EB-5 PLANNING
OPPORTUNITY TO AN
ALTERNATIVE
FINANCING VEHICLE
By Ronald R. Fieldstone, Esq.
Arnstein & Lehr LLP
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OVERVIEW STRUCTURE – REGIONAL CENTER
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OVERVIEW STRUCTURE – DIRECT EB-5 PROGRAM
NO REGIONAL CENTER
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In planning each EB-5 transaction from its inception, the
following checklist of items needs to be considered:
1.
Job Creation. Role of economist. Use of indirect construction jobs. Concern over
“Tenant Occupancy” issues (see attached USCIS publication).
2.
TEA – Economist or Direct with State Agent. Use of census tracks (always
$500,000 investment).
3.
Multiple Location Offering. Possibility of TEA for some locations and not others.
4.
Economic Model to be Used. RIMS, REDYN, IMPLAN, others.
5.
Debt vs. Equity. Almost all transactions are debt offerings.
6.
Capital Stack:
a.
Developer Equity;
b.
EB-5 Debt (if debt program) or EB-5 Equity;
c.
Senior Debt, if applicable; and
d.
New Market Tax Credits or other sources of financing.
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Need to comply with debt to equity ratios for purposes
of marketing projects.
Investors (brokers) like to see at least 25% to 30% of
developer equity.
7.
Bridge Financing:
Ability to prefund development in order to commence development. Look back time
period needs to be considered. Need to place EB-5 Funding language in bridge
financing documents (see attached language):
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Bridge Financing
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Compliance with EB-5 Restrictions. Borrower acknowledges that YYY, LLC, an
affiliate of Lender, or its designee (“YYY”), has arranged alternative financing
(“Permanent Loan”) through the fifth employment based (EB-5) preference category
of the Immigrant Investor Program (“IIP”) administered by U.S. Citizenship &
Immigration Services and under the authorization of a USCIS-designated Regional
Center, (the “Regional Center”). The Lender hereby acknowledges that it has made
the Loan in contemplation of being repaid by the Permanent Loan. Borrower agrees
to operate its business in a manner that is designed to comply with, and to enable
EB-5 Investors and Regional Center to comply with, legal and policy requirements of
the IIP, as advised by Regional Center. In particular, Borrower agrees that, pursuant
to the terms of such Permanent Loan, the Borrower will:
– track, maintain and share data and records with YYY and Regional Center
concerning the Project, including the expenditure of funds, employment of
workers, completion of construction, operation of facilities and enterprises.
•
Such Permanent Loan will provide for an interest rate of X% percent (X%) per
annum, interest only payments during the term of such loan, a five (5) year term and
such additional terms and conditions as are customary for a EB-5 financing,
commencing from the date of funding.
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In planning each EB-5 transaction from its inception, the
following checklist of items needs to be considered:
8. Team Involvement.
a.
Players:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Economist;
Business Plan Writer;
Immigration Attorney;
SEC/Corporate Attorney;
Marketing Project/Marketing Study Preparer;
Sales/Marketing Group to Sell Project;
Escrow Agent; and
Client Representatives.
b.
Regular conference calls and circulation of documents and
reports.
c.
Set time schedules for all participants in order to coordinate
processing.
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Special Product Considerations – Structure of Loan
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•
•
•
•
•
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Interest rate and sharing between investors and Regional Center and
Manager. Have direct payment to Regional Center and Manager. Income
tax issues.
Collateral. First or second position.
Term and right of extension. One or two years.
Exit Strategy. Obligation to sell project to liquidate investment within
second extension period.
Conflicts of interest and disclosure of affiliated transactions.
Minimum/Maximum Concept:
– Scalability of Project
– Other Sources of Capital
1940 Investment Act Considerations.
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Marketing Issues
a.
SEC Restrictions regarding Broker-Dealer/Finder Issues
b.
Payment of Commissions - Sources.
•
Part of Initial cost to Investor from administrative cost payment.
c.
•
Developer Fee. In part utilized to subsidize regional center costs. The
cost to maintain regional center cannot come from EB-5 investor funds.
•
From fee payments by Developer paid to Regional Center and Manager
for management and administrative fees.
•
Sales within and outside the United States. Combine Regulation D and
Regulation S exemptions. Registered Investment Advisor and BrokerDealer registration issues.
Sales within and outside the United States. Combine Regulation D and
Regulation S exemptions. Registered Investment Advisor and Broker-Dealer
registration issues.
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DEVELOPMENT OF INVESTEMENT CRITERIA AND DUE
DILIGENCE STANDARDS
Corporate/Securities Viewpoint
1.
Issues of Investment Security:
a.
Debt;
b.
Equity;
c.
Collateral Base – 1st mortgage, 2nd mortgage, mezzanine loan or
unsecured;
d.
Recourse to developer; and
e.
Guarantees.
2.
Is the project in an industry with a high default rate?
3.
Feasibility Report?
a.
Yes, from reputable/well known firm with positive result;
b.
Yes, from unknown firm, with positive result;
c.
None; and
d.
Yes, not positive result.
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4.
What is the excess demand for the product or type of real estate in local area?
a.
High;
b.
Medium;
c.
Low; and
d.
No demand.
5.
Value of the collateral in relationship to total EB-5 investment plus all senior
debt?
a.
Developer Equity;
b.
Total Debt;
c.
EB-5 debt in relationship to developer equity; and
d.
Total equity based upon appraised value of the project (3
variations).
(1)
Existing Asset Valuation;
(2)
Completed Project Value; and
(3)
Stabilized Value.
6.
Track record of developers/owners?
a.
Completed 2 successful projects of similar size and attributes;
b.
Complete one or two successful projects of similar size and
attributes; and
c.
No track record.
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7.
What is the construction risk?
a.
Very low as project has completed a 3rd party construction budget
review;
b.
Low with Completion bond or other surety bonding;
c.
Unknown with Completion/Surety bonding;
d.
Not addressed/Project spending-schedule is within industry-regional
standards; and
e.
Not addressed/Project spending-schedule is outside industry-regional
standards.
8.
Exit Risk; what is the exit strategy?
a.
Sale of Facility;
b.
Refinancing;
c.
Cash Flow from operations- More applicable for Direct Programs;
d.
Tax Rebate not based on revenues; and
e.
Tax Rebate based on revenues.
9.
Public/Private Projects – weight to government sponsorship and government
sponsored Regional Center.
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Ronald R. Fieldstone, Esq.
Arnstein & Lehr LLP
200 South Biscayne Boulevard
Suite #3600
Miami, FL 33131
Tel: 305-374-3330
Fax: 305-374-4744
Email: rrfieldstone@arnstein.com
10950176.1
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