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Supply and Demand Effects on
a Saturated Marketplace
Unless the government increases the overall EB-5 quota, the
market for EB-5 projects is likely close to being saturated at its
current level. This means that stakeholders in the EB-5 value
chain will face increasing competitive pressure while facing a
more limited investor pool. As a result of market saturation,
we might well see the beginning of more competitive EB-5
offerings and more competitive behavior among Chinese
agents, including possible fee reductions and more aggressive
selling behavior among smaller agents who are still establishing
themselves in the marketplace, or, on the other hand, increased
fees among agents who have consistent track records in being
able to bring investors to deals.
EB-5 offerings will also have to be increasingly supported
with experienced business/operational teams who have proven
track records, and we may also start to see better deal terms
offered to investors overall. Over the medium term, we anticipate that the quality of EB-5 offerings will increase as supply
of available investments meets or exceeds market demand and
investors start to cherry-pick the best deals.
More Creativity in Escrow
Over the last two years we have seen some significant changes
to how escrow is being employed in the EB-5 process. Some
of these changes include releasing funds from escrow upon the
first I-526 approval, or employing a hold-back methodology,
whereby a portion of investor funds are released upon filing
of the investor’s I-526 petition and a portion is held back to
allow the company to pay back any investors whose applications
are not approved, instead of escrowing the funds until I-526
approval. In some cases, albeit rarely, we have seen deals with
no escrow at all being sold successfully in the marketplace. The
main driver behind implementing more creative uses of escrow
has been increasingly long USCIS processing times combined
with the need for projects to get capital into their projects
without having to wait over a year for I-526 approvals.
With retrogression taking effect, there may be a need for
more creative approaches to escrow as, on one hand, investors
may be seeking delayed release of their funds to the project,
while, on the other hand, EB-5 project owners continue to face
the pressures of a more immediate need for capital.
A Longer Window for Job Creation
Chinese investors who are only now submitting their I-526
petitions will not face delays in processing, but they will face
a longer wait time before being issued their conditional green
cards. As a result, the clock will not start ticking on the job
creation window until the investor becomes a conditional
resident. To illustrate this point, an investor who is not affected
by retrogression and who submits their I-526 today might get
approved in 14 months, with current processing times, and
would therefore only need to demonstrate that jobs have been
created (or a ‘reasonable expectation’ of job creation) when
they get to the I-829 stage (this time period is currently counted as 2.5 years from the I-526 approval date). By contrast,
if an investor who is affected by retrogression has to wait an
additional year - for example, before they get their conditional
green cards - this will give them (and therefore the project) an
additional year to prove job creation, effectively eliminating the
2.5 year rule as a result.
There are downsides to this longer job creation window. First
is the fact that a business may need to operate successfully for a
longer period of time in order to show that the necessary jobs
are still in existence at the time of the I-829 filing. Second is
that the longer window means a longer time period before
EB-5 investors can ultimately exit from a given deal, which may
negatively impact a project’s refinancing plans.
While a free and uncapped market would be the best situation
for the EB-5 industry, retrogression is reality. Given this reality,
stakeholders in the EB-5 industry should be aware of how some
of the by-products of retrogression can impact them and the
industry in both positive and negative ways.
★
Phil Cohen is the president of Strategic Element,
a company that focuses on developing EB-5 business plans, economic impact reports, feasibility
studies, and custom ‘direct’ EB-5 projects.Cohen
has been active in the EB-5 industry since 2010
and has participated in the development of more
than 90 EB-5 regional center and direct projects.
Cohen is also the lead author of The EB-5 Definitive Guide.
Phil Cohen
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EB5 INVESTORS MAGAZINE