EB-5 2.0 with Peyman Attari of Integra Finance – Episode 69
Over the years, the EB-5 program has undergone a natural evolution. Today, Mona and Mark sit down with Peyman Attari to discuss EB-5 2.0, explaining how the size and structure of projects has changed and describing the flaws in the Regional Center model. Listen in for insight around the redeployment of funds, the role of an investment advisory, and the impact of a likely increase in the minimum EB-5 investment.
Peyman Attari argues that waiting for EB-5 legislation is like waiting for Godot: You are likely to be disappointed. But while Peyman is not optimistic about seeing changes to the law itself, he does anticipate the implementation of some new regulations slated for Spring 2019. So, in the absence of sweeping changes, how has EB-5 evolved naturally over the past few years? How would you describe EB-5 2.0?
A seasoned investment professional with more than 30 years of experience in finance, investment research and portfolio management, Peyman is the co-founder and partner of investment advisory Integra Finance, a firm dedicated to meeting the needs of the EB-5 market. Integra assists project sponsors in strengthening the marketability of their project, reducing their liability, resolving conflicts of interest and demonstrating compliance with regulatory issues.
Today, Mona, Mark, and Peyman discuss EB-5 2.0, describing the natural process of evolution the program has undergone in lieu of changes to the legislation. Peyman explains why the industry has shifted from megaproject to the Bespoke Model and offers insight on the danger of a Regional Center that is aligned with a project’s sponsor or developer. Listen in to understand the nuances around the redeployment of funds, the role of an investment advisory in vetting projects and devising a redeployment strategy, and the pros and cons of the likely increase in EB-5 minimum investment from $500K to $1M.
The Natural Evolution of the EB-5 Program
- Time after time, we have anticipated new EB-5 legislation only to be disappointed. Instead, the program has undergone a natural process of evolution.
- New legislation seems unlikely at this point, though changes in regulations are likely to come in Spring 2019. For that reason, new projects should be structured in a way that allows for flexibility.
From Megaproject to the Bespoke Model
- Since the fall of the Chinese market, megaprojects requiring a large number of investors find it more and more challenging to secure funding. For this reason, the industry has shifted to the smaller projects that Peyman refers to as the Bespoke Model.
- The Bespoke Model involves a group of investors teaming up with a developer to put together their own project. This structure especially appeals to Indian entrepreneurs looking to be equity investors alongside the developer.
- The key benefits of the Bespoke Model include a higher interest rate of 2—5% (versus 0.25—0.5%) and an equity position in the capital stack. This affords investors an upside, years into the future, as they maintain an equity holding even after the project has ended.
The Drawbacks of the Regional Center Model
- In a perfect world, all Regional Centers would function as independent entities, acting in the investors’ best interests. Unfortunately, many Regional Centers are closely aligned or even owned by the project sponsor or developer.
- Regional Centers that do not function as independent entities suffer from a lack of oversight. This can lead to fraud, pending a third-party entity is not employed to protect the interests of the investors and ensure that funds are deployed appropriately.
The Issue of Redeployment of Funds
- Peyman contends that redeployment is a ‘freight train headed toward the EB-5 industry,’ and he cites the lack of clarity from USCIS as the source of the problem. Yet to satisfy immigration requirements, investors cannot be paid back early and their funds must be reinvested.
- This issue stems from the one- to two-year turnaround time on smaller projects like an apartment building, for example. If the project is completed and either refinanced or sold, the Regional Center, new commercial enterprise (NCE) or project sponsor should enlist the help of an experienced investment advisor to manage those funds.
The Role of a Firm Like Integra Finance
- Individual investors can engage Peyman’s company, Integra Finance, prior to making an EB-5 investment. Integra can review and research a specific project the investor is considering OR make recommendations based on projects they’ve already vetted.
- An individual investor cannot employ Integra to oversee the redeployment of funds. Rather, the NCE must hire (and pay) a firm like Peyman’s to devise a redeployment strategy.
- Even if the operating agreement allows managing members full discretion, making unilateral decisions around reinvesting funds—without investor approval—means acting as an unregistered investment advisor. That, of course, runs contrary to the rules of the Investment Advisers Act.
The Likely Increase in EB-5 Minimum Investment
- We are still expecting the minimum EB-5 investment to increase from $500K to $1M in the spring. The upside to this likely change is that projects will require fewer investors to raise the necessary capital.
- The downside to an increase in minimum investment is that the quality of the project and its structure, oversight measures, expected returns and financial issues become that much more important. The stakes are higher, and smart investors will take more time to review the potential of a project before agreeing to invest $1M.