What due diligence do EB-5 developers need to conduct?
Despite the approaching EB-5 Regional Center Program deadline on December 22, 2017, many EB-5 developers continue seeking hundreds of millions of dollars in EB-5 capital for large-scale real estate projects.
Which EB-5 developers have recently sought EB-5 funding to finance the construction of their projects?
In December, SL Green announced that it is seeking $200 million for the construction of One Vanderbilt, a 1,401 foot tall skyscraper located next to Grand Central Terminal in New York. Earlier this year, the Hudson Yards project also sought additional EB-5 funding for 35 Hudson Yards and 55 Hudson Yards.
Why are developers looking to the EB-5 Program as a way to raise capital?
The EB-5 Program was created by Congress in the 1990's as a way to stimulate the U.S. economy through capital investment and job creation. Foreign entrepreneurs can invest $1 million, or in most cases, only $500,000, in a job-creating commercial enterprise in exchange for permanent residency in the U.S. for themselves and their immediate family. Since EB-5 investors are primarily concerned with obtaining green cards, they are willing to invest in projects that appear less risky and offer lower returns for their investment. EB-5 developers have taken advantage of these opportunities to obtain low-cost funding for their projects. In addition, EB-5 continues to be an extremely attractive option to developers who may not be able to secure the entire funding required for their project through traditional methods.
What about the risks?
EB-5 financing still has its risks and it's imperative that developers conduct due diligence. EB-5 investors must meet strict program requirements. If a project developer fails to deliver on their end and causes their EB-5 investors to be denied residency, they may face lawsuits from their investors.
Here are some examples of ways that developers could lose deals or face liability if they rush into a project without conducting proper due diligence.
1. Not understanding the EB-5 Program requirements.
While obtaining EB-5 funding is attractive, the EB-5 Program is complex, and developers need to conduct due diligence before pursuing this type of funding.
2. Depending on a regional center too heavily and not reading the required documentation for accuracy.
EB-5 developers must ensure that the regional center they are working with is accurately presenting the projects to investors. Not doing so can delay progress, require revisions, instill anxiety in EB-5 investors, and make it difficult to acquire traditional loans.
3. Not having an attorney look over critical documents such as the offering memoranda and business plan.
Consult with an experienced EB-5 immigration attorney when seeking EB-5 funding for a project. If relying on the regional centers' team of experts, look at each team members reputation and experience.
4. Being too vague or too precise in the offering memoranda.
It's important to be thorough and accurate in the documentation, but being too specific may cause issues. Depending on the project's industry, developers may not want to include any information that has a strong chance of changing down the line.
5. Issues with investors not knowing what to expect with their project because they are not receiving updates.
Problems could arise if developers do not have an effective method of communicating with their EB-5 investors. A lot of EB-5 investors do not speak English and rely on their agents to translate news for them. If they do not receive consistent updates it may cause them unnecessary worry, especially if the developer hits a problem in construction.
For more information on EB-5 financing and EB-5 developer due diligence, send us a message. Or read, "Three Lessons EB-5 Developers Learned The Hard Way."
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