such as limited partnerships and non-traded real estate investment trust (“REITS”). While these markets can successfully
provide liquidity for some investors, they are not familiar with
the complex ins-and-outs of EB-5 investments, and have no
experience dealing with the cultural issues associated with
working with foreign investors. Even so, we certainly can learn
from these markets by taking the best practices they have taken
years to establish, and using those practices to fold in the more
complex requirements of the EB-5 immigration process.
To say that the EB-5 process is complex is an understatement.
The process is also often fraught with seemingly competing
mandates. On the one hand, the United States Citizenship
and Immigration Services requires foreign investor’s money to
be at risk with no guarantee of returns on investment. On the
other hand, however, the SEC and FINRA are looking at EB-5
offerings and scrutinizing them for compliance with traditional
securities issues such as Know Your Customer, anti-money laundering, suitability, and best execution and policies and procedures
that are in place to protect investors. So far, the consensus is that
these mandates can co-exist while an EB-5 investor is moving
through the immigration process. But what happens after an
investor receives an I-829 approval, which effectively satisfies
the immigration aspect of their investment? Or what happens
when an initial five to six year timeline extends into seven or
ten years because of changes in the real estate market? After an
investor receives an I-829 approval, an investment made to satisfy
their needs from an immigration perspective, may no longer be
consistent with their investment needs.
The question of aligning an investor’s needs with access to
liquidity is a common and often repeated issue in the various
markets mentioned above. A common misconception is that
sponsor’s and investor’s needs will not change over the life span of
the EB-5 program. That is scarcely the case with any investment,
especially one that is illiquid. EB-5 investors may have different
needs after receiving their I-829 approval while, at the same time,
project sponsors might have changing needs based on shifting
timelines driven by market conditions, like construction delays or
for EB-5 specific issues like retrogression.
Other equity markets have experienced these types of delays.
For example, changes in legislation severely hurt limited
partnerships in the early eighties essentially removing the tax
incentive that enticed investors in the first place and leaving them
with an investment that no longer matched their investment
needs. The crash of 2009 added several years to the life span of
many REITs because the underlying assets were devalued to such
a point that they could no longer be sold to meet liquidity needs.
In The Stanger Report, A Guide to DPP, NT-REIT & NT-BDC
Investing, a journal published by RA Stanger & Co., Inc. that
monitors trading activity for the illiquid alternatives markets,
there are limited partnerships that are still trading 20 years into
their life cycle. Some non-traded REITs are in their 10th year for
offerings that were sold as five to six year holds. Likewise there
are EB-5 projects that are into their second one-year optional
extension with some equity based projects well past their original
liquidity projections. There are countless reasons that can
contribute to this delay, but the biggest reason is that all of these
investment mechanisms are beholden to the fluctuations of the
real estate market. The expectation is that as the EB-5 market
matures it will be no different, since the primary mechanism
used to satisfy the requirement of an at-risk investment that also
creates jobs is real estate.
A Solution for EB-5 Investors
That being said, most investors in limited partnerships, REITs,
and other illiquid real estate investments are not seeking liquidity
because they are dissatisfied with the in vestment. They are instead
trying to address life events that have made waiting no longer a
viable or best option. The majority of these life events fall into
what are called the 3Ds: death, disability and divorce. A fourth,
disaster, is often added for good measure. Statistics provided by
Central Trade & Transfer, LLC , an online liquidity provider for
the alternative investments space, suggest that over 90 percent
of requests for liquidity fall into one of these four categories.
Medical expenses, college funds for children or grandchildren,
and foreclosure prevention are also often listed as reasons for
selling. Anecdotal evidence suggests that at any given time, six
percent of investors in illiquid investments need liquidity for
reasons similar to those listed above. It stands to reason that
post-I-829 approval EB-5 investors would experience the same
needs at some point, too.
One of the first investors to try and sell their EB-5 qualifying
investment by accessing liquidity options that were normally
reserved for the REIT secondary market indicated that they were
“ecstatic” at having received their permanent green cards but were
now in a position that they could no longer wait for the project
to go full-cycle. The brokered transaction between them and a
qualified buyer allowed them to receive cash for their investment
and respond to life events that were dictating a change in their
plans, part of which was using the proceeds to buy a house and
thus bring closure to their immigration journey. This family’s
experience is a prime example of how an EB-5 investment after
doing what it was intended to do, secure green cards, became a
burden that became heaver the longer the liquidity expectations
went unmet.
A Secondary Market Signals the Maturation of
the Industry
As life events put pressure on investors, investors put pressure
on the sponsors. When sponsors are unable to provide liquidity
through their own channels, secondary liquidity options provide
an important pressure-release valve. Although not all investors
who need liquidity are“needy”, the ones who are can be a drain
on sponsor resources and, if not taken care of, can affect other
investors. Allowing a needy investor to gracefully exit restores
balance and harmony to the long-term goals of the project and
keeps the frustrations of one investor from bleeding over to
others. Allowing an EB-5 investor to exit the project on their
own terms can provide similar benefits to EB-5 project sponsors.
WWW.EB5INVESTORS.COM
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