EB-5 Due Diligence: Selecting the Right Project for Your Investment |Paperfree Guide

Master EB-5 due diligence with our Paperfree Guide. Get essential tips for selecting the right project. Explore the intricacies of EB-5 projects for confident investment decisions.

last updated Tuesday, March 19, 2024
#eb 5 due diligence checklist #eb 5 due diligence

John Burson

CONTENTS

The Importance of Due Diligence

While EB-5 investors typically possess diverse backgrounds and due diligence experience in their fields, navigating the unique EB-5 context can be challenging. Investors face a dual due diligence process in the regional center model — first on the EB-5 project and developers and second on the regional center itself.

Beyond empowering investors to make informed decisions and safeguard their investments, due diligence also offers insights into the likelihood of successful immigration under the EB-5 program, gauged by the regional center's track record.

What is EB5 Due Diligence? Due Diligence Checklist.

EB-5 due diligence reviews relevant documents to verify claims, analyze investment risks and strengths, and provide transparency to interested parties. It includes Due Diligence Checklists:

1. Document Review Checklist

This includes the business plan, market feasibility studies, market statistics, architectural plans, construction schedules and costs, land purchase contracts, and lease contracts.

Investment Documents Due Diligence

Private Placement Memorandum (PPM)
Review the project's business plan, financial projections, risk factors, and exit strategies.
Verify the project's eligibility under the EB-5 program and compliance with USCIS regulations.
Assess the experience and track record of the project developer and management team.
Operating Agreement/Limited Partnership Agreement
Understand your rights and responsibilities as an investor, including voting rights, distribution schedules, and potential liabilities.
Ensure the agreement aligns with the PPM and protects your interests.
Escrow Agreement
Verify the escrow agent's credentials and reputation.
Confirm the terms and conditions for transferring and releasing investment funds.
Subscription Agreement
Review the investment amount, payment terms, and refund policies.
Ensure the agreement accurately reflects your investment commitment and protects your interests.

EB5 Financial Documents Due Diligence

Project Financials
Review historical financial statements and projected financial statements.
Analyze the project's revenue streams, expenses, and profitability potential.
Assess the project's reliance on debt financing and its potential impact on your investment.
Escrow Account Statements
Verify the receipt and proper allocation of investor funds.
Monitor fund releases by project milestones.
Independent Audits
Review independent audits of the project's financials and operations.
Look for any red flags or discrepancies in financial reporting.

Legal and Regulatory Documents

Regional Center Designation Letter
Confirm the regional center's designation by USCIS and its eligibility to participate in the EB-5 program.
TEA Designation (if applicable)
Verify the project's location within a Targeted Employment Area (TEA).
Immigration Forms
Review I-526 petitions and other immigration forms submitted on your behalf for accuracy and completeness.
Third-Party Service Contracts
Review key contracts with third-party vendors involved in the project.
Assess potential risks associated with these contracts.

2. On-Site Visit EB 5 Due Diligence Checklist

An on-site visit is crucial in your EB-5 due diligence process, providing firsthand insights into the project's operations, management team, and overall viability. This checklist outlines key areas to focus on during your visit and potential questions to ask:

Pre-Visit Preparation

Review Project Documents
Familiarize yourself with the PPM, business plan, financial statements, and other relevant documents to form informed questions.
Schedule Itinerary
Discuss and confirm your visit agenda with the project developer, ensuring it covers all areas of interest.
Prepare Questions
Develop a list of specific questions based on your review of the project documents and any lingering concerns.

On-Site Visit Preparations

Project Location and Facilities

Observe the location
Is it situated in the designated TEA? Are there any potential zoning or environmental concerns?
Tour the facilities
Assess the quality and functionality of buildings, equipment, and infrastructure.
Meet key personnel
Engage with project managers, construction workers, and other relevant staff to gauge their expertise and dedication.

Project Progress and Operations

Verify construction progress
Compare the current stage with the project EB-5 due diligence timeline and identify potential delays or deviations.
Evaluate marketing and sales efforts.
Understand the developer's strategy for attracting investors and meeting job creation requirements.
Review financial records
Request access to relevant financial documents and inquire about funding sources and expenditures.

Management Team and Expertise

Meet the leadership team
Assess their experience, qualifications, and track record in managing similar projects.
Discuss risk mitigation strategies.
Understand the developer's approach to managing potential risks and ensuring project success.
Evaluate communication procedures
Clarify how investors will be kept informed about project progress and developments.

Additional Considerations

Take photographs and videos
Document your visit for future reference and potential evidence.
Ask follow-up questions
Don't hesitate to clarify any unclear points or address lingering concerns.
Trust your gut instinct.
Pay attention to red flags or inconsistencies that raise doubts about the project's legitimacy.

**Post-Visit **

Document your observations and findings
Compile a detailed report summarizing your visit, including key takeaways and unanswered questions.
Share your report with your legal and financial advisors
Seek their professional interpretation of your findings and guidance on the next steps.
Continue your due diligence.
Don't rely solely on the on-site visit; continue your research and analysis until you are fully confident in the project's viability.

3. EB5 Regional Center Due Diligence

This includes researching the due diligence eb5 regional center and reviewing the economic impact analysis.

USCIS Designation and Track Record

Verify Designation
Confirm that the regional center has an active designation from USCIS. Check the USCIS website for current status and past designations.
History of Success
Research the center's past performance. How many projects have they completed successfully? Have they secured green cards for previous investors?
I-924A Filings
Review their annual I-924A filings to assess financial stability and compliance with program regulations.

Management Team and Leadership

Leadership Backgrounds
Investigate the experience and qualifications of the management team. Look for relevant backgrounds in real estate, finance, and immigration law.
Track Record of Integrity
Research past lawsuits, bankruptcies, or regulatory issues involving the leadership team or affiliated companies.
Compensation Structure
Analyze the fees and profit-sharing arrangements between the regional center and the project developer. Excessive compensation packages could raise red flags.

Financial Strength and Transparency

Financial Analysis
Review the regional center's audited financial statements. Assess their assets, liabilities, cash flow, and debt levels.
Independent Audits
Verify the presence of independent third-party audits to ensure financial accuracy and transparency.
Escrow Agreements
Understand how investor funds are managed and protected through escrow arrangements. Ask about the qualifications and reputation of the escrow agent.

Project Selection and EB-5 regional center due diligence

Project Evaluation Process
Inquire about the regional center's process for selecting and vetting EB-5 projects. Do they conduct independent due diligence?
Project Portfolio Mix
Analyze the diversity and risk profile of the regional center's project portfolio. Is it concentrated in a single industry or geographic area?
Job Creation Analysis
Scrutinize the regional center's economic impact analyses for past and current projects. Verify how they calculate job creation estimates.

Communication and Investor Relations

Information Accessibility
Assess the transparency of the regional center's communication with investors. Do they provide regular updates, reports, and financial disclosures?
Response Time and Customer Service
Gauge the responsiveness of the regional center to investor inquiries. Observe their level of professionalism and willingness to address concerns.
Investor References
Contact past investors from successful projects to gain firsthand insights into their experience with the regional center.

4. Reginal Center Projects Economic Analysis. Checklist.

This includes economic impact analysis starting until completion.

Methodology and Assumptions

Model Selection
Understand the economic model used in the EIA. Is it industry-specific, regional, or national? Is it validated and accepted by economic experts?
Data Sources
Verify the credibility and timeliness of data used in the analysis. Find reputable sources like government agencies, industry surveys, and economic databases.
Key Assumptions
Identify and critically evaluate the key assumptions about project revenue, expenses, employment levels, and wage scales. Are they realistic and based on sound evidence?

Job Creation Projections

Direct and Indirect Jobs
Analyze the breakdown of projected job creation - how many are direct jobs at the project site and indirect jobs within the community?
Wage Levels and Benefits
Scrutinize the estimated wage levels for created jobs. Do they meet the prevailing wage requirements for the TEA? Are benefits factored into the analysis?
Job Retention and Sustainability
Assess the plan for retaining created jobs over the long term. Are there measures to ensure ongoing business viability and prevent job losses?

TEA Designation and Impact

TEA Qualification
Verify the accuracy of the project's TEA designation. Check with USCIS and local authorities to ensure it meets all criteria for unemployment rates.
Job Creation Relevance
Analyze how the projected jobs align with the needs of the local labor market. Will they fill existing skill gaps and benefit the community?
Impact on Unemployment Rates
Evaluate the EIA's estimates of how the project will impact the TEA's unemployment rate. Are they realistic and achievable?

Risk Assessment and Mitigation

Market Risks
Identify potential market risks affecting the project's performance and job creation goals. How are these risks addressed in the EIA?
Financial Viability
Assess the project's financial stability and potential for unforeseen expenses. Can it weather economic downturns and still fulfill job creation promises?
Contingency Plans
Verify the presence of clear contingency plans in case the project falls short of projected job creation. Will investors be compensated or protected?

Independent Review and Transparency

Independent Verification
Look for evidence of the EIA being reviewed and endorsed by independent economists or government agencies.
Transparency and Accessibility
Ensure the EIA is readily available and written in clear, understandable language. Ask for clarification on any technical jargon or complex methodologies.
Ongoing Monitoring
Inquire about plans for monitoring and verifying actual job creation after the project launches. Will results be shared with investors?

5. Investment Project Market Feasibility Study

This includes the property's title, geography, topographic study, construction or rehabilitation costs, and feasibility of the intended use.

Market Definition and Segmentation

Target Market
Understand the project's target market - who are they trying to reach and why? Analyze the size, demographics, and purchase behavior of this group.
Market Segmentation
Assess if the MFS segments the target market into relevant subgroups based on age, income, location, or other factors. Does this segmentation align with the project's offerings?
Competition Analysis
Examine the competitive landscape. Who are the project's main competitors? How does the project differentiate itself, and what are its competitive advantages?

Demand and Supply Analysis

Historical Data and Trends
Evaluate how the target market has behaved historically about similar products or services. Are there any relevant trends or shifts in demand?
Supply and Market Saturation
Analyze the supply of similar products or services in the project's planned location. Is there sufficient demand to avoid saturation and ensure project success?
Pricing Strategy
Assess the chosen pricing strategy - is it competitive and aligned with the target market's willingness and ability to pay?

Marketing and Sales Plan

Marketing Channels
Evaluate the MFS's proposed marketing channels to reach the target market. Are they effective, efficient, and relevant to the chosen audience?
Sales and Distribution Strategy
Scrutinize the sales and distribution strategy. Is it realistic and achievable in the chosen market? Can the project reach its projected sales volume?
Competitive Analysis
Compare the MFS's marketing and sales strategies to those of competitors. How does the project differentiate itself and stand out in the market?

Financial Projections and Assumptions

Revenue Forecasts
Analyze the revenue projections in the MFS. Are they based on realistic assumptions about market penetration, pricing, and sales volume?
Cost and Expense Analysis
Scrutinize the cost and expense projections. Are all relevant costs, including operational, marketing, and personnel expenses, factored inaccurately?
Profitability and Sustainability
Assess the projected profitability and financial sustainability of the project. Can it generate sufficient revenue to cover expenses and provide returns to investors?

Risk Assessment and Mitigation

Market Risks
Identify potential market risks like economic downturns, changes in consumer preferences, or increased competition. How are these risks addressed in the MFS?
Contingency Plans
Verify the presence of clear contingency plans to address potential market challenges. Can the project adapt and adjust its strategies if needed?
Exit Strategy
Evaluate the proposed exit strategy for investors. Is it realistic and achievable within the projected timeframe?

6. Background Due Diligence Check Checklist

This includes background checks on key persons and entities.

Key Individuals and Entities

Project Developer
Research the developer's track record, experience, and qualifications in managing similar projects. Look for any past bankruptcies, lawsuits, or regulatory issues.
Management Team
Investigate the background of crucial team members like executives, financial officers, and construction managers. Assess their expertise and potential conflicts of interest.
Regional Center (if applicable)
Verify the regional center's designation and track record of success in securing green cards for investors. Review their financial standing and any past controversies.
Legal and Financial Advisors
Assess the qualifications and experience of legal and financial advisors involved in the project. Look for potential conflicts of interest or past disciplinary actions.

Public Records and Databases

Court Records
Search for civil and criminal court records associated with the individuals and entities involved. Look for judgments, bankruptcies, or involvement in fraudulent activities.
Regulatory Filings
Review company filings with the Securities and Exchange Commission (SEC), state regulators, and professional licensing boards for any red flags.
News Articles and Media Coverage
Analyze media coverage, both positive and negative, related to the individuals and entities involved. Look for any patterns or recurring issues.
Sanctions and Watchlists
Check against government sanctions lists and watchlists to identify individuals or entities involved in criminal activities or terrorist financing.

Independent Investigation Services

Professional Background Checks
Consider hiring a professional background check firm to conduct comprehensive searches on key individuals, including criminal history, education verification, and employment verification.
Financial Investigations
Depending on the project's complexity, consider engaging financial investigators to assess the project's financial health and identify potential fraud or misrepresentation.
Reputation Management Firms
Consulting with reputation management firms can provide insights into online sentiment and potential concerns around the individuals and entities involved.

Asking the Right Questions

Direct inquiries
Engage in open and candid conversations with the project developer and key stakeholders. Ask specific questions about their experience, qualifications, and potential risks associated with the project.
Follow up on discrepancies.
Don't hesitate to ask for clarification on any inconsistencies or unclear information you find during your research.
Seek external validation
Consult with trusted advisors and independent professionals to review your findings and offer their perspectives.

7. Risk Analysis EB-5 Firm Projects Checklist

This includes evaluating risks from construction start until completion.

Pre-Construction Stage

Project Planning and Design
Evaluate the comprehensiveness and quality of the architectural plans and specifications. Are they realistic and compliant with local regulations?
Assess the experience and qualifications of the chosen architects, engineers, and construction team. Do they have experience with similar projects?
Review the construction timeline and identify potential milestones and critical tasks. Is the timeline realistic and achievable?
Permitting and Approvals
Verify that all necessary permits and approvals have been obtained from relevant authorities. Are there any outstanding permits or potential delays anticipated?
Understand the potential impact of environmental regulations or zoning restrictions on construction.
Financial Considerations
Analyze the construction budget and identify potential cost overruns or unforeseen expenses. Are contingency plans in place to manage cost fluctuations?
Verify the developer's financial resources and access to additional funding to ensure project completion in case of unforeseen challenges.

Construction Stage

Contractor Selection and Performance
Investigate the track record and financial stability of the chosen construction contractor. Do they have experience with similar projects and a good reputation?
Monitor contractor performance throughout construction, focusing on adherence to schedule, quality control, and safety measures.
Material Procurement and Quality Assurance
Understand the sourcing of materials and ensure they meet required specifications and quality standards.
Review the project's quality control and assurance protocols to guarantee construction integrity and functionality.
Risk Management and Mitigation
Identify potential construction risks, including weather delays, material shortages, or labor disputes. Are there contingency plans in place to address these challenges?
Verify insurance coverage for potential risks and delays to protect your investment.

Post-Construction Stage

Inspections and Finalization
Ensure all necessary inspections by authorities are completed successfully and comply with building codes.
Confirm that the final construction aligns with the approved plans and specifications.
Warranties and Guarantees
Understand the warranty and guarantee policies offered by the developer and contractor. What defects or issues are covered, and for what duration?
Ongoing Maintenance and Upkeep
Evaluate the proposed maintenance and upkeep plan for the completed project. Who will be responsible for ongoing repairs and ensure long-term functionality?

8. Investor Funds Protections Checklist

This includes scrutinizing measures in place to protect investor funds.

Escrow Agreements

Escrow Agent Selection
Verify the escrow agent's qualifications, reputation, and experience handling EB-5 funds. Are they independent from the project developer and adequately bonded?
Fund Deposit and Release Conditions
Analyze the terms and conditions governing deposit and release of investor funds. Are they aligned with project milestones and job creation progress?
Refund Provisions
Investigate the project's refund policy in case of project failure or failure to secure green cards. Are your funds fully or partially protected?

Financial Disclosures and Transparency

Regular Financial Reporting
Assess the frequency and comprehensiveness of financial reports provided to investors. Do they detail fund usage, project progress, and expenses incurred?
Independent Audits
Verify the presence of independent financial audits conducted by reputable firms. Do they assure the project's financial health and fund allocation?
Compliance with Regulations
Ensure the project's financial management adheres to relevant EB-5 program regulations and securities laws. Seek legal advice if needed.

Investment Structures and Security Instruments

Lien Provisions
Analyze any lien provisions in the offering materials. Do they grant the project developer rights to your property or assets in case of default?
Guarantees and Security Interests
Investigate the presence of any guarantees or security interests offered by the developer or third-party entities to protect your investment.
Exit Strategies and Liquidity
Understand the potential timelines and mechanisms for your eventual exit from the investment and accessing your returns.

Communication and Investor Rights

Investor Relations Contact
Identify the primary point of contact for investor inquiries and concerns. Is there a dedicated team or individual responsible for communication?
Access to Information
Assess the transparency and accessibility of project updates, financial reports, and other relevant information for investors.
Investor Meetings and Participation
Investigate opportunities for investor meetings, site visits, and participation in project decision-making processes.

9. Fund Administrator Oversight Checklist

This includes third-party fund administrators' eb5 investment due diligence endorsing fund transfers.

Administrator Selection and Qualifications

Independence and Reputation
Verify the fund administrator's independence from the project developer and any potential conflicts of interest. Evaluate their industry reputation and experience handling EB-5 projects.
Licensing and Regulatory Compliance
Ensure the administrator is properly licensed and complies with all relevant financial regulations and EB-5 program requirements. Seek legal counsel if needed.
Technology and Infrastructure
Assess the administrator's technological infrastructure and systems for secure recordkeeping, transaction processing, and investor reporting.

Oversight and Management of Funds

Escrow Account Management
Verify the administrator's role in managing investor funds held in escrow, including deposit, release, and reconciliation procedures.
Disbursement Authorization
Understand the process for authorizing fund disbursements from escrow to the project developer. Does it involve independent verification of project milestones and job creation progress?
Financial Reporting and Audits
Analyze the administrator's reporting protocols for tracking fund usage, project expenses, and financial performance. Do they provide accurate and timely reports to investors?

Investor Communication and Transparency

Investor Portal and Access
Evaluate the availability and user-friendliness of an online portal for investors to access account information, transaction details, and project updates.
Communication Channels
Assess the administrator's responsiveness to investor inquiries and concerns. Are there dedicated contacts and clear communication protocols in place?
Independent Investment Verification
Investigate if the administrator offers independent verification of project progress and compliance with investment parameters, further ensuring transparency.

10. EB 5 Loan Administration Procedures Checklist

This includes verifying the alignment of loan administration procedures with banking standards.

Loan Documentation and Structure

Loan Agreement
Meticulously review the loan agreement, scrutinizing terms and conditions, interest rates, repayment schedules, and default provisions.
Verify alignment with industry standards and compliance with pertinent regulations.
Security Interests
Confirm the existence of adequate collateral or security interests to back the loan, mitigating risk in case of default.
Assess the value and enforceability of these interests.
Third-Party Guarantees
If applicable, evaluate any guarantees from third parties, ensuring their financial strength and commitment to fulfilling obligations.

Loan Administration Team

Qualified Personnel
Verify the qualifications and experience of personnel responsible for loan administration.
Seek evidence of expertise in commercial lending and familiarity with EB-5 program requirements.
Segregation of Duties
Confirm the presence of internal controls to prevent conflicts of interest and safeguard assets.
Ensure separate personnel handles loan origination, servicing, and collections.

Fund Disbursement Controls

Draw Request Procedures
Assess the process for approving and authorizing draw requests from the project developer.
Ensure compliance with loan terms, project milestones, and job creation progress.
Independent Verification
Verify the involvement of independent third parties (e.g., engineers, appraisers) to validate draw requests and project progress.
Fund Flow Oversight
Examine procedures for tracking and monitoring fund disbursements, ensuring alignment with intended project expenses.

Financial Reporting and Audits

Regular Reporting
Assess the frequency and comprehensiveness of financial reports provided to investors, detailing loan status, payment history, and project financials.
Independent Audits
Verify the presence of independent audits conducted by reputable accounting firms to ensure accuracy and transparency in financial reporting.

Compliance and Regulatory Oversight

Regulatory Compliance
Ensure loan administration adheres to all relevant banking regulations, EB-5 program requirements, and securities laws.
Anti-Money Laundering (AML) and Know Your Customer (KYC) Policies
Verify implementation of robust AML and KYC procedures to prevent financial crimes and protect investor funds.

11. Review The Refund Policy

This includes a refund policy as a safety net, mitigating potential risks, and safeguarding your investment.

Trigger Scenarios for Refund

I-526 Petition Denial
Analyze the refund policy if USCIS denies your I-526 petition for immigration benefits. Are you guaranteed a full or partial refund?
Project Failure
Understand the refund provisions if the project fails to achieve its stated economic goals or reach completion. What triggers a refund, and what percentage of your investment is recoverable?
Material Misrepresentation
Investigate the policy for refunds in case of material misrepresentation in the offering materials or project development process. How do you prove misrepresentation, and what is the refund process?

Refund Conditions and Exclusions

Timeline and Deadlines
Verify the timeframe for claiming a refund under various scenarios. Are there strict deadlines or limitations to be aware of?
Fees and Deductions
Assess any potential fees or deductions associated with claiming a refund. What administrative or legal costs might be incurred?
Investor Actions
Analyze if your actions or non-compliance with project requirements can impact your eligibility for a refund. Are there any clauses addressing investor communication or participation?

Transparency and Communication

Clear Policy Terms
Ensure the refund policy is written and accessible, avoiding ambiguity or technical jargon. Seek legal counsel if needed for interpretation.
Regular Updates and Notifications
Understand how you will be informed about any changes to the refund policy or project developments that might affect your rights.
Communication Channels
Identify the designated contact point for inquiries or concerns regarding the refund policy and potential claims. Is there a dedicated team or individual responsible for communication?

An EB-5 Investor’s Guide to Effective Due Diligence

Investing $800,000 - $1,050,000 in one of the EB-5 projects that ultimately fail jeopardizes the investor’s funds and the U.S. residency of the investor’s family. Therefore, every investor would be wise to know as much as possible about the investments they’re considering.

Before committing to any investment, investors must conduct "due diligence," a formalized discovery period to validate assumptions, identify risks, and assess the viability of proceeding with the contemplated investment. Investors should engage in a reasonable amount of due diligence, outlining the process to be undertaken before investing in a real estate project or operating business. EB-5 Project Due Diligence investors can significantly mitigate investment risks and gain valuable insights into the investment opportunity and its sponsors by conducting pre-investment research. Whether involving a real estate project or operating a business, investors can steer clear of undesirable surprises and enhance their confidence in the investment.

Real Estate Due Diligence

Due diligence is essential before engaging in any arm's length real estate investment, irrespective of the property type or location. Fortunately, investors can often leverage the experienced real estate developer's due diligence efforts supporting the project. Once the property type and geographic location are chosen, the real estate developer usually ensures they have comprehensive and accurate information about the property's physical asset, financial performance, and prospects for Due Diligence of EB-5 Projects.

Developer Due Diligence

Due diligence by seasoned real estate developers and sponsors typically involves the “pre-letter of intent” and the “post-letter of intent” due diligence. The pre-letter of intent phase includes more high-level inquiries, meaning the buyer relies on public and seller-provided information rather than expending significant time or cost. If this first phase yields favorable results, the buyer or developer will often negotiate a letter of intent with the seller governing the price and material terms before commencing a more extensive due diligence process.

Once the investment is subject to a letter of intent, the due diligence involves more costly inquiries, such as ordering third-party studies and expending more significant investments of time to complete a deeper property analysis, focusing on its history, present condition, and economic potential. This second phase of due diligence will often lead to the negotiation and execution of a purchase and sale agreement. Throughout both phases, the chief aim is to inspect the property physically, fiscally, and legally to mitigate financial uncertainties and ascertain the property’s current and prospective value.

Scope of Developer Due Diligence

The due diligence process thoroughly examines various aspects, including the property's title, geography, topography, construction or rehabilitation costs, and feasibility for the intended use.

Environmental studies, tax bills, seller's financials, and zoning certificates are scrutinized. For improved properties, due diligence includes reviewing surveys, permits, licenses, easements, existing debt and liens, leases, rent rolls, contracts, construction blueprints, engineering plans, and appraisals.

The developer aims to identify potential issues with the property, its title, and other critical considerations.

The following outlines critical subject areas in a real estate-based due diligence analysis, each requiring verification of assumptions based on the specific circumstances of the property.

Physical Inspection.
The physical inspection of the property should include, as applicable:

The area surrounding the location
General Condition of the Property
Deferred maintenance
The structural condition of buildings
Condition of building systems (plumbing, electrical, HVAC, elevators)
Land conditions
Access and flood plains
Compliance with building codes
Compliance with fire codes
Insurance rating issues
Hazards

Leases.
The analysis of leases on the property should confirm that there are no undisclosed, extraordinary obligations or unexpected liabilities by reviewing the respective property’s:

Rent roll
Leases and amendments and side letters
Financial terms
Lease terms, renewal, and expansion options
Basic rent, additional rent, and escalations
Tax and expense pass-through
Insurance requirements
Cancellation and recapture rights
Subordination and non-disturbance
Estoppel obligation
Landlord’s unperformed obligations
Maintenance and repair obligations
Options to renew, expand, purchase
Rights to sublet, assign, and/or assume
Indemnity obligations expiration
Environmental protections, obligations
Disposition of security deposits
Pending disputes

Existing Debt.
Analyze existing debt to determine limitations on debt payoff, including reviewing:

A loan agreement, promissory note
Deed of trust/mortgage
Assignment of leases, rents, and income
Security agreements and guarantees
Financing statements
Loan commitment letter
Review financial terms
Unpaid principal amount
Interest rate, interest accrued
Amortization rate/balloon payment
Term and payments
Tax escrow and Insurance escrow

Easements, Permits, Licenses & Utilities.
Due diligence should include review of permits, licenses, easements, and access to utilities:

Appurtenant easements
Permits for buildings and building system
Building permits and access permits
Environmental permits
Special activity permits
Business licenses
Water Sewer and storm drainage
Electricity
Natural gas
Telephone and telecommunications

Environmental Issues and Liabilities.
Violation of environmental laws can lead to significant liability for cleanup; thus must review the following:

Environmental permits and compliance
Compliance with federal, state, and local laws
Pending or threatened enforcement actions
Property’s compliance history
State, federal, or local inspections available
Potential for toxic tort litigation
Contamination from neighboring properties

Building and Zoning and Other Miscellaneous Regulations.
Confirm that the current and intended uses of the property are lawful by confirming compliance with the following:

Building and fire codes
Americans with Disabilities Act (ADA)
Review certificate of occupancy
Compliance with a master plan
Zoning compliance
Local master plan
Planned Unit Development (P.U.D.)
Annexation agreements and plat notes
Stormwater Discharge
Wildlife/Endangered Species/Wetlands
Water and sewer service

Title Review, Public Record Searches, Taxes and Assessments.
Due diligence efforts should include a search of a myriad of public records and obtain title commitments or abstracts to review:

Legal description
Compliance with survey
Tax assessor’s map
Title vesting
Requirements to convey can be met
Adverse possession, prescriptive easements
Indemnity for mechanics liens
Easements benefiting/burdening the land
Covenants, conditions, and restrictions
Liens, deeds, mortgages, UCC filings
Mechanics liens, judgement liens,
Environmental liens
Association dues
Assessments title insurance
UCC and county real property records
Litigation and bankruptcy records
Judgment lien records
Clerk and recorder of county records
Central Filing Office records
Tax assessment records
Sales tax payable on personal property

The extensive exploration of the real estate due diligence process outlined above serves a specific objective: to emphasize that when a developer, sponsor, or fund approaches investors, they should have already conducted substantial due diligence. Investors can request copies of these findings without incurring any cost or time investment. Here are some recommendations on how to proceed:

Piggy Back on Completed Due Diligence

Initiating the investment process involves the investor receiving private offering materials, which typically include a private placement memorandum (PPM), a subscription agreement (accompanied by an investor questionnaire), and, for limited partnerships, a partnership agreement or, for LLCs, an operating agreement.

These documents, along with other supporting materials, serve to disclose the offering terms and project merits. It is crucial to thoroughly review these materials and accompanying exhibits, addressing any questions. While the enthusiasm to participate in a real estate deal is understandable, it should be tempered with the requisite due diligence for prudent investment.

Upon reviewing the offering materials for one or more projects and choosing an investment, it is advisable, before executing the subscription agreement and wiring funds, to request due diligence documents from the aforementioned categories such as:

Experience of the Developer.
A critical factor influencing the success of a real estate project is the developer's experience. Before investment, the investor must scrutinize and confirm the developer's track record. Inquire about the number of past deals completed and assess whether the developer possesses expertise in the current asset class.

Conduct an internet search on the developer's name and team members to ascertain their experience, track record, and any history of litigation, bankruptcies, liens, judgments, or pending legal issues related to breach of contract or securities law violations.

Ownership, Financing, and Title Documents.
Investors must ask for title documents as proof of property acquisition from the developer. In cases where acquisition is pending, the developer should furnish the letter of intent and land acquisition contract to demonstrate ongoing efforts and outline the timeline for the purchase.

Additionally, requesting the senior loan agreement offers assurance of project legitimacy and proper funding by confirming the availability or progress of senior financing.

Third-Party Reports and Studies.
Third-party reports obtained by the Developer or its senior lender objectively assess the property's strengths and weaknesses. These reports serve multiple purposes: property valuations, appraisals, environmental site assessments, surveys, engineering studies, and feasibility studies.

Firstly, their availability confirms the legitimacy of the project. Secondly, they demonstrate the developer's capability to manage the project effectively, showcasing financial resources and experience in conducting thorough due diligence.

Lastly, the reports delve into the project's viability, a crucial consideration before investing, despite information provided in the PPM and marketing materials.

Miscellaneous Additional Due Diligence.
Investors should inquire about any additional documents in the "Scope of Developer Due Diligence" applicable to the current project. Fortunately, none of the outlined steps incur out-of-pocket costs for the investor, with time being the only investment offering substantial benefits.

A red flag should be raised if the developer refuses to provide requested due diligence materials to the investor, indicating that:

The project is still in its infancy; thus too early in the due diligence process to invest wisely;
The developer, sponsor, or fund principals may lack sufficient experience to conduct due diligence. Thus, it would be imprudent to invest or
If the developer, sponsor, or fund is not promoting a legitimate project, it may never be a good time to invest.

Remember always to be willing to walk away from an investment if necessary.

Operating Company Due Diligence

Following the November 21, 2019, changes to the EB-5 program, non-real estate financings for operating businesses seeking capital have emerged. Despite smaller raises, it's crucial to recognize that the associated risks may not be proportionately reduced. Validating the company's claims and business model is imperative.

Business due diligence involves thoroughly examining a company's business, financial position, and prospects and identifying significant associated risks. This process ensures the accuracy and adequacy of the information included in the company's Comprehensive Matter of Ho Business Plan and private placement memorandum.

The scope of business due diligence varies based on the company's nature, risk level, securities offered, and jurisdictions involved. Investors should understand this isn't a definitive guide; no one-size-fits-all rules exist. Determining the necessary diligence depends on the unique circumstances of each offering and company.

Below is a summary of critical items for an EB-5 Investor's due diligence in a private offering for an operating business. Due diligence investigations can be categorized into:

Business diligence;
Legal diligence; and
Financial and Accounting

Business Due Diligence

Business due diligence aims to acquire comprehensive insights into a company's business and financial aspects, whether for direct investment or through a regional center. This process evaluates the company's financial health, liabilities, significant contracts, executive team, potential risks, and market feasibility. It encompasses a range of considerations, including:

The market in which the business operates.
Competitors and barriers to entry.
The business’ strengths and weaknesses.
The business’ production, sales and marketing.
Research and development.
The business’ forecasts and budget.
Future growth potential and strategy.
Relationship with significant stockholders.
Use of proceeds from investment.
Whether the business is pre- or post-revenue.

Business due diligence is conducted by using some or all of the following investigations:

Conduct a comprehensive examination of the Matter of the Ho-compliant business plan.
Arrange a meeting with senior management to pose specific inquiries regarding the company's background, products, services, competitive market, research and development, sales, marketing,, and any additional questions not covered or supported in the business plan.
Seek a site tour of the business's primary facilities or retail locations.
Scrutinize the business's historical and projected financial information, ideally through financial books and records prepared by an accountant or, preferably, audited financials.
Evaluate third-party reports and studies from consultants, such as feasibility studies or risk assessments, providing valuable insights into the propositions outlined in the private placement memorandum.
Prospective investors should inquire about the availability of such studies or reports.

Legal Due Diligence

The principal areas of review covered in the legal due diligence include an analysis of the following:

Organization documents, including capital structure, charter, by-laws, and the rights the EB-5 Investors will have compared to the rights of management and other shareholders.
Intellectual property and technology ownership, licenses, and proper filings to protect the company’s due diligence.
Material agreements, meaning agreements that are material to the business and that pose material business or liability risks to the business. A review of the material contracts can raise various issues for consideration, including:
- Does a credit agreement or other debt instrument need to be amended before the offering can proceed?
- Will a significant supply contract, for example, terminate in the near future?
- Does the business have a few specific significant contracts or clients essential to its viability?
Tax issues that might impact the health of the company.
Management and employees, including compensation and benefits arrangements.
Environmental issues.
Whether the business is involved in any significant disputes or litigation.
Adequate insurance coverage.
Investigation of title to any significant property and premises.
Regulatory framework, including compliance with laws and regulations material to the business.
Issuer’s strategy, plans, and projections.
Industry outlook and any issues specific to the business industry sector.

Potential investors or their legal representatives gather business information from diverse sources. While a company's website is a valuable initial resource, investors should extensively search the internet for news and additional details about the business, its management, and its industry. Traditional sources remain relevant for information on intangible assets. For instance:

The existence of any patents and registered trademarks, including any applications that have been filed, can be found at the US Patent and Trademark Office.
Information about real property can be found at the local land registry department.

In addition, company counsel may consider, in certain instances, ordering searches for the following items about a company’s debt and insolvency:

Bankruptcy filings.
UCC filings.
Federal tax, state tax, and judgment liens by or against the business and its subsidiaries.

Corporate service companies can facilitate searches by coordinating and conducting investigations into public records at the state and local levels. These searches aim to uncover any bankruptcy filings, creditor claims, or tax liens. It is essential to order lien searches for the state of incorporation and its subsidiaries. Additional public sources of business information comprise:

Any public regulatory filings by the business.
Press releases by the business and its subsidiaries and other affiliates.
Analyst and rating agency reports on the business or its industry sector.
Other third-party media coverage of the business or its industry sector.

While a significant portion of the required information can only be accessed from the business, interviews with the management can yield valuable insights. Crucial details about a business, often poorly or undocumented, necessitate effective questioning during these interviews.

Given the value of management's time, questions should be pre-prepared and focused on information unavailable elsewhere. Additionally, a site visit may be considered, especially for businesses where direct observation is relevant, assessing the condition of facilities, equipment, and potential environmental concerns.

Financial and accounting due diligence, usually led by accountants, involves collaboration with the business's accounting, treasury, finance departments, and external auditors. This process typically entails a review of the following:

Historical and pro forma financial statements, including any material changes from the previous year’s reporting period and significant items in the financial statements (such as restatements, impairments, unusual transactions, acquisitions, derivatives and hedging, reserves, off-balance sheet arrangements, or under-recorded liabilities).
The business’ projections, budgets, and any long-term plans.
Outstanding debt securities, existing credit facilities, and any other financing arrangements, and a determination of whether the offering violates any of the business’s existing financial covenants.
Issuer’s current financial condition and conditions in its industry.
Research reports by other analysts.
Historical trends in the industry.
The business prospects. This involves a comparison of expectations against future trends based on factors such as the budget and cash flow projections.
The industry condition and competition. Who are the business’ significant customers, and what are the major contracts?
The use of proceeds. How exactly will they be used?
Capital expenditure estimates.

Red Flags in Financial Statements. Potential investors should be conscious of any “red flags” in the financial statements that may indicate that the financial statements should not be relied on. Some examples of red flags include:

Changes in internal credit risk assessments.
Goodwill/asset impairments.
Boosting income with unusual or one-time gains.
Shifting current expenses to a later period or future revenues to the current period.
A pattern of indebtedness to the business’ executives by underwriting syndicate members.
Off-balance sheet entities.
Many backlog orders from customers.
Management claims that information key to a material transaction is unavailable.
Backdating of a sales contract to permit timely revenue recognition.
A financial press article questioning a business’ aggressive accounting.
The booking of significant consignment sales at the end of a quarter.
Guaranteed sales practices allow customers to exchange or return non-defective merchandise.
Complex organizational structures without any apparent business purpose.
Lagging systems and control procedures during a period of rapid growth.
Significant accounts or operations in tax haven jurisdictions.

Again, refusing to supply requested due diligence materials to an investor should be a red flag not to proceed.

Immigration Risk Due Diligence For EB-5 Projects

As immigration objectives drive investors, potential EB-5 investors must assess the likelihood of the investment achieving their immigration goals. Consulting with immigration counsel is advisable for this analysis, which should typically cover the following:

Targeted Employment Area

To ensure investors contribute the correct amount, it's essential to determine if the business is located in a Targeted Employment Area (TEA). Investments in a TEA warrant a minimum of $800,000, while those outside require $1,050,000.

The business must furnish all EB-5 investors with a letter from an EB-5 expert confirming the business's location in a TEA or adjacency to one. This letter should also indicate that the weighted average unemployment rates in the TEA and adjacent census tracts exceed 150% of the national average.

Alternatively, if the business allocates the EB-5 investor's capital to a rural area, the lower $800,000 minimum investment applies. Investing $800,000 without evidence of funds being deployed in a TEA is not advisable for EB-5 investors.

Job Creation

EB-5 investors must ensure their capital contributes to creating ten jobs within three to five years. Conducting thorough business due diligence, as previously described, is essential to satisfy investors that the investment is reasonably likely to generate the required job count.

Investors are encouraged to choose projects anticipating more than the mandated 10 jobs per investor, and projects claiming fewer than 12 jobs per investor should be avoided.

A qualified EB-5 economist must provide a job creation analysis for projects involving regional centers. This analysis should undergo review by experienced securities or immigration attorneys in EB-5, and investors should verify the assumptions and calculations presented.

Investments in operating businesses and smaller ventures without a job creation analysis require a clear and reasonable strategy, verified through diligent business due diligence.

Regional Center Due Diligence

When an EB-5 investment is made through a USCIS-approved regional center, the investor's outcome depends on the regional center and the developer. Investors must check the USCIS website's approved regional center page to verify the center's designation.

Review the regional center's website for information on its experience and background. Pay attention to any red flags related to previous deals and regulatory inquiries.

“At-Risk” Requirement

EB-5 program regulations stipulate that an EB-5 investor's capital must remain "at risk" during the conditional residency period, which spans approximately two years. During their initial due diligence, investors aim to ensure the stability and long-term viability of the project in which their capital is invested.

Both real estate and operating businesses typically have exit strategies in place, envisioning the eventual liquidation of the investor's investment. If the conditional residency period has not concluded, investors need assurance of a redeployment solution or strategy, enabling their capital to be invested in another "at-risk" project.

However, not all redeployment solutions or strategies are created equally. In assessing a business’ redeployment strategy, investors should consider:

Will their investment be redeployed into a vehicle that will result in a favorable immigration result?
Will their investment be redeployed into a project comparable to the business?
Will the investment be redeployed into a project controlled by the business or an unfamiliar management team?
Will their investment be redeployed into a risky project?
What input, if any, will investors have in reinvestment, such as an opt-out or approval right?
Can the investors consent to the entity that will receive their redeployed funds? (Investors should understand that a right to consent is not typically provided.)
Will they be able to achieve a refund of their capital shortly after their conditional residency ends, or is their capital illiquid and locked into the redeployed project?
What is the anticipated liquidity date of the redeployed project?
Does the redeployed investment carry the same return or profit share, or will the investors enjoy a larger return in exchange for their capital being redeployed?
Do they have enough information to evaluate a business’ redeployment strategy?

The foregoing factors apply equally in the regional center context and regarding direct investments, the performance of which would reduce immigration risk substantially.

Due diligence requires time and attention to detail, which will save investors from costly mistakes. Comprehensive due diligence before investing is a risk management strategy that all severe investors should undertake. While nothing is entirely certain in investing, due diligence can provide much more assurance. The practice of due diligence before committing to an investment mostly derives from common sense and, in some cases, a legal obligation. Nevertheless, studies indicate a positive correlation between the extent of the investor’s due diligence and the investment’s subsequent performance. The correlation appears to span different types of investment scenarios, and it strongly supports the case for due diligence.

The main EB-5 investors' investment concerns

EB-5 investors have two central concerns.

Is whether investing in an EB-5 project will allow them to become permanent residents of the United States.
It is whether a project will provide a return on the investment.

The EB-5 program mandates two visa petitions.

The first, the I-526 petition, is filed by the investor after the initial investment, demonstrating the source of funds and the project's capacity to create the required jobs.
After a two-year residence period, the investor submits the I-829 petition to remove conditions, providing evidence that the EB-5 project fulfills the program requirements from the I-526 petition.

The process spans approximately six years, but Chinese investors may face extended waits due to visa retrogression concerns.

Beyond assessing a project's financial sustainability during the visa application period, investors must ascertain the new commercial enterprise's ability to repay the substantial investment amount—$1,800,000 or $900,000 if in a targeted employment area.

Given the significant sum, investors are understandably cautious about entering a loan agreement without assurance of repayment.

Due diligence in confirming the viability of a project is thus crucial within the EB-5 context.

Due Diligence Questions, Investors list.

When engaging in due diligence, an investor needs to consider various factors. The initial step involves assessing the regional center, its track record with USCIS, and its capability to oversee a project effectively, ensuring a return on investment. Key questions for investors to scrutinize when evaluating a regional center include:

1. Has the regional center previously facilitated successful visa petitions?

A regional center should inform investors about the number of prior investors who successfully filed visa petitions. In cases where permanent residence is denied to any previous investors, the center should transparently present valid reasons for these denials and demonstrate proactive measures taken to prevent similar issues in future petitions. Investors need to note that denials can sometimes occur due to reasons unrelated to the regional center, such as issues with the source of investment funds.

2. How long has the regional center been operational?

Investors should investigate the regional center's USCIS designation date and project management history. A regional center with prior experience navigating the unique challenges in the EB-5 context is better equipped to address USCIS adjudicators' specific concerns and handle emerging issues. Given USCIS's recent scrutiny of regional centers falling short of EB-5 program goals, a demonstrated track record enhances the likelihood that the regional center will remain operational during an investor's conditional residence.

3. Has the project been approved by USCIS?

The initial visa petition for an EB-5 project involves an added layer of USCIS scrutiny focused on the project's business plan and economic impact report. This extended adjudication process makes it advantageous for investors to join a project after this initial USCIS review. Investors can verify the project's status with the regional center. Additionally, investors should ensure the project has obtained all necessary licenses and permits to prevent potential delays after committing funds.

4. Can the project support the required number of jobs?

To secure a visa under the EB-5 program, each investor must substantiate that their investment has created 10 full-time jobs within the designated employment area. In projects involving multiple investors under a regional center, the precise timing of job creation is crucial to ensure each investor receives the correct job credit. Investors should meticulously examine project documentation to confirm that developers have incorporated a sufficient buffer regarding the number of jobs generated. Projects should not target merely 10 jobs per investor, as unforeseen contingencies may impact the job count, leaving investors short.

5. Does the regional center have a redeployment plan for the investment funds?

Regional centers must consider the potential for early loan repayment as the investment amount must stay at risk during the conditional residence period. One approach is to restrict borrowers from repaying the loan before the I-829 petition is adjudicated. Alternatively, the regional center can promptly reinvest any repaid investment funds into another project, ensuring they remain at risk for the required duration. Investors should seek guidance from a financial advisor to determine the best strategy for their needs.

Consulting with EB-5 Practitioners

In due diligence, investors benefit from collaborating with professionals well-versed in the EB-5 program's requirements.

A financial advisor aids in safeguarding against fraud, providing financial guidance for favorable loan agreements. Likewise, an immigration attorney represents the investor working with the regional center, gathering necessary documentation for I-526 and I-829 petitions, including project offerings, financial statements, source of funds records, and proof of job creation.

Adequate due diligence on regional centers and projects empowers investors to make informed decisions, enhancing the likelihood of a successful visa petition.

Given the substantial stakes involving the investment amount and the investor's permanent residence, thorough due diligence is crucial in guiding investors through the planning stages, instilling confidence in their EB-5 project investments.

Utilizing Government Resources

In the complex realm of EB-5 investments, depending solely on project sponsors' materials falls short. An informed decision requires integrating government sources into your due diligence.

These resources provide independent, official data and perspectives, offering insights into a project's viability and potential risks.

Here are some key government sources to consider as you analyze potential EB-5 projects:

United States Citizenship and Immigration Services (USCIS)

EB-5 Investor Program Government Website
https://www.uscis.gov/working-in-the-united-states/permanent-workers/eb-5-immigrant-investor-program
This page provides comprehensive information about the EB-5 program, including regulations, case processing times, and statistics.
EB5 Cases History Tool
https://egov.uscis.gov/processing-times/
This tool allows you to track the processing history of individual EB-5 petitions, indicating potential delays or issues with specific projects.
Public Inquiries
Submit questions directly to USCIS officers through their online form or public engagement events.

Securities and Exchange Commission (SEC)

EDGAR Database
https://www.sec.gov/edgar/search/ Access filings from publicly traded companies and investment funds involved in EB-5 projects. Look for financial statements, risk disclosures, and any litigation history.
Investor Bulletin Archive
https://www.sec.gov/investor/alerts Review past investor alerts and notices related to EB-5 fraud or misconduct to identify potential red flags.

Government Accountability Office (GAO)

Reports and publications
Investigate GAO reports on the EB-5 program, focusing on topics like program integrity, economic impact, oversight mechanisms, and EB-5 fund administration.

State and Local Government Sources

Project permitting documents
Obtain building permits, zoning regulations, and environmental impact reports for project locations.
Tax records
Depending on the state, you may be able to access property tax records or other financial information about the project entity.

Industry Associations and Publications

EB-5 Investment Magazine
https://www.eb5investors.com/magazine/
This publication offers news, analysis, and data on the EB-5 industry.
American Immigration Lawyers Association (AILA)
https://www.aila.org/
AILA provides resources and guidance on immigration law, including EB-5 program developments.

Remember:

Utilize a combination of sources for a well-rounded perspective.
Don't hesitate to contact government agencies or industry experts for clarification or guidance.
Consult with an experienced EB-5 attorney to interpret the information and assess its implications for your investment decision.

By engaging with government sources and other reliable resources, you can conduct a thorough and insightful due diligence process, minimizing risk and maximizing your chances of choosing the right EB-5 project for your investment goals.

Additional Resources:

U.S. Citizenship and Immigration Services (USCIS): https://www.uscis.gov/
EB-5 Investment Coalition: http://eb5coalition.org/
Securities and Exchange Commission (SEC): https://www.sec.gov/
Regional Economics Models, Inc. (REMI): https://www.remi.com/
IMPLAN: https://implan.com/
Stanford Technology Ventures Program: https://stvp.stanford.edu/
American Institute of Architects (AIA): https://www.aia.org/
American Society of Civil Engineers (ASCE): https://www.asce.org/
National Association of Real Estate Investment Trusts (NAREIT): https://nareit.com/
Federal Deposit Insurance Corporation (FDIC): https://www.fdic.gov/
Office of the Comptroller of the Currency (OCC): https://www.occ.gov/