Mr. Behar attended the IIUSA EB-5 lobbying stakeholder annual convention in Washington, DC this past week. Below is a report of the opportunities and challenges which face all EB-5 investors and project sponsors. It is not set out in any particular order so we recommend reading to the bottom to assess what may interest you.
Laws vs regulations:
While there are several proposals on the table from both the Congress and the EB-5 unit, there appears to be indecision and a clash of objectives between the two sides. The greatest concern for the industry is the limited definition of a ‘targeted employment area’ (TEA) as well as the proposed increases in the investment amount. The regulations, as proposed by Judiciary committee chair Charles Grassley is suggesting an increase for TEAs to $1.35 million, and $1.8 million for any other area. Congressional leaders are recommending $800,000 for TEAs and $1.3 million for all other areas.
There are approximately six vested interest groups, all lining up with various opinions and interests, as well as rural vs urban development projects. These groups are still undecided and not united. As at the writing of this memo, there is no clear indication which side or forces will prevail. What is clear is that the higher legislative initiative can be implemented at any time after the review period of all the comments, possibly as soon as July 12, 2017. The collective opinion is that the higher level would be the death knell of the EB-5 program.
EB-5 Program Extension:
By collective government extension, the EB-5 program has been extended to September 30, 2017. It is expected that at that time that either a new budget will be introduced. We have no opinion on this matter as it is highly politically motivated. We do, however, hope that the extension will give the various parties an opportunity to arrive at a consensus which seems to still be eluding the various interest groups.
It also appears that the destiny of the small EB-5 program (compared to other immigration allocations) will be tied to the future of the Conrad program (for medical graduates) and E-verify, for employers needing to register new employees on line. It is clear that the new Congress seeks national security and integrity of the program through transparency, verification and oversight.
Some of the legislative reforms being considered by the Congress require audits of regional centers and EB-5 projects, all under the penalty of sanctions, fines or both. Congress is seeking third party financial oversight to ensure that fraud is reduced (note that there were 4 cases of fraud in 2016 and 2 in 2017 so far).
Financial statements of regional centers and/or EB-5 projects will need to be audited with reporting to investors on a regular basis; monthly reporting is recommended. Newsletters to investors monthly are also recommended.
Some proposals recommended an increase in visa numbers so as to only count the principal investor and include immediate family automatically. It is still under consideration.
Much discussion revolved around infrastructure projects which the President has supported and is supported by the US Chamber of Commerce. Legislation also contemplates set asides of 20% of the quota for rural projects plus 10% to distressed areas. Ninety two percent of active projects today would not qualify if the new regulations were implemented.
Speech of Julia Harrison, head of the EB-5 Unit:
Ms. Harrison attended the annual meeting last year and this year. She feels pleased that the office has added 12 new officers even though the backlog of I-526 and I-829 cases keeps growing. The EB-5 Unit is hiring more economists as they search and train qualified personnel. The attitude of Ms. Harrison is that she or her team will not sit with any outside firm or project for fear of giving the appearance of impropriety or favoritism. She had two personnel officers recording her comments and attending the presentation.
Ms. Harrison’s team is going through the comment period of the new regulations. They were extensive. Form I-526 has been updated but the USCIS will continue to accept the old form until June 9, 2017 after which only the new form will be accepted.
USCIS will now commence to do site visits. They will be unannounced and may range from ‘drive by’ visits to full on-site inspections. Further, USCIS may conduct full audits of project financials, bank accounts, and tax returns. Every dollar of investor funds and projected jobs creation will need to be accounted for. The SEC has had a banner year in terms of prosecution of bad actors. Regional Centers will be required to come into full compliance when reviewing the economics of the projects.
While regional centers now number over 850, several are closing due to attrition. It is recommended that a notice of closure be sent to USCIS to reduce administrative termination procedures. Fees for extensions are sent to the California Service Center.
Ms. Harrison discussed the limitations on ‘expedited requests’ of the national interest waiver exception: the request must include a request from a US government entity stating that the delay would be detrimental to US national interests.
Ignoring the realities of real estate development, USCIS will not accept ‘term sheets’ from lenders as part of the I-924a for an Exemplar. The full and final loan documents which will become part of I-526 filings will need to be included, even though the current backlog of adjudication is near 18 months. In cases where an Exemplar has been approved OR where an initial I-526 project application has been approved, it is recommended that counsel add a face sheet indicating ‘escalated inquiry’ which may provoke the reviewing officer to assess if a precedent has been established for a specific project thus giving ‘deference’ to standard documents. That said, USCIS reserves the right to still inquire or even deny cases for which deference should have applied if there is a suspicion of change of circumstances or documents or a mistake of law or fact. The definition of a ‘material change’ remains elusive.
Investor or attorney inquiries are recommended to use the Customer Service box to assess status of pending cases. Most often this will trigger a standard, computer generated response, but at least it remains on the record.
There have been increased denials of I-829 applications which, sadly, would automatically provoke Removal Proceedings for the investor. Most denials rest on the incompletion or termination of a project but others are based on errors not caused by the investor. USCIS will review each on a case by case basis.
President Trump’s First 100 days in Office:
The President is using different media to communicate with the mass population to get his pro or anti-immigrant message across. There is no clear indication where he stands aside from continuing mass deportations and his desire to build the southern wall with Mexico. While his son in law Jared Kushner has two massive EB-5 projects under way, the President has not opined on this matter to date; Mr. Kushner has recused himself from the discussion as to the regulations due to potential appearance of conflict of interest.
It is the general stakeholder consensus that the jobs creation and capital infusion would continue to make him a ‘friend’ of EB-5, but his opposition in Congress is significant. A compromise between the regulations and the legislative initiatives is essential and possible as it is designed to promote and protect American workers.
The President is emphasizing anti-fraud and enforcement as his key immigration initiatives with visa numbers being woefully short. There are initiatives under way to show the President how EB-5 can be used to fund his infrastructure initiatives. It is an ‘opportunistic time’ for EB-5 to be extended for another five years, which would provide longevity and stability to the program as well as a platform for future growth and development. The concern is new anti EB-5 staff entering positions of decision making in the Judiciary committee and administrative posts.
The onus of the administration today is not about economic development but on fighting terrorism through the Department of Homeland Security. The threat of harsh regulations is real due to incoming staffing changes as implemented by Senator Grassley of Iowa.
NES Financial presented models for developer capital stacks which were of great interest:
The traditional models demonstrated as follows: 48% senior loan; 31% EB-5 capital; 21 % developer equity.
The emerging model requires: 31% senior loan; 22% EB-5; 26 % private equity; and 21% developer equity.
This recent model adds another layer of protection to the project and is sought after by investors as well as requirements from construction lenders. We are securing the PowerPoint from NES Financial, of which we are Medallion Partners, which will show distribution of EB 5 capital by industry sector for a future issue of this newsletter.
It would appear that the China is advancing toward a more balanced currency level since reserves have dropped and has prompted Beijing to be more relaxed in its currency controls; growth rate has hit a 6.9% annual rate most notably in real estate. That said, limitations on export of capital remains difficult and restrictive. China’s main trading partner is not the US, it is Europe.
Enforcement and Compliance:
There was extensive discussion of SEC requests for regional center and/or project financial information, primarily Ledgers, Accounting, and Financials. SEC is concerned about inflation of capital requirements. Any false statement on forms may trigger an FBI audit and thus a perjury charge.
There was an extensive presentation of the largest EB-5 fraud at Jay Peak, Vermont, by Receiver Michael Goldberg. Jay Peak is a ski mountain area in upstate Vermont which attracted some 700 EB-5 investors over the course of eight years. When the Receiver took it over, there were 1500 employees, payroll due, and funds misplaced or stolen. The life issues and money issues were real and project threatening due to diversion of funds by the developer. Investor funds were used to pay for the initial acquisition in the name of the developer within a span of two hours. To keep the project operational, and not close the matter, money was raised and a Bar Order was implemented for the protection of the creditors.
It is clear that the AnC Biomedical project will not be completed. That said, the proposed settlement with Raymond James in the amount of $150 million will be implemented to return capital to investors and allow them to ‘redeploy’ to another qualified EB-5 project at the same investment level as initially used in the AnC filing and preserve the priority dates. If legislation is passed, Congress will allow this redeployment if there is no fault of the investor. The objective of the Receiver has always been the preservation of the immigration status of the investor and eventual return of capital. This structure, designed to allow the process to move along faster, will also allow for the completion of construction and eventual sale of all remaining phases.
It is clear that USCIS is in a ‘holding pattern’ for both I-526 and I-829 filings until the matter is clear at the legislative level. Third party audits of Jay Peak, had they been instituted, would have prevented such diversion of funds. Key recommendations from the Receiver are: disclosure by issuer of all salient facts, communication with investors on a regular basis, monthly newsletter and in the language of the investor. We also recommend disclosure of construction time lines and project completion dates and photos.
A key consideration of litigating with USCIS is whether a Motion to Reopen is making the record better or worse. The attorney of any defrauded investor must use caution in the affiliated transaction. All documents must be reviewed: business plan, third party verification, franchise agreements, management agreements, correspondence and contracts.
Attorneys should conduct independent site visits, dated and documented and list who was present, view architectural plans, and funding flows. If there are any material changes, a supplement to the Private Placement Memorandum is essential.
In the event of an I-829 denial, the burden is on the government to show that the investor didn’t perform the conditions of the petition. A reasonable projection of time for project completion will normally be acceptable. Note that the SEC does not represent the investor; it merely seeks to impose penalties and interest to the delinquent parties.
Strategic Planning / Backlogs:
In 2016, there were 3,300-3,400 individual investors, thus providing close to 9,400 EB-5 visas of which 44% were principal investors and 66% dependents. China is oversubscribed, not retrogressed. Note that the chargeability of the investors is always attached to the country of birth. Other alternatives such as EB-2 or EB-3 may be easier to accomplish than EB-5.
It is highly recommended to pay the visa fee for children even if not current so as to reduce the risk of rejection of a DS-260 and age out of child. Attorneys now have a direct line to the National Visa Center to obtain case status or information. SB-727 proposes to remove per country limitation and increase the annual quota for investors only.
Many developers, at end of EB-5 cycle, are changing investment funds to marketable securities with investor consent. This allows the investor to be able to remain in the ‘family’ of the developer. Note that no K-1 is needed on investors whose funds are still in escrow.
We are reminded that the preferred equity model, while in vogue, is not essential to an EB-5 approval. No separate entity is required for pure equity models, while sometimes such an entity is desirable to identify the equity investor (s).
CCIM has over 15,000 members, one third of whom are in China. It has been in Russia since 1988 in an educational capacity.
In 2016 the following countries yielded the following investors:
Latin America: 387; Brazil: 150; Venezuela: 109; Mexico: 57; Argentina: 36; Colombia: 35; India: 149; Vietnam: 334; currencyrestrictionshavejustbeenlifted in Argentina.
Target markets are millionaires in the home country of which Brazil has 150,000, Colombia 40,000, Argentina 30,000; Venezuela ~ undetermined. Trending countries are Vietnam with 12,000 millionaires; India: 200,000 millionaires. Note that most Indians seek direct EB 5 projects and vary by region and local dialect. Indians seek risk mitigation, oversight and exit strategy; they are also subject to currency export controls and severe penalties.
Agent fees: competition for qualified agents is harsh, but agents in Latin America seek only half of administrative fees. Agents in other target countries such as India may vary such as bankers, realtors.
Russia: it is affected by political changes, oil price fluctuations, European instability, and privacy considerations for investors. Most Russians prefer to hold EB-5 meetings in London.
Private Equity vs Loan Program:
There is nothing to preclude dual offering structures. Further, many projects have dual purposes, such as selling real estate condominiums and the other part to promote an EB-5 project.
Risk Control Committees in China:
Marketing companies and agents in China do not take marketing materials into consideration. They are more interested in their fiduciary duty of analysis for investors, transparency, and the independence of the general partner. Borrowers cannot be the general partner.
Chinese agents, while preferring the US EB-5 program, also look closely at projects in Spain, Portugal, Hungary, Canada and Australia. The main attraction to the US remains education of children and economic opportunity. Pre immigration tax planning is essential. Implosion of Canadian program was partially due to lack of provable job creation, ie. No benefit to the country. Inspectors look to self-governance, transparency, project quality. Location of project is not as essential as project quality.