making an EB-5 investment? 100% and unequivocally yes! Investors must investigate any project that they are looking at investing their hard-earned dollars into and this cannot be stressed enough.  Every deal has pros and cons and good and bad elements and the investor should weed out all the risks for themselves (or get a knowledgeable consultant who can help them) so that they can make a decision that they are comfortable with.   Will there be deals out there that don’t succeed? I imagine so, it is a free market after all and the statistics for failures of new businesses in America show relatively high numbers. It would be safest for investors to assume that EB-5 deals would not be different on the whole, although EB-5 deals are often brought to market by experienced teams and the author does not believe that EB-5 business failures are even in the same ballpark as published statistics on the whole.

There are many deals for EB-5 investors to choose from today and investors must choose the project and risk profile that suits them best, and again, they absolutely must investigate any business deal, EB-5 or not.  I have seen investors willing to take undue risk in their EB-5 investments in their eagerness to move themselves toward the opportunity to participate in the American dream.  Spending more time to check out every detail, however, will help to ensure that the investment gets the desired result with the least amount of risk.  So EB-5 investors don't rush, investigate everything and then make the choice that you are most comfortable with.

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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.

Do I Need a Feasibility Study for My EB-5 Regional Center Project?

 

Feasibility studies are becoming more and more commonplace in the EB-5 world to prove the feasibility and plausibility of a given EB-5 regional center project.  This isEB5 regional center application resized 600 especially true for larger projects but also for projects where feasibility studies are common, such as in the hotel business.

When things become common in EB-5, the community often starts to treat them as (essentially) expected by USCIS in order to be safe. Indeed, when it comes to increasing the professionalism of what is being presented for an EB-5 project, USCIS does follow suit as often as not. Indeed, some recent RFEs have asked for formal feasibility studies.

Using a feasibility study developed by a reputable source is the best form of market, competitive and overall plausibility analysis for the project in question, minimizing any reason for USCIS to respond with an RFE for these particular points. In our business we consider it a best practice and strongly recommend that our clients make the investment in these analysis reports where it is reasonable to do so.

Always seek to maximize your odds of success the first time when it comes to starting an EB-5 regional center and project application.  Follow the general rule of thumb for feasibility studies that if they are readily available or commonly used for a particular type of development then they should be attained for you project submission.  It can help to save processing time and money in the long run.  Of course, the added overall benefit is providing an extra element of credibility to your investors.

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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

What Does An Ideal EB-5 Business Plan Look Like?

 

describe the imageThere are conflicting views among EB-5 professionals as to what constitutes an ideal EB-5 project business plan.

If you are a follower of this blog you are likely already aware of the "Matter of Ho" business plan requirements as well as other requirements that have been issued by USCIS via policy memoranda and other unofficial statements. The question comes in, however, as to what level of detail is sufficient for a qualifying business plan.

Some attorneys and advisors are of the mind that a shorter business plan is better as longer plans by definition (in their opinion) are inherently committing the entrepreneurs behind the business to doing more, or at least that's the concern.

On the other hand, there are those who believe that longer plans with more detail give USCIS very little wiggle room when it comes to questioning details and issuing RFEs. We count ourselves in the second group and we believe that our record with RFEs proves the point. When we develop our business plans, we are of the belief that more detail is better, while at the same time we are careful to minimize forward-looking statements which would bind any entrepreneur to doing more than they would be committed to doing if they were to submit a shorter plan.

We believe that this approach works, not only because we rarely see RFEs for our business plan work, but also because we believe that preventative efforts to minimize RFEs go a long way for our clients in terms of helping them to avoid extra time and/or expense in getting their EB-5 projects approved.  Indeed, when we are asked to fix business plans written by others because of RFEs, we commonly see plans that skimped on details, leaving room for questions to form in the mind of an adjudicator.  

Thinking things through in detail is a way of forcing oneself to answer questions that others may have as well.  Similarly, a good business plan developer will provide that detail without over-committing the business to specific actions where it is not necessary to do so; rather, they will use the detail to make the business concept more convincing and to demonstrate that the entrepreneurs behind the business are very serious about what they are doing and are considering all the things that matter in order to be successful.

The other reason that we err on the side of developing more detailed business plans, is that we are providing investors, who also see the plan, with enough backup information to give them comfort about the project and a level of security relating to their investment, making it an easier 'sell' for the entrepreneur.

True, longer plans do typically cost more, however, the incremental amount of investment for addressing this step thoroughly is minimal in the context of other professional costs and the cost of the whole process and the value of the benefits it can provide to the entrepreneurs and ultimately to the investors represents a considerable ROI in the long run.

The trick, from our perspective, is to assume that many readers are not likely to read every single detail of the business plan, so we structure the plan in such a way as to make it easy for the reader to find what they are looking for, and also to easily find any supporting detail, should they wish to dig deeper.

We suggest speaking to several service providers before making any decisions on your EB-5 team, however, given that a business plan is one of the least expensive (and key) parts of the process, we encourage anyone considering going down the EB-5 road to consider not just the price but the financial and timing impact of the product before making a final decision.  

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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.

Why Bother with a TEA for my EB-5 Regional Center Project?

 

Why a TEA?TEA Target Employment Area resized 600

A question often asked of EB-5 professionals is, "why should I seek to have my EB-5 regional center in a TEA (Target Employment Area) if it only reduces the investment requirement for EB-5 regional center investors, meaning that I will need to find more investors to raise the same amount of money?".


Simply put, the answer is the saleability of your deal.  EB-5 regional center investors have to put their capital at risk for a period which is usually at least 5 years and for returns that are below market for a comparable level of risk.

For these key reasons, EB-5 regional center investors seek to invest the lowest-possible amount in a given project.  As a result, most EB-5 regional center projects are put into TEAs and projects that are not are at a disadvantage, unless they are able to entice investors with other benefits.

Find out more about starting an EB-5 regional center at starteb5.com

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

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