by Rob Donnelly, Managing Partner, EB5 & Co
The elephant in the EB-5 living room is the fact that the vast majority of Regional Investment Centers are “affiliated” with their underlying projects and entities creating an environment fraught with conflicts of interest, diluted investor representation, and misalignment between the Regional Center and their EB-5 Immigrant Investors. The sum of which equals a challenged, or in some cases broken, fiduciary relationship.
Let’s first start by understanding what we mean by the term affiliated. EB-5 projects are based on a specific framework provided by USCIS, which includes two business entities: (i) the New Commercial Enterprise (NCE) which serves as the investment entity or fund in which EB-5 investors make their cash investment, and (ii) the Job Creating Entity (JCE) which is the actual project entity that will be creating jobs through a combination of construction and permanent jobs as described in the project’s economic report.
EB-5 investors are legally and financially connected to the NCE, which is the entity where their actual investment is made. As such the NCE will accept the EB-5 investors cash investment, make distributions, and return capital to the EB-5 investors at the end of their immigration process. The NCE is the guardian and fiduciary for investors.
The most common structure in the EB-5 industry is a subordinated loan from the NCE to the JCE that owns the project and manages the work product and assets. Think of the JCE as the actual operating business that is developing and managing the real estate project. The JCE will have its own set of equity investors, a senior loan from a bank, a management company, operating partners, and other stakeholders. The NCE, therefore, is a lender that generally fits in between the senior bank and the equity investors in the project.
Returning to the term affiliated, while Regional Centers must be the creators and managers of the NCE since that is the direct connection to the EB-5 program and investors, they have the option to create, manage, or be financially connected to the JCE as well. This is, in fact, how the vast majority of EB-5 projects are structured in the EB-5 industry today.
Returning to the term affiliated, while Regional Centers must be the creators and managers of the NCE since that is the direct connection to the EB-5 program and investors, they have the option to create, manage, or be financially connected to the JCE as well. This is, in fact, how the vast majority of EB-5 projects are structured in the EB-5 industry today.
When a Regional Investment Center has a legal, financial, or ownership interest in both the NCE and JCE, it is deemed to be affiliated and must be disclosed to USCIS and investors.
One of the reasons this structure is prevalent is the fact that the majority of Regional Investment Centers were born of the real estate developer community and not of financial services or banking. Creating real estate projects by organizing and managing the necessary components, including the capital stack (the debt and equity financing required), is the traditional playbook for developers.
