Immigration Insider

Econometrics, EB-5 Regional Centers, and Job Creation[VERY POOR AUDIO]

Folks, this second attempt at a video blog was shot in my Miata on the morning commute.  While I'm okay with the video (having come to terms with what I actually look like at 48 as opposed to what I THINK I look like) the audio is horrific.  I still posted it because there are a few points who some might want to hear but trust me, the audio is absolutely horrific and annoying due to the little car's vibration, so skip it unless today's topic is of serious interest.

BTW, thanks to all of you who gave me positive feedback regarding the concept (and not the execution) of the first video blog.  The numbers on the blog tripled yesterday, although it could simply be the result of people emailing links to each other and saying "you have to see how gray Jose has gotten".  Whatever...thanks for the feedback regardless.

Footnote: the Miata overheated (again) as I was waiting for a train to pass in Miami Shores and Melissa rescued me.  More soon and I'm working on the audio as well.

EB-5 Jeebies- Regional Center Investment Misinformation Abounds

Look, I'm TRYING HARD here, guys.  I'm not really interested in naming names or getting people angry but I'll tell you what: if some of the more BALONEY-laden EB-5 Regional Centers and lawyers don't get a grip on the nonsense they spreading, I'm going to start blogging about them.  How's this Miami Herald quote from a developer pitching the EB-5?:

"In the worse case scenario, this project will make a lot of money"

Well....no.  In the worst case scenario, the investor will lose his or her money, not get his/permanent residency, have to leave the U.S, and transplant their families back to their country after being led to believe that there was "no risk".

I first noted this whole thing when we were in Venezuela a few weeks ago.  Turns out a lot of other self-proclaimed EB-5 attorneys are going down there...and other Regional Centers, some approved, some not approved.  By day three in Caracas it was pretty clear to me that the rampant disinformation we were constantly correcting among our prospective clients was not the result of "I read it online so it must be so" Syndrome but, rather, the result of information gathered by folks at our seminar...from OTHER seminars presented by OTHER immigration attorneys and Regional Center marketers.  So let's just cut through the nonsense and clear up a few things:

-The higher the promised return, the higher the risk.  That is a fundamental fact of investing. Anyone who says otherwise is lying.

-Just because an EB-5 Regional Center investment predicts a teensy weensy annual return does not necessarily mean that the investment is "safer".  It could just mean the project managers are taking a big chunk of profits away from the investors.

-Exit strategies matter.  Don't believe otherwise.

-Yes, there are legitimate real estate opportunities in the belly-up U.S. real estate market, but just because prices are low does not necessarily mean it is a "great time to invest".  It depends on the specific property, plan, and investment managers.

-Developers are not investment managers, investment managers are not investors and immigration attorneys are neither.

-Banks make money when they lend on good projects.  While the banking sector has indeed reacted miserably to the credit crisis, that in and of itself does not create an "opportunity" for private capital.  If it was that easy, the banks would be lending.  With reward, put simply, comes risk.

-You CANNOT "cash out" on your EB-5 investment in "two years or less" AND have your green card.  Legally impossible and the people saying this are lying through their teeth.

-Think about it: $500,000 and 10 new jobs.  That's $50,000 per job, right?  Darn near impossible. The intelligently-structured Regional Centers are combining EB-5 funds with private U.S. equity and other non-EB-5 sourcing to insure that the per-investor job numbers materialize.

-Not all Regional Centers are intelligently structured.

-The initial petition I-526 looks at investor eligibility and origin of funds; the I-829 petition which makes the residency  of the EB-5 investor permanent focuses on confirming the job creation and fulfillment of business plans.  Just because a Regional Center is getting the first approved does not guarantee that the removal of conditions will sail through.  In fact, the catastrophic failures of EB-5 visas in the 90's mostly involved approved I-526s with I-829s subsequently denied.

Look, folks: there are some excellent and intelligent EB-5 Regional Programs out there, as well as some excellent attorneys working with the EB-5 category.  But the abundance of pure nonsense being fed to prospective investors both in the U.S. and abroad is making hard for folks to learn the truth.  And so I blog.

Like the guardian Knight of the Templar protecting the Holy Grail said to Indiana Jones:  "Choose wisely".

Not All EB-5 Regional Centers are Created Equal

In the past few months, I've had the opportunity to meet with a lot of folks with approved Regional Centers.  In the process, I've asked a lot of questions and spoken to some of the most sophisticated real estate developers, portfolio managers, and financial minds in the country.  I've learned a few things and I think they might be of interest to those of you who are considering an investment in an EB-5 Regional Center, as well as those of you who represent such potential EB-5 investors in one capacity of another.

For the purposes of today's blog, I won't name names.  I have in the past and I most certainly will in the future.  In fact, the more I learn about EB-5 Regional Centers, the more comfortable I feel with some...and less so with others.  So while I'll expand and get more specific in the coming days and weeks -- and will not doubt make some folks really angry (hey, it's been awhile) -- let's start with a pasty and generic look at three fundamentals I've observed:

1- The Government has approved and is approving a LOT of EB-5 Regional Centers.  In the second half of 2009, the number of approved EB-5 Regional Centers has soared from 40-something to over 70...pretty staggering when you consider that it took about a decade and a half for the first 40-something to be approved.

2- The rapid approvals have caught many of the new EB-5 Regional Centers unprepared.  Whether this is a function of unexpectedly fast processing or simply slow-moving entrepreneurship, a very significant number of the newest centers have nothing specific to offer EB-5 Investors right now.  It works like this: once an EB-5 Regional Center is approved, then and only then can they start offering an investment and comply with all the disclosure requirements relating to securities laws.  These are not prepared overnight and, in an ideal world, the RC team is working on the initial legwork during the pendency of the USCIS adjudication.  My impression (and that's all it is because I have only explored a fraction of the new centers) is that a lot of these newer centers were caught off-guard and are now scrambling to put together projects.  (If you are an investor, would you want your investment team to be hurrying to throw something together?  Not me.)

3- The better newer EB-5 Regional Center models (and some of the veteran ones) are increasingly debt-based vs. equity-based.  This means that in the pooling of the investor funds, the debt-based models operate as lenders to specific projects. Because the loans are often linked to governmental or quasi-governmental borrowers, bond secured, and finite --these structures, although more conservative on returns than the equity-based models, are increasingly appealing to many prospective EB-5 investors.  But don't get me wrong - some of the most successful programs are equity-based).

I guess the most important thing for EB-5 Regional Centers to keep in mind as the momentum continues to build is the trinity of top considerations echoed consistently, in the same order of priority, by the dozens of prospective EB-5 Regional Center investors I've spoken to recently:

1. Assurance of the approval of the permanent residency
2. Security of the underlying $500,000 capital investment and
3. Return on investment

Things are getting complicated and my impression is that very significant distinction exists not only between the fundamental structures of the new EB-5 Regional Centers, but between their underlying philosophical approach to how an EB-5 Regional Center should operate.  Those which understand the aforementioned trinity of priorities will inevitably lead the pack.

 

Taxation Without Representation

I've been representing foreign investors in the U.S. for 18 years.  So have many of my colleagues.  So why is it that the notion of "tax planning" is such a conundrum for most immigration attorneys?  The truth is that we, as immigration counsel, are "programmed" to steer most folks to legal permanent residency.  There are valid reasons, the primary one being that the majority of clients seek such status.  But a significant (and growing) number of foreign investors in the U.S. wish to preserve their foreign residence as primary...and have no desire on becoming subject to taxation in a country in which they do not intend to live permanently!

It seems like on an almost-daily basis I'm approached by a client with substantial offshore assets who is neither interested in U.S. permanent residency nor in abandoning his home country...but is being advised by immigration counsel that getting a green card is their sole option...not so!

I am hardly an expert on international taxation but I know the basics:

• whether you like it or not, the U.S. taxes worldwide income on anyone who is a "tax resident" within the meaning of the Internal Revenue Code
• tax residency is automatic for persons who get permanent residency
• tax residency is triggered by so-called "physical presence" tests which determine tax status based upon the amount of time a foreign national has been physically present in the U.S.
• In addition to worldwide taxation of all income anywhere, U.S. tax residency means estate taxes apply for assets worldwide (unless legal protective mechanisms, such as trust structures, have been established.)

All this adds up to one thing: for high-net-worth foreign nationals, a complete understanding of the income and estate tax implications is essential BEFORE they get their green card...or before they establish tax residency via physical presence.

What are the implications of this for immigration counsel?  Several important considerations:

1. It is critical to insure that the client receives competent tax counsel both in his/her home country AND in the U.S....before U.S. tax residency is manifested and the individual is subject to U.S. tax laws.
2. On many occasions, it is necessary to defer the U.S. permanent residency -- even prolongued presence in the U.S. -- until all of these issues are resolved under a tax planning arrangement most prudent for that individual client.

It's a shame to see the colossal financial damage which can occur to clients who have been given limited options by immigration counsel.  Once you are a U.S.tax resident like the rest of us, you have to cough it up, and that's what the law requires.  Before you are U.S. tax resident, however, you have a number of legal tools and options with which to minimize the financial impact of coming to the U.S.

Perhaps as immigration counsel we should step back and look beyond the next immigration step to consider the client's big picture.