Reading PPMs with the Exit in Mind with EB-5 Attorney Ronald Fieldstone – Episode 85
What should EB-5 investors look for in a PPM to ensure they’ll eventually get their money back? On this episode, Mona and Mark are joined by Ronald Fieldstone to discuss potential delays in capital repayment and the differences between the loan and preferred equity models. Listen in for insight around exiting a commercial note and learn how to choose a good project with a solid exit plan—even if you’re in a hurry to beat the November 21st deadline.
Aspiring immigrant investors are in a rush to get into the EB-5 game before the rules change on November 21st. But what should they be looking for when it comes to an exit strategy? How can EB-5 investors compare the private placement memoranda (PPM) of various projects and choose one that ensures they will eventually get their money back?
Ronald Fieldstone is a partner is the Miami office of Saul, Ewing, Arnstein & Lehr, a firm with 400-plus attorneys serving businesses across the US and around the world. Ronald has experience representing developers as well as Regional Centers, and he is currently handling more than 300 EB-5 projects with a combined capital raise of $7B. On this episode of EB-5 Investment Voice, he joins Mona and Mark to discuss the ins and outs of exit plans. Ronald explains how the dramatic extension of adjudication times impacts the return of capital and why many developers intentionally delay repayment.
Ronald describes the role of a third-party loan administrator, the process of vetting a project developer, and the difference in exit plans for a loan versus a preferred equity model. Listen in to understand the challenges around exiting a convertible note and learn what investors and developers should consider leading up to the new regulations taking effect on November 21st.
The Five-Year Loan Before & After Retrogression
- Prior to 2014, the loan program model was fairly straightforward, and exits were easy. Projects budgeted a five-year loan period with one or two extensions. By the time the loan was paid off, most EB-5 investors had their I-829 approval and their money was returned.
- This all changed when retrogression hit China in 2014, and the industry had to find a way to keep the EB-5 investors’ money at-risk for an extended period of time. The dramatic extension of adjudication times delays the entire process and prevents investors from getting their money back in a timely manner.
Why Developers May Delay Repayment
- If developers are not getting the figures they want from the bank for a refinance, many will choose to wait because they are not bound to pay EB-5 investors back at a particular time. For instance, the advent of Airbnb impacted what hotels in New York could get for a refinance, and many developers waited as long as eight or nine years to return money to their EB-5 investors.
- Developers will delay repayment of EB-5 capital because it’s fairly inexpensive compared to private equity capital. As a result, agents and investors must look carefully at offering documents and loan agreements for details around the developer’s legal obligation to pay off the loan.
The Role of a Third-Party Loan Administrator
- Ronald points out that EB-5 is in the lending business. As such, investors must think of themselves as a bank and appoint someone responsible for following the deal, as a bank would, to make sure the money is spent properly.
- A Regional Center that is not the developer, an agent, or the investor themselves may take on this responsibility. If the Regional Center was formed by the developer, Ronald recommends hiring a third-party loan administrator to enforce the EB-5 investor’s rights under the loan agreement.
Vetting a Project Developer
- The EB-5 industry is demanding more and more integrity. Most investors do their due diligence, looking at the developers experience and track record before handing over their money for a project.
- Chinese investors rely upon migration agents with significant resources to vet developers and determine whether a project works or not. Indian investors are much more independent, often conducting their own due diligence.
The Loan Model vs. Preferred Equity
- In most cases, the loan model is safer than preferred equity. Yet in some cases, equity can be just as good from a protection standpoint and afford a better investment economically.
- A loan is preferable in terms of exiting so long as it is executable and includes a maturity date. It is easier to exit a loan providing that time periods are fixed, and the developer does not have unlimited discretion to extend the loan.
How to Exit the Regional Center Equity Model
- Certain projects simply cannot use a loan model, so EB-5 investors must make use of the equity model. In the case of a Regional Center, the new commercial enterprise (NCE) makes a preferred equity investment with a rate of return equivalent to that of the loan model.
- If the project is sold or liquidated, the EB-5 investors get paid first. Unfortunately, the EB-5 company cannot have an absolute put right, as USCIS considers this a redemption agreement.
- Ronald’s firm created a model in which EB-5 applicants make a preferred equity investment for a five-year term with one- or two-year extensions, and if the developer does not exercise the option to buy out the NCE entity at that point, it has the legal right to require the developer to sell the project.
The Challenges Around Convertible Notes
- In the case of a convertible note, either the NCE or the developer can force conversions. If a deal is successful, converting debt to equity is advantageous because the investment increases in value.
- Examine the legal documents carefully to understand the terms of a convertible note, as it is not illegal for a developer to keep EB-5 money in a project indefinitely. Immigration law does not require that a capital investment be returned, it just has to be at risk.
The Upcoming November 21 Deadline
- Investors and developers alike feel the pressure of getting in before the new regs go into effect on November 21st. Developers whose projects are no longer in a targeted employment area (TEA) after the deadline are at the greatest disadvantage, as they will not be able to compete once the minimum investment shifts from $500K to $1.8M.
- The good news is, developers in the process of raising EB-5 money can take advantage of the increased interest in the program. This is the last chance immigrant investors will have to bring their families to the US for $500K.
- EB-5 investors may be at risk if developers fail to raise the required capital for their projects prior to November 21st. Look carefully at the documents to ensure that the developer has other ways to fill the capital stack to cover EB-5 deficiencies.