Magazine

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 Sunday, February 18, 2024
#EB-5 due diligence process #eb 5 due diligence checklist EB-5 due diligence process



John Burson     Subscribe
Untitled

CONTENTS

What is Due Diligence?

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. EB5 Due Diligence 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 a crucial step 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 for Investors Checklist

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. Economic Analysis for EB-5 Regional Center Projects 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. EB5 Due Diligence Market Feasibility Study Checklist

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 in relation to 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. EB5 Compliance and Due Diligence Background 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 financial health of the project 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. Due Diligence and Risk Analysis EB-5 Firms 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. EB5 Due Diligence Investor Fund 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 provide assurance about 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. EB-5 Fund Administrator Oversight Due Diligence 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. Due Diligence 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 of EB-5 Due Diligence Refund Policy Checklist

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

Trigger Scenarios for Refund

  • I-526 Petition Denial
    Analyze the refund policy in case your I-526 petition for immigration benefits is denied by USCIS. 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 fails, jeopardizes both 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. By conducting pre-investment research, EB-5 Project Due Diligence investors can significantly mitigate investment risks and gain valuable insights into the investment opportunity and its sponsors. 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

Before engaging in any arm's length real estate investment, due diligence is an essential step, 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 physical asset, financial performance, and future prospects for the property for Due Diligence of EB-5 Projects.

Developer Due Diligence

Due diligence by seasoned real estate developers and sponsors typically involves two phases the “pre-letter of intent” due diligence and the “post-letter of intent” due diligence. The pre-letter of intent phase includes more high-level inquiries, which means the buyer relies on public information 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 plus expending greater investments of time to complete a deeper analysis of the property focusing on its history, its present condition, and its 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 encompasses a comprehensive examination of various aspects, including the property's title, geography, topography, construction or rehabilitation costs, and feasibility for the intended use (residential, hospitality, commercial, etc.).

Additionally, environmental studies, tax bills, seller's financials, and zoning certificates are scrutinized. In the case of improved properties, due diligence extends to 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 key 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:

  • 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 to review:

  • 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:

  • 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 on their part. 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 that arise. 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. Prior to 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 offer an impartial assessment of the property's strengths and weaknesses. These reports, such as property valuations, appraisals, environmental site assessments, surveys, engineering studies, and feasibility studies, serve multiple purposes.

Firstly, their availability confirms the legitimacy of the project. Secondly, they demonstrate the developer's capability to manage the project effectively, showcasing both 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 mentioned 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 proper due diligence thus it would be imprudent to invest; or
  • The developer, sponsor, or fund is not promoting a legitimate project thus maybe it will never be a good time to invest.

Remember to always 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 a thorough examination of a company's business, financial position, and prospects, identifying major 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 factors like the company's nature, risk level, securities offered, and jurisdictions involved. Investors should understand that this isn't a definitive guide; there are no one-size-fits-all rules. Determining the necessary diligence depends on the unique circumstances of each offering and company.

Outlined below is a summary of key 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 major 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.

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

  • Organization documents, including capital structure, charter, and by-laws, and the rights the EB-5 Investors will have in comparison 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 major supply contract, for example, terminate in the near future?
    • Does the business have a few specific major contracts or clients that are 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 major property and premises.
  • Regulatory framework, including compliance with laws and regulations material to the business’ 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 pertaining to 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 itself, 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, and finance departments, as well as 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’ major 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 shifting future revenues to the current period.
  • A pattern of indebtedness to the business’ executives by members of the underwriting syndicate.
  • 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, the refusal 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 investors are driven by immigration objectives, 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 both 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 that their capital contributes to creating ten jobs within a three- to five-year period. Conducting thorough business due diligence, as previously described, is essential to satisfy investors that the investment has a reasonable likelihood of generating 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.

For projects involving regional centers, a qualified EB-5 economist must provide a job creation analysis. 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 job creation 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 is dependent on both the regional center and the developer. Investors must check the USCIS website's approved regional center page to verify the center's designation.

Additionally, review the regional center's website for information on its experience and background. Pay careful 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. Investors, during their initial due diligence, 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. Investors need assurance of a redeployment solution or strategy, enabling their capital to be invested in another "at-risk" project if the conditional residency period has not concluded.

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 by 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 right 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 should be undertaken by all serious investors.  While nothing is entirely certain in investing, due diligence can provide a much higher level of assurance.  The practice of due diligence before committing to an investment mostly derives from common sense and, in some cases, a legal obligation. Nevertheless, there are studies indicating 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 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. In the regional center model, investors face a dual due diligence process — 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.

Investment/Project Concerns for EB-5 Investors

EB-5 investors have two central concerns. The first is whether investing in an EB-5 project will allow them to become permanent residents of the United States. The second 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 making 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 for Investors

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 ensuring a return on the investment effectively. 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 furnish investors with information on 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 its history of managing projects. 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 post this initial USCIS review. Investors can verify the project's status with the regional center. Additionally, investors should ensure that 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 led to the creation of 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 actual job count, leaving investors short.

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

As the investment amount must stay at risk during the conditional residence period, regional centers must consider the potential for early loan repayment. 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 strategy that aligns best with 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 in 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.

Effective 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 both 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.

EB5 Due Diligence: Selecting the Right Project with Government Sources

In the complex realm of EB-5 investments, depending solely on project sponsors' materials falls short. A truly 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)

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, and oversight mechanisms.

 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 be afraid 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 actively 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:

 
 
 

Subscribe to Paperfree Magazine

Free Paperfree Concierge Service


Paperfree Concierge

Get dedicated service, from finding the right information to complex investment challenges.


EB-5 due diligence process


JOIN FREE TODAY


Real estate investment strategies



Add Content to Magazine