EB-5 Commentary

New Article Analyzes the Cost of Raising EB-5 Capital

Posted by Phil Cohen on Tue, Nov 01, 2016 @ 01:10 PM

 

In a new article by Strategic Element's Phil Cohen and attorney Rohit Kapuria of Arnstein & Lehr, LLP the cost of raising EB-5 is analyzed and discussed.  The article focuses on one of the most-often asked questions by those seeking to raise capital under the program, but which is rarely addressed in a comprehensive way.

What is the Cost of EB-5 Capital.jpg

Understanding the total cost of raising capital and the factors that can affect this cost is of critical importance to anyone looking to start a project and raise capital under the EB-5 program.

See the article published in the most recent issue of EB5Investors Magazine, online here, or in the hard copy publication.

 

Phil Cohen is the founder and president of Strategic Element Inc., a company focused on the development of EB-5 business plans, economic impact reports and feasibility studies. www.strategicelementconsulting.com

 

Tags: capital raise, EB5 capital, EB-5 Project, What is EB-5?, EB5, start EB-5, Cost of Capital

The Birth of The EB-5 Financier

Posted by Phil Cohen on Mon, Feb 22, 2016 @ 02:02 PM

New alternative ways to access EB-5 capital have been emerging 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.

There are now an increasing number of both experienced and new 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 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.

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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, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com). 

Download Your Free Paper:  9 Things to Know  Before Going Down  The EB-5 Road

Tags: capital raise, EB5 capital, Chinese Investors, EB-5 Project, EB-5 explained, bridge financing, EB-5 investors, USCIS, EB-5, EB-5 Regional Center

Using Escrow in EB-5 Projects

Posted by Phil Cohen on Tue, Sep 15, 2015 @ 02:30 PM

describe the imageMany EB-5 regional center projects these days no longer wait for approval of their exemplar or hypothetical project business plans before releasing EB-5 investors' funds to a qualifying project.  This approach may work for some, but when starting an EB-5 regional center or project it is recommended to think twice first.

Avoiding escrow represents an additional element of risk as far as investors are concerned because the investor does not get the benefit of knowing whether there might be an RFE issued by USCIS for this particular EB-5 project before their funds are committed (and accordingly, what the nature of that RFE might be).  Typically, the best recommendation from the investor's perspective is for new EB-5 projects or regional centers to make use of escrow so that the funds may be held in trust while USCIS's review of the project business plan is pending.  Over time, as the EB-5 regional center and/or project manager builds its reputation for delivering for EB-5 investors, it might make more sense to ask investors to take this 'leap of trust,' although these projects will always be up against other choices that do make use of escrow.

Some EB-5 regional centers might make use of other options.  For example, one option is to release a portion of the funds immediately to the project and another portion later, when the investor's I-526 application is approved.  This approach mitigates some risks for both sides but also poses some risk for both sides.  For example, if an investor is denied their I-526 application they will have committed half their funds to the project already by this point. Depending on the terms of the agreement, the funds that have been committed may not be refundable to the investor which would obviously be a concern for them.  This is not ideal for the investor, but at least in this scenario the risks are shared by both parties.

It is always a bit of a balancing act for EB-5 regional center and project founders to come up with a deal that allows them access to capital without having to wait nine months or longer, while the regional center's I-924 or exemplar, actual or hypothetical I-526, is reviewed by USCIS.  In this time other project fundamentals may change, resulting in new challenges to the project's overall success.  At the same time if investors perceive too high a level of risk, they may simply look elsewhere.

To compound this challenge, the ground is constantly shifting within the EB-5 world itself, with long processing times, changing policies or directives from USCIS and a rising number of established and reputable regional centers developing proven track records.

We advise our clients who are starting EB-5 regional centers to consider reputation first in order to be able to make use of the EB-5 program in the future.  As one's reputation becomes established and re-proven, the time to win over investors will very likely be shorter in the future as the market comes to consider a given team as a known quantity with demonstrable results.

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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, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com). 

 

Download Your Free Paper:  9 Things to Know  Before Going Down  The EB-5 Road

Tags: EB-5 center I-924, capital raise, EB-5 Regional Center Application Cost, regional center EB5, EB-5 explained, program, EB-5 investors, EB-5 regional centers, EB-5 Regional center processing times, EB-5, EB-5 Regional Center, EB-5 Regional Centre, EB5

The Risks and Rewards of EB-5 Investment

Posted by Phil Cohen on Thu, Jun 04, 2015 @ 10:46 AM

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, put forward overly aggressive projections and/or assumptions, but this is true of many businesses seeking funding, whether they are seeking EB-5 capital or not. Like for any business investment, investors must thoroughly investigate the EB-5 project's 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?  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? Likely 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 investor can choose an investment leads 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, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com). 

 

Tags: capital raise, EB-5 Team, EB-5 Project, EB-5 explained, EB-5 investors, EB-5 regional centers, EB-5, job creation

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

Posted by Phil Cohen on Mon, Apr 27, 2015 @ 06:55 AM

On the February 26, 2014 stakeholder’s call EB-5 Investmentwith USCIS 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

On the surface, this appeared to be 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 an 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.  

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.  In the meantime, however, many have seen significant pushback from USCIS when they have attempted to use guest expenditure.

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.

 

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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, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com). 

Tags: EB-5 center I-924, capital raise, EB-5 Regional Center Application Cost, EB5 capital, EB-5 investors, applications, USCIS, tenant occupancy, I-924, EB-5, EB-5 Regional Center, job creation

Chinese EB-5 Visa Retrogression Shouldn't be Stopping You

Posted by Phil Cohen on Mon, Mar 09, 2015 @ 08:50 AM
describe the image

As a follow up to a blog article posted here on September 9th, 2014 (Some Deeper Implications of Chinese EB-5 Visa Retrogression), I want to reiterate what many in the industry are already saying in order to help quell some fears associated with Chinese visa retrogression and to help make sure that those who are new to the EB-5 community understand that retrogression is not the death knell of EB-5.

Retrogression does not mean that investors cannot have their I-526 petitions processed and approved. It only means that they won't get their green cards right away upon I-526 approval.

Retrogression probably does not mean that Chinese investors will lose interest in EB-5 any time soon, perhaps even the contrary.  If anything, the Canadian program demonstrated the propensity for Chinese investors to wait in line.  When the Canadian program was cancelled, there were over 60,000 investors in line, willing to wait up to seven years to be processed. Arguably, the EB-5 program might be slightly less of a draw because of the 'at risk' requirement, but being the only North American game in town worth mentioning these days in addition to the still-increasing base of HNW individuals in China I would suggest that there may well be a rush to get in line over the next 2 to 3 years.

Retrogression does not mean that projects should stop marketing in China, the source of 85% of EB-5 investors today.  For the reasons stated above Chinese demand is not expected to abate.  For the medium and longer term, however, those who expect to be involved in EB-5 for the forseeable future should expand their marketing horizons.  Bear this in mind, when developing your EB-5 business plan.

Retrogression does not mean that projects will be delayed in getting money into their projects (yet).  Funds can be released to a project upon I-526 approval and because there will be no additional delay in processing of I-526 petitions from Chinese applicants once retrogression kicks in, funds can be released on schedule.  Over time, this may change as the backlog grows.

 

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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, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com). 

  Download Your Free Paper:  9 Things to Know  Before Going Down  The EB-5 Road

Tags: capital raise, EB5 capital, Chinese Investors, EB-5 Project, EB-5 investors, I-526, USCIS, EB-5, EB-5 Business plan

A Reminder About Bridge Financing in EB-5

Posted by Phil Cohen on Mon, Feb 09, 2015 @ 07:12 AM

bridge

The good news for those who would look to put bridge financing in place ahead of attaining EB-5 capital is that the bridge financing now only has to have been considered as temporary financing at the time that it is put in place (May 30th, 2013 USCIS Policy Memo), and the deal for that financing should somehow reflect the fact that it is short term or bridge financing. 

By definition then, anyone who is looking to get a deal going under the EB-5 program using bridge financing to get started more quickly, should be able to move forward to replace that bridge financing with EB-5 capital even if using EB-5 capital specifically was not the plan initially.  In turn, this means that EB-5 business plans can be developed with more definitive development schedules, and even better, that indirect jobs based on economic impact models that use investment dollars as an input can start to claim job creation even before investors are found.

It should also be noted, however, that commonly the farther back in time that one goes (i.e. the distance in time from the date that EB-5 funds are expected to be raised and used to relieve the use of funds from bridge financing), the more challenging it becomes to show sufficient 'nexus' (or the connection between how the EB-5 funds/ bridge funds lead to the creation of jobs).  If you are using bridge financing be sure to have an in-depth discussion with your attorney to make sure it is set up properly so that you will not have problems down the road.

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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, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com). 

 

Download Your Free Paper:  9 Things to Know  Before Going Down  The EB-5 Road

Tags: capital raise, EB5 capital, EB5 Regional center, bridge financing, EB-5 investors, USCIS, EB-5 Business plan