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By Jeff Campion*
For those looking to immigrate to the US, pursuing the EB-5 route may seem like a daunting task, but it doesn’t have to be. Having traveled to South Africa multiple times the last 12 months for EB-5, I wanted to provide four questions to ask and blow up a few misstatements that are being trafficked by projects to entice investors.
Below are four questions to ask:
- Can the project be built without EB-5? This is a critical question that most projects must answer “no” to. And, yet, the project will try to redirect the investor to something that sounds like this: “the developer has great banking relationships” or “this is why you want a smaller project. We can raise the amount we are requesting. Both of these answers dodge the issue. You want a project that when you add the (a) bank loan and the developer equity together they are sufficient to build the project. This ensures the project will be built. Projects that want EB-5 to reduce the cost of capital and that don’t need EB-5 capital is the type of project to invest in. And, make sure that the EB-5 capital is reducing the construction loan.
- What is the Investor security (how much developer equity is there)? In the US we call this “skin in the game.” When you look at the project to ensure that your money is safe it is a twofold analysis (a) what is the collateral for the EB-5 capital and (b) how much developer equity is there behind EB-5 money – i.e. that EB-5 is paid first. If there is a good collateral position but not a sufficient amount of developer equity (15%-20%) then the EB-5 capital may not be safe. You must make sure that the collateral and equity protect your money.
- What is the repayment strategy? Most projects say they will sell or refinance. But be careful. Banks normally require 20% equity to refinance. If a project does not have 20% equity, a refinance is normally not an actual option. This means that the only option would be a sale. But, what if the sales price is not the price the developer was looking for? Then, you may have to wait or be paid back less than your investment amount. This is why it is critical to understand the market dynamics for a refinance or sale for the project you are considering.
- What type of jobs do you use? The safest jobs are construction expenditure jobs – as long as the project is built, the jobs are created. You want to stay away from operations jobs as they are harder to predict. Think about it this way: how often does a project cost less to build than projected – rarely; how often does a company not hit its sales projections? More often. Ad the sales projections are what dictate operations jobs in EB-5 which is why it is best to not rely on them.
On to two misstatements I have heard:
- Invest in a project that does not have investors from backlogged countries because your money will be tied up with theirs for a longer period of time. Most projects provide for your EB-5 money to be paid back separately from backlogged countries. This is simply a method to play on your fears. Ask the project to show you when you will be paid back. Most good projects allow investors to be paid back once (a) the I-829 is filed for that investor, (b) the conditional residency period for that investor has expired, and (c) the project has been paid back.
- Smaller projects are better because they need less investors. They can be more dangerous. When this statement is made it implies that there are not sufficient funds to build the project without EB-5. In fact, if the project is fully capitalised, a large project is probably your best bet. Ask the right questions.
There is a lot of demand in South Africa for EB-5. That attracts good and, unfortunately, bad actors. Consequently, one must be wise. If you ask the right questions and demand proof of the answers, it will become very clear who is who.
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