20 Apr EB-5 Project Structures with Patrick Hogan of CMB
In this episode, Mona and Mark sit down with Patrick Hogan from CMB Regional Centers to explore the structure of EB-5 projects. They also touch on non-real estate projects as well as important guidelines for investors when looking at future prospects. The loan versus equity model is also discussed in depth
For today’s podcast, Mark and Mona talk about the structure of EB-5 projects with Patrick Hogan, the CEO and managing member of CMB Regional Centers. Patrick has 23 years of experience in the EB-5 industry. He is regarded as one of the most serious practitioners in the EB-5 market. He has lived the wars of the early years of EB-5 and is based in Quad Cities, Rock Island, Illinois. From the time that Patrick got the Regional Center Certification on 1997, the company currently has 10 Regional Centers today, with over 5000 investors and 60 projects.
How are you successful?
- Most businessmen believe that the location is very important in a project. Usually, investors would build their Regional Centers in big cities like New York, Texas or Washington D. C., to name a few. Patrick’s mantra is “take care of the client and we’ll make money.” CMB Regional Centers believe that if you structure a project such that the likely return or outcome of the project and immigration pursuit is assured, it doesn’t matter about the location. A project in a highly desirable area does not always assure its success.
- For a hotel project, a good location is important simply because of the type of the business that it is. However, the structure of the business is more important. The client should dig deeper and be assured that the job creation is going to occur and that the likelihood of the client being repaid is high. Investors should play an active role in the investment by doing their due diligence and finding out about the project for themselves.
- Although real estate projects are the most common in the EB-5 industry, non-real estate projects such as infrastructure also create a tremendous amount of jobs. What matters is how safe is the project, how is it constructed, and what is the likelihood of green card approval and the return of capital investment.
Tips to investors when looking at projects
- Find an attorney who understands the business questions that are actually immigration questions. The requirement of 10 jobs is not a business requirement but an immigration requirement. Where you locate the investment is an immigration requirement, not a business requirement. The likelihood that the investment is going to be successful is an immigration requirement because without the successful business, there are no jobs or return of capital. These due diligence questions should be answered by attorneys as an advocate to the investor.
- Check the project’s capital stack or the different layers of financing sources and where it’s going. There are things that you can be put in the project that can guarantee project fulfillment such as completion bond, or for construction projects sub-guard insurance on the various subcontractors. The more protection that you build in to the capital stack, the more likely that jobs will be created.
- Structure projects in a way that there is enough equity to take care of investors even if the project will fail. You don’t want to be in a position where you have no recourse or collateral. Even if the project fails and investors start fighting over the assets, the Regional Center should put the investor in a position where they have recourse.
Vertically integrated projects
- These are projects setup where the investor owns the property, constructs something on the property and then later on manages and owns it. CMB is setup as a third-party Regional Center doing projects for other people. Patrick feels that without an outside audit, projects like these are very dangerous to get in to. It is important to assure investors that their money is treated in a proper way. For CMB, this meant asking a third-party company to audit all the 60 partnerships they’ve had. This should be regarded as a best practice for every project to make them feel much safer.
Where do you get your investors from?
- When CMB started in the 90’s, Taiwan was the hot market. But due to Taiwan’s licensing requirement struggles, CMB got most of their investors from Korea. At the moment, CMB has investors from 83 countries, covering 17 languages, with representatives in China, Vietnam, Africa and Turkey to name a few.
- Agencies and finder groups are sometimes discouraged, especially in China, because of the amount of money agents are asking as commissions. The pressure is on increasing the price of the investor through syndication fees and paying points on the back side. It takes the focus off the quality of investment and on how much middleman is getting paid. The more money that agents require, the more pressure there is on the project to generate more income to pay the agent.
Loan versus equity
- Very few equity models in EB-5 have ever paid anyone back. The Equity Model has so many variables that investor is taking a chance in. The Loan Model is superior and provides a defined exit strategy.
- In other parts of the world, some cultures like those in the Middle East prefer the Equity Model. If an investor wants an equity position, it is advisable to use the direct method of EB-5 so they can put their money in a company that they can control. The Regional Center concept, the investor becomes a very small portion of what the equity is.