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A disgruntled investor is oftentimes not the biggest challenge
facing an illiquid real estate market. The amount of money
raised in the EB-5 market over the last couple years has brought
it to the attention of what are known as mini tender firms,
colloquially referred to as “sharks” or “vultures.” These firms
prey on individual investors by directly soliciting their shares,
through mini tender offers, tender offers that are small enough
that they do not need to be registered with the SEC, oftentimes
at pennies on the dollar. Mini tender firms may also use
language and arguments that undermine the sponsor such as
suggesting that the project is under-performing or that project
sponsors may arbitrarily extend the life of the project. Sponsors,
in turn, spend valuable time, energy and effort responding to
unsolicited tender offers – resources that could be better spent
in other areas. For 2014, it is estimated that some non-traded
REIT investors lost an additional 50 percent of their equity by
accepting a mini-tender offers instead of selling at fair market
prices established through the secondary liquidity market.
Although there is no indication that there have been tender
offers directly soliciting EB-5 projects yet, it is only a matter of
time, as both the amount of money being raised in the market
and the time to liquidity increase.
confronted with unexpected life events get the liquidity they need.
The best liquidity markets are the ones that are allowed to
arrive at “fair market” pricing without the undue influence of any
of the individual stakeholders, while at the same time working
closely with them. This independence allows all the parties in an
EB-5 transaction: agents, lawyers, regional centers, project sponsors, investors and buyers to participate in the market without
creating conflicts of interest that could damage reputations.
One of the biggest conflicts is pricing, and how it was reached.
Transactions that cannot clearly explain how they arrived at
pricing will not withstand scrutiny going forward. The more
investors list their investments the more buyers will participate
and the more buyers participate, the better the pricing. But
getting investors and buyers to buy into the market requires all
the stakeholders to participate.
Conclusion
In order for an EB-5 secondary market to succeed and arrive
at “fair market” pricing, it needs the active participation of all
stakeholders. It needs to be a place where savvy EB-5 investors
can list their investments for sale on an open and transparent
A well-established liquidity market allows sponsors to sell
a more realistic timeline while at the same time letting investors
confronted with unexpected life events get the liquidity they need.
Challenges for the EB-5 Secondary Market
Liquidity can be a touchy subject, especially for regional centers and
project sponsors, but it does not have to be. As established above,
an effective liquidity market does not only benefit investors. It is a
substantial benefit to sponsors, too. And it is not just equity-based
EB-5 sponsors who may need access to a secondary liquidity
market. In the same discussion about liquidity with Mr. Hirson
mentioned above he suggested that even loan-based regional centers
could find it difficult to provide liquidity if the job creating entities
(“JCEs”) ran into issues that delayed repayment of loans to the new
commercial enterprises and that there were several JCEs who have
exercised their options to add additional years to their loans and,
subsequently, liquidity to their investors. Recently, there have been
several success stories of loan-based projects, like CMB, returning
money to investors, but this still remains a small portion of the total
money raised to date.
Because sponsors need to continue raising money they must
walk a fine line between servicing their current investors while
at the same time funding subsequent offerings. The fear being
that low secondary market prices may deter future investors from
investing in the sponsor’s future projects. In the EB-5 space this
is even more critical because investors tend to invest in regional
centers that have a reputation for not only successfully guiding
investors through the immigration process, but also for returning
money. A well-established liquidity market allows sponsors to sell
a more realistic timeline while at the same time letting investors
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platform, where they can see pricing histories and they can monitor the progress of their sale. It needs to be a place where buyers
can compete for investments knowing that they are actually
competing for investments, and thus are willing to raise their
prices. It needs to be a place that sponsors can claim, at arms
length, that they have no influence over pricing, while at the
same time asserting that the pricing does not reflect the reality of
how their projects are doing. It needs to be a place where agents
and immigration lawyers can show investors that are just starting
the process that after receiving their I-829 approval there are
viable alternatives when life events get in the way of waiting for
their EB-5 projects to go full-cycle. It needs to be a market
that becomes and integral part of the EB-5 success story, and
when it does it will be an open and transparent “fair market”
liquidity option where all parties benefit.
★
Jon Baker
EB5 INVESTORS MAGAZINE
Jon Baker is COO and founding partner of Central
Trade & Transfer,* a leading online trading platform
for illiquid real estate investments, including EB-5
projects. His interests lie at the nexus of illiquid
markets and technology and how access to information, transparency and efficiency improve liquidity
options for investors. Baker has pushed the limited
partnership and non-traded real estate investment
trust (REIT) secondary market to new industry standards: in 1997 after developing the industry’s first
online trading platform, and again in 2009 by introducing Central Trade & Transfer’s current trading
platform. *Central Trade & Transfer is a branch office
of Orchard Securities, LLC member FINRA/SiPC