Wednesday, September 8, 2010

Imagine What a BIG EB-5 Regional Center Would Look Like...



My
favorite dumb EB-5 marketing quote of the week:



“We
are a small regional center…our center can only accommodate up to 320 clients.”



Sounds
like a cozy little venture, eh? (-:  I’ll
tell you guys, in this colorful world of EB-5 Regional Centers, there is never
a dull moment. But sometimes the hyperbole associated with the marketing of
EB-5 RC projects goes totally overboard and kind of makes the whole sector look
ridiculous.  In fact, I've had more than one savvy investor who really WAS
interested in the EB-5 but concluded it was all shady business after wading through
the muck of several bombastic RCs promising the world.





One
misconception further perpetuated by both Regional Centers and those who market
them is that "bigger is better".  While one cannot quarrel with
historical facts such as the number of approved I-526s or I-829s, there is
often a tendency for prospective investors to come through the door asking
"who has the most approvals?"  It's a good question; but it is
only part of the picture.  The other part: “how likely are the investors
to recoup their investment.”  In reality,
Congress crafted the EB-5 visa way back in 1990 (or thereabouts) so that
investors who took a legitimate risk
with their investment could not only get their permanent U.S. residency…but
maybe even make a buck.  Revolutionary!



But
as history shows, some of the largest and most successful equity-based programs
got those impressive approval numbers without addressing that second part of
the question…and only now is the real downside coming to light.

 What downside?  I'll answer that by
asking you a question:



“Where is the market for private equity
investment limited partnership shares?



I'll
tell you where: Nowheresville!  When you're finished with permanent
residency and it's time to cash out, what is the exit strategy for an
equity-based EB-5 Regional Center?  Well, in the vast majority of cases
involving non-branded equities (as opposed to recognized franchises showing a
profit) there is only one interested buyer: the General Partner who got you in
the Regional Center in the first place. 
In fact, the GP isn't interested at all in letting you out;  they’d just as soon you keep those hyper-inflated
condos in the money-losing rental pool and just go away.  But if you make enough noise, some will give
you a fraction of your $500,000 to make you quietly go away.





Things
have changed in these past years since CMB invented their brilliant loan-based
model, now emulated (less brilliantly, I should add) by an increasing number of
RCs, and more recently, when folks like Queensfort have compartmentalized
single-store Sonic franchises for small groups of 8-10 investors, providing the
kind of LP protections never before offered to EB-5 investors in an
equity-based project.  With those kind of options, does it really make
sense to go "old school equity"?  I mean, do you really want to own three condos with
maintenance fees for the foreseeable future? Not me.





A
client the other day said something that made me smile: "Jose, anyone who
goes into EB-5 expecting their $500,000 investment back in full is
dreaming".  I had to disagree! 
I told him that “the better mousetraps”, in both equity and loan
incarnations, have been built, and no longer is it necessary to think of the
EB-5 investment as the “purchase price” for your green card.  For some
very smart investors, the green card is coming with a tidy return and, someday,
maybe a profit.
 
Hey, it can happen!



The
fact, however, is that risk is the non-negotiable, quintessential element which
everyone avoided in the 90s and which drove this wonderful visa category into
the ground faster than you could say "creative financing". 
Anybody besides me remember Golden Rainbow?  
As so eloquently state by the 9th Circuit U.S. Court of Appeals:





"The
long and short of it is that they lost their gamble that Golden Rainbow's
creative financing approach would manage to get through the whole process. The
INS finally acted to prevent a perversion of the program contemplated in the
statutes and the regulations. The mischief that was avoided far outweighed any
detriment to Golden Rainbow or anyone else."



So
don't get fooled by stats, and do not let your immigration attorney
weenie out of opining on the EB-5 project you are considering; we may not be
investment advisers, and we may make you sign 50 pages of disclaimers saying as
much, but we have a duty to view all elements of the investment vehicle you choose,
be it an EB-5 or an L-1, since that is the basis upon which your immigration objective will be judged.  Educate
yourself before investing and dispense with the notion that “bigger is better”;
times are a changin’…talk to me if you have questions! J







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