While these have become ubiquitous they are not all
created equal. The investor, with the help of their attorney
and investment advisor, should look for three things when
evaluating these guarantees: who, how, and when. First,
check to see who is signing the denial guarantee. Then
evaluate the signatory’s assets or financial capabilities
to make a repayment to the EB-5 investors. If the party,
or person, is not credit worthy, the guarantee is not worth
more than the paper it is printed on. Next, consider the
language in the guarantee describing how and when
the investor’s capital will be returned. Many projects
contemplate finding a replacement investor or other
“commercially reasonable efforts”
to return the investment during a
denial. The strongest I-526 denial
guarantees set a time limit on these
activities and outline a backup plan
if that does not return the investor’s
full investment.
It is important to first take into consideration the physical
location of the project. The U.S. is a large country and
market conditions vary from city to city. For example, a
luxury high rise condo building may not be feasible in a
city with a population of 40,000 and an average income of
$75,000. However, that same city may have substantially
unmet demand for senior housing resulting in favorable
market conditions for that particular asset class. The risks
of those two projects, in the same city, will differ greatly.
To scope out the market conditions, investors and their
advisors should thoroughly review the project’s market
study. Before diving into the data,
check to make sure the market
study is completed by a reputable
third party, conducted on behalf of
the project (public data alone does
not provide sufficient details), and
that it is current. Once in the report,
look for indicators that the market
is stable, shows strong signs of
grow th, and that the project will
benefit from various demand drivers
that will continue to push customers
to the project. For example, a hotel
would benefit from being located
near a university or international
airpor t, since both have a broad
base of users frequently looking for
hotels. The market study, in addition
to the business plan, should also
discuss competition. Look for signs that the project has a
reasonable plan regarding how it will compete.
"With source and
path of funds being
the most common
reason for an I-526
denial, it is imperative
investors work with
immigration counsel to
properly document their
investment capital prior
to investing."
Another tool to manage financial
risk, in this early stage, is an
escrow account. Previously, escrow
accounts were structured to release
investor capital only af ter I -526
approval. As USCIS adjudication
times become lengthier, the practice
shifted to utilizing partial holdback
accounts. These are useful tools to
reduce the financial risk of denial;
however, it often creates challenges
for the project including delays. On occasion an investor
may still come across projects that use a holdback account.
In these cases, remember this only provides certainty that a
portion of the principal will be readily available in the event
of a denial. Investors should still inquire as to what, if any,
other protective measures are in place to ensure financial
risks at this stage are properly managed.
STAGE 2: CONSULATE INTERVIEW AND
CONDITIONAL RESIDENCY
ADMISSIBILITY RISK
As with each stage, investors are required to show they are
admissible during the consulate interview or adjustment
of status process. Investors need to be mindful of their
prior immigration history, as a lapse in status or having a
prior visa revoked may put EB-5 immigration plans at risk.
Further, any arrests or convictions anywhere in the world
may jeopardize the ability for an investor to immigrate
to the U.S. Investors must be open and honest with their
attorney, prior to investing, to identify any potential issues
with their immigration or personal history in order to
improve their chances of securing residency.
MARKET RISK
Investing in a good project is the best way to manage
market risk. This involves evaluating the market conditions
in a particular geographic area, demand, competition, and
financials.
122 EB5 INVESTORS M AGAZINE
Market studies should also include operational finance
information. Cross-reference the financial assumptions
with those used in the project’s business plan. For example,
if a market study determines a hotel in that location will
have an expected occupancy rate of x and average daily
rate of y, make sure those are the same figures used by the
project. If not, run a stress test on the financials to see how
it performs at these determined market rates.
CREDIT RISK
The investor should assess a developer to see if they are
creditworthy. Look for developers and operators with a
trusted and extended track record. This helps show they
can manage their business both when times are good and
also during downturns. Ask about their previous work and
give preference to firms who have a portfolio in the same
asset class as the EB-5 project. A good hotel developer
new to senior housing is more risky than a developer
whose por tfolio may be smaller but has exclusively
completed senior housing facilities. Additionally, verify if
the past experience is ground up construction, value add,
or management of a project. Do not assume someone who
has been successful acquiring, managing, and growing
a real estate portfolio is equally capable of a ground
up construction project. Investing with an experienced
developer should provide confidence the project team can
properly see the construction to completion, secure all