of having an institutional lender involved in the
process is they will likely want to have oversight
over the funds as soon as they are released to the
NCE. They may even require that the funds
are transferred to an account held by a title
company or at their financial institution until
the draws are processed and funds are ready to be
leant to the JCE.
local news articles for information about the project. If
your client is ready to move forward with a project, it
may be worth a site visit. Steer clear of groups that deter
stakeholders from site visits. With today’s technology,
many groups also provide a live web-cam of the project
as it unfolds. This can be a great source of real time data
without the travel expense.
Completion Guarantee
Disbursement Agreement
Most EB-5 transactions are real estate construction based.
Multi-party construction projects have a disbursing agreement in
place at closing that documents how each party in the deal must
verify, approve, and authorize expenditures before disbursement.
This agreement should indicate how loan proceeds, EB-5 funds,
and investor equity are disbursed throughout the construction
period. Typically, the lender, owner, developer, NCE, general
contractor and title company are all parties to the agreement.
Most third party lenders require a personal completion
guarantee from the developer, ownership group, or general
contractor that the project will be completed regardless of final
costs. This completion guarantee gives comfort that the project
will be completed and the JCE will open for business creating
(hopefully) all of the jobs needed to meet the 10 job per
investor requirement.
ADVISORS
Accounting
Title Company
The title company ensures there are no liens, claims, or ownership disputes on the property other than the liens placed by the
first mortgage lender. In order to monitor this, the title company
requires all expenditures to be funded through a title company.
This third party procedure carefully documents expenditures
and ensures that no funds are misappropriated by the owner,
developer, sub-contractor and general contractor during this stage
of the process. The title company receives a lien waiver from each
contractor, confirming payment for work performed and waiving
the right to put a lien on the property.
Construction Review
An institutional lender will often also require a third party
review architect to verify the monthly construction draws from
commencement through completion. The review architect will
audit charges for non-allowable costs and prevent failure to
deliver items within the contracted scope. If the review detects
possible sources of fraud, the institutional lender should not fund
until they have resolved all material issues.
Government Tax Credits or Grants
If the federal, state or local government has funds in the
structure, they are likely conducting an audit to verify expenditures. In addition, most institutional investors in tax credits
require audited cost certificates or a third party audit verifying
that project funds were spent on qualified project expenditures.
In a tax credit investment, the developer typically personally
guarantees that the funds were spent on the project, creating
tangible accountability.
Visual Confirmation
Visual confirmation is the easiest detection measure. Research
Identify which third party accounting firm the fund manager
has hired and the main account manager. A third party review of
the financial performance of the fund manager will help to reveal
mismanagement and internal controls deficiencies.
Attorney
Avoid inherent conflicts of interest by always using a third
party attorney that is not related to the manager, regional center,
or the project, for all due diligence and related legal services.
Select a Regional Center Fund Manager who uses an
experienced attorney for their I-829 template. If the NCE
Fund Manager is using the cheapest option or hasn’t given any
thought to counsel, they likely have given limited consideration
to immigration compliance. Due diligence should include a close
examination of the attorney’s track record, since a good attorney
will not have knowingly taken on a bad project.
Final Thought
While you may think you have considered all possible factors
which would confirm a solid investment make sure you revisit all
of the due diligence. The importance of thoughtful review cannot
be overstated.
★
Robert Kraft is Chairman, President, and CEO of
FirstPathway Partners, a firm managing investment funds within the EB-5 Regional Center
Program. Kraft is an active member of the IIUSA
President’s Advisory Council and serves on
numerous Boards, including IIUSA, Metropolitan
Milwaukee Association of Commerce World Trade
Association, and Co-Chair of the China Council.
Kraft has been involved in the EB-5 industry since
2006. He has been featured on television, radio,
and in newspapers internationally.
Robert Kraft
WWW.EB5INVESTORS.COM
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