07 Jun PROJECT STUCTURES WITH MONA SHAH & PATRICK HOGAN
EB-5 Investment Voice,
(Mona Shah & Associates Podcast Series)
Reported by Hermione Krumm, Esq.
EB-5 Investment Voice is the only Podcast series that focuses on and the United States immigrant investor visa, EB-5 and foreign direct investment
Mona Shah, welcomes guests from the industry including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.
In this podcast, Mona Shah interviews Patrick Hogan, the CEO and managing member of CMB Regional Centers, about the structure of EB-5 projects. 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. 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. The followings are some topics discussed in this episode.
Is the location of a project important?
- Mona stated that for any EB-5 project, a well known location is very important. Investors are naturally attracted to big cities like New York or Washington D. C. Pat Hogan disagreed, as he believes that if you structure a project in a manner that the likely return or outcome of the project and immigration pursuit is assured, the location does not matter. 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 and the quality of the project are more important.
Tips to investors when looking at projects
- Find an attorney who understands the business model and not just the immigration aspects. 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 a 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.
- 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 the project is, how it is constructed, and what the likelihood of green card approval and the return of capital investment is.
- Don’t be fascinated by the glamor of big real estate and hotel projects, be open minded to other industries, such as technology, energy or transportation. Manufacturing also creates jobs and assures the certainty of capital exit.
- It should not matter where the project is located, the most important issues are: how safe the project is, how it is structured and what the likelihood is to achieve the two results for the investors, that is, the green card and the return of the investment.
- Two aspects need to be considered: First, you want to set it up that your visa is assured and in fact the job creation will be there. Second, how bad the downside would be if the project doesn’t perform or doesn’t do what it says.
What to look at Capital Stack?
- Check the project’s capital stack or the different layers of financing sources and ensure the EB-5 money is going where it is supposed to be 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. The reason why construction projects account for majority of EB-5 projects is because it is so easy for these projects to prove jobs.
- Select a project structured 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.
- Be sure that you are not the last one on the capital stack, and the likelihood of you are not getting anything, if in fact there will be a failure, is high.
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, which means the regional center is set up for their own projects. 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 into. 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 investors come from?
- Even though China is a big market for EB-5 investment, nowadays, the investors are coming from more diverse backgrounds, take, for example, CMB has investors from 83 countries, covering 17 languages, with representatives in China, Vietnam, Africa and Turkey to name a few.
Some concerns about the agencies
- Both Mona and Patrick agree that 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 end. Consequently, it causes the problem that it takes the focus off the quality of investment and on how much the 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, which eventually results in the suffering of investors. The good thing is that, with the access of social media nowadays, more and more clients are looking for projects on their own rather than relying on the agencies.
Why some particular projects are using EB-5?
- Large real estate projects is using EB-5 because it is cheaper comparing with other loans such as mezzanine loan which is with 11-13%. For some other projects such as transportations, they are using EB-5 because it is extremely difficult for them to get conventional financing.
Loan model versus equity model in EB-5
- 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 EB-5 investors are the minority owners who have no power to force the liquidation, so it is very difficult for the investors to cash out. Comparing with equity model, 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 who 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.
Some Other Advice for EB-5 Investors
- Investors should play an active role in the investment by doing their due diligence and finding out about the project for themselves. 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. For EB-5 investor, the first question to ask should be “How do you prove the jobs?” rather than “How much money am I going to get?” Because without job creation, the project can’t be successful.
- Do your own due diligence to dig deeper in the projects. Don’t just believe in what regional centers say to you, ask for proof. The projects with third party audit are safer, for they are being audited not only the finance but also the EB-5 statistics.
About the Author:
Hermione Krumm, Esq. is an associate attorney with Mona Shah & Associates. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.