With no strong legislative muscle seeking to lift the weight of EB-5 reform in Washington, the expectation is that the EB-5 program will be extended into the next year. The EB-5 program, which attracts foreign capital (mainly from China) to real estate development deals in the US, was created in 1990 for the purpose of job creation and foreign investment to stimulate the economy. Foreign investors can receive a conditional green card, leading the way to US citizenship by doing two things:
In 2008, during the financial crisis, the EB-5 program became attractive to real estate developers that were otherwise finding it difficult to obtain construction financing. It now is a popular vehicle driving a lot of high-profile development projects and is especially popular in the hospitality space—hotels create lots of jobs, and hotel investors find the alternative source of capital attractive since many lenders view hotels as high risk.
The program has been controversial amongst lawmakers for years and is under renewed scrutiny and calls for reform due to the continuing cases of fraud and abuse and concerns regarding national security. The stories of fraud within EB-5 are sweeping, and a quick Google search will provide plenty to read about. For example, recent headlines in the San Francisco Business Times regarding EB-5 projects unraveling in Oakland after investor money was used in a shell game to support personal ventures. Eventually, it is expected that reform will address investment amounts, definitions, and procedures for determining TEAs and also call for more accountability to prevent abuse.
Many Regional Centers, developers, and investors are realizing that some checks and safeguards throughout the development process are necessary to control the progress, quality, and completion of their projects. Investors are mainly concerned with obtaining citizenship, and much less concerned about an actual return on their investment so their top priority is to ensure the project gets completed and that the job creation required for citizenship is realized. Thus for EB-5 deals, a solid construction risk management program is a must.
What does such a risk management program look like? It should include the following components:
Engaging an independent 3rd-party consultant with boots on the ground is the key component to guaranteeing the progress, quality, and completion of EB-5 projects and preventing fraud that so often is the issue on EB-5 deals.
Partner has the resources to provide construction risk management services and more. We can work directly for Regional Centers representing investors, or directly for developers that want to show investors that they have the appropriate risk management and due diligence pieces in place to ensure constructability and completion of the project. Partner can also customize scopes of work to satisfy particular investor demands on individual projects.