Most projects funded by regional centers are very large development ventures that are divided into separate components or phases. Often the EB-5 Investor is contributing money which is slated for investing only in one subcomponent of the larger project. For the purpose of differentiation I will at times refer to the entire development program as the “Overall Project” and the subcomponent relevant to the specific EB-5 investment as the “Subject Project”.
This due diligence is to be carried out for the benefit of one or more EB-5 investors (the “Investor”).
Due Diligence Tasks
Basics
Describe the Subject Project that is being funded by the Investor and the Overall Project (if different) and how the Subject fits into the overall development plan. Summarize the basics of the investment plan and the roles of the participants.
Regional Center
Verify that the Regional Center (“RC”) is on the USCIS approved list. Confirm that the entity soliciting the investment is in fact the same RC entity that is approved by the USCIS.
Review I-924 application, revisions, and approval documents and describe the changes to the RC’s geographical area and development categories over time. Verify that the current Overall Project is still within the purview of the RC’s approved mandate and that it has specifically been approved by the USCIS.
Summarize previous Overall Projects completed by the RC in the past.
Summarize previous EB-5 Limited Partnerships sponsored by the RC, both related to this Overall Project and other unrelated EB-5 funded developments.
Project Participants / Investment Terms
Detail the roles of the major active participants in the venture including the RC, project managers, real estate developers, and any other sources of funding. Investigate and summarize their past histories, relevant experience and current status.
Map out the roles and relationships of the various LLC’s, limited partnerships corporations and other companies involved in the venture. Specifically detail all of the funding contribution commitments of each entity and the anticipated calculation of repayment of their capital and payment of profit relative to the Investor.
Contact all of the project participants to confirm that their commitment to the project conforms with the project plan information given to the Investor and to the USCIS.
Review the offering documents to identify problematic issues such as any stipulations that are unreasonably detrimental to the investor or if the plan appears to fail to satisfy USCIS regulations.
Project Status / Local Government / Market Area Information
Describe the current status of the Overall Project as stated by the sponsors (i.e. planned but with no entitlements, entitled but no construction underway, underway/20 percent complete, etc.) and the future plans for development and marketing and disposition of the final product.
Evaluate information provided by the sponsor to determine if the project has proceeded so far according to the original schedule and projections. Compare original cost projections with actual experience. Verify that sales of project units have occurred as scheduled and at the pricing as originally anticipated.
Verify the current status of the project with local government agencies such as city or county planning departments, redevelopment agencies, and community development departments. Confirm with the agencies that the project has planning approval or is in the process of obtaining approval as declared by the sponsor.
Confirm the reasonableness of the future timelines for development and the marketing, disposition and pricing of the final product with local government agencies and real estate professionals. Seek pricing and sales volume information regarding recent comparable developments in the market area. Confirm that this information is consistent with the project’s projections.
Determine from the local agency (tax assessor in most cases) what entity owns the land parcels that comprise the project. Confirm that real estate taxes are currently paid.
Determine the zoning of the land parcel and determine if it conforms with the land use planned. If not, find out if the local planning agency is likely to grant variances.
Confirm that there are no for-sale listings for the land with regional real estate brokerages.
Describe the plan for ownership of the land and for the transfer of ownership as the development progresses. Identify milestones in that plan. Evaluate the degree to which the land ownership plan is in the equal best interest of all participants.
Obtain pipeline of similar developments in the planning department process and those under development in the market area. Identify planned developments of any kind located very proximate to the site.
Obtain third party real estate market reports and assessments. Search local newspapers for articles on the project, local project participants and other projects of similar type.
Funding / Repayment of Capital / Payment of Profits / Job Creation
Per above, detail all of the funding contribution commitments of each entity involved in the project. Summarize the anticipated calculation of repayment of their capital and payment of profit relative to the Investor.
Examine the history of previous LP’s in this Overall Project. To the extent possible, develop an understanding of how much previous funding has been contributed by each source, how many EB-5 investors have already contributed to the project, and how many more are planned for later.
Validate the job creation calculations for the subject LP and any previous and planned future LP’s. Confirm that the required number of jobs will be created by the project to obtain permanent residency status for the Investor. Determine if there is or should be any guaranteed limitation on additional EB-5 funding for the project that might dilute job creation volume slated for allocation to the Investor.
Examine the financial model for the project and determine if it reflects the stated financing and repayment structure described in the offering materials. Evaluate the development cost assumptions against comparable benchmarks. As stated previously, compare pricing and sales volume information regarding recent comparable developments in the market area and confirm that this information is consistent with the project’s projections.
Summarize the exit strategy for the project. Determine if there is any additional source of funds in the event of cost over-runs or underperformance or delay in the project and describe the plan for such events.
