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Things to Keep in Mind While Choosing Your Regional Center

Published by Davies & Associates at August 22, 2016

For the Indian investor the fastest and most secure way to Permanent Residency in the United States (otherwise known as a “Green Card”) can be by investing in a project offered by an experienced Regional Center.

There are over 700 approved Regional Centers in the US, so how can an Indian investor know which are the best EB-5 Regional Center projects to select? While Davies and Associates, LLC provides individual guidance to EB-5 investors from every major market in India, this article is intended to outline a few key considerations when selecting an EB-5 Regional Center project.

1. It’s all about the ‘Project’

Remember that regardless of what a Regional Center’s past history might be, you are investing in a specific project. It is always critical to conduct proper due diligence on any project. We strongly suggest using a legal and financial advisor who are completely independent from both, the regional center and the project.

It is important to note that many EB-5 lawyers state that they perform “EB-5” or “immigration” due diligence only. For Indian investors this is a fundamental mistake as the loan documents in a project may contain structured lending risks that a Regional Center will not point out to you and such risks are only detected by experienced structured finance lawyers. Failure to detect these issues can result in one losing their investment. Davies and Associates has lawyers with twenty years of structured finance experience, and we suggest that you ensure that any law firm you engage has experienced structured finance lawyers in addition to EB-5 lawyers.

2. Loans or Direct Model?

In order to obtain an EB-5 approval you have to be an investor in a project. Some Regional Centers tend to sponsor projects that are structured purely as “direct equity” investments while other Regional Centers favor projects structured as loans.

The problem with a “direct equity” investment is that as an investor you are purely purchasing an equity stake in the project. As an equity holder in any project, the assets of the business do not secure your investment. In an unfortunate scenario where the business folds or does not have the cash to repay your investment, and where you are unable to sell your participation, you may lose some or all of your money.

Whereas a loan-based model involves the pooling of investor assets by the regional center in order to make a loan to the project. This loan is a debt that is typically secured by the assets of the business involved. Thus, if the project does not have funds to pay you back, you may be able to foreclose the assets of the business and obtain a full or partial repayment of your investment.

3. Secured or Under Secured?

Many Indian investors invest in an EB-5 project believing that their investment is fully secured by the assets of the business. On several occasions, Davies & Associates has been able to show investors that the developer has the ability to bring in additional funding in the future in a way that may trump the security of the EB-5 investors. Due to such transactions the relevant question is not whether the EB-5 investors’ loan is fully secured at the time the loan is advanced, but whether such loan is likely to be fully secured in the future when re-payment becomes due. The risk that EB-5 investors might later become unsecured investors as a result of additional infusions of capital does not exist in every EB-5 project.

An experienced finance or lending lawyer will be able to appropriately analyze your security position in the regional center’s project. What is critical is that you check that your lawyer has meaningful specialized experience in complex structured finance arrangements and can perform investment risk analysis, as many EB-5 lawyers lack such expertise.

4. Taxi Cab Problem

The taxi cab problem refers to the issue involved with rapidly depreciating assets.

Suppose an Indian EB-5 investor finances the acquisition of a fleet of new taxi cabs. Now, in an unforeseen scenario, two years later the taxi-cab business gets into difficulties and cannot repay their EB-5 investors. The taxi cabs are now worth only a fraction of what was paid for them, so the business simply does not have assets that can be sold to cover their investor’s repayment. In this scenario investors could lose most or all of their money. Now, contrast this with a loan-based EB-5 investment in a major real estate project that is fully secured by the property. Real estate does not generally depreciate as quickly as taxi cabs and in case of real estate investment, EB-5 investors are able to receive their investment.

5. Conflicts of Interest

There are two main “conflicts of interest” to watch out for:

  1. Dual Representation

    Unfortunately, many lawyers represent the Regional Centers whose projects they present to you. This means that the lawyer or law firm would have drafted all the documents in favor of the Regional Center before you are even involved.

    You need to ask yourself how comfortable you are with a lawyer reviewing Regional Center documents that they have drafted themselves on behalf of their client, the Regional Center. In our experience, these documents contain flaws and risks that favor the Regional Center, their client, at the expense of the EB-5 investors, You.

    We strongly suggest that investors do not hire a lawyer or law firm that also represents a Regional Center. What happens if things go wrong and you need your lawyer to bring a lawsuit against the Regional Center?

  2. Payments from Regional Centers

    While the Securities and Exchange Commission in the United States is bringing prosecutions over this issue, one will encounter agents and lawyers who are being paid by a Regional Center and yet try to get you to let them represent you as an investor in the Regional Center’s project. There is an obvious conflict of interest which is of great concern to the US government and should be to you.

    Ask whether or not a lawyer or agent has EVER received so much as one dollar from a Regional Center, do not be satisfied being told that they have, but not in relation to your project. If an agent or lawyer has ever been paid by a Regional Center, then they are permanently impaired from representing investors who are placing their hard earned money in that Regional Center’s projects. If something goes wrong with your investment, a lawyer may need to act swiftly and aggressively against a Regional Center, and a lawyer who has been paid by a Regional Center will be unable to do so.

    There is a difference between referring a project and assisting clients in making an informed decision. An unbiased attorney will put the pros and cons of the project before you in order to assist you with making a sound informed decision. An attorney’s interest in the regional center and the project should be limited to the success of your application.

6. Repayment

How will the project operator repay your money?

In many large infrastructure projects, paying off your investment is made through a later re-financing and has nothing to do with the operational success of a project. Looking for a solid payoff plan with financial backing to be able to execute on the plan is key.

Contrast this with a taxi company relying on cab operators to take fares in a market that already has too many taxi operators. If fares are not sold the project operator won’t be able to return your money.