Vantage Pointe Investments, developers of assisted living communities and luxury apartment communities throughout the Southeast, had utilized conventional funding for capital stack needs in much the same manner and from most of the same types of sources used by all developers. When the economy began changing in 2008, we began looking for alternate sources of debt as well as equity. We were introduced to the EB-5 world by happenchance shrugging it off as likely just another government program with little or no substance. Our introduction came during a chance encounter while dining and started as innocent dinner conversation; looking back it was a conversation where one party spoke as if they had knowledge and experience, we know now that the statements made were far from the facts or the truth.
by RON WILKINSON, Developer
The lessons I “learned” are the experiences I don’t like to recall and I certainly intend to never repeat. If I choose one theme to hope you would remember from our journey, it would be that most Regional Centers are only conduits to the United States Citizens and Immigration Services EB-5 program, offering little or no help and offering advice that may take you down roads “less traveled” leading often to expensive u-turns.
Our First Course was Regional Center Chaos
Having no previous experience with EB-5, my first mistake was not thoroughly investigating the Regional Center with which we started doing business. Instead, I relied upon the Regional Center’s legal counsel’s verbal résumé as well as their online description of what later was proved to be non-existent success. There was no correlation to their fictional résumé and reality. Apparently, no one in the industry polices such information provided on Regional Center websites. We were guilty of assuming and we did not investigate to find out that this Regional Center had at that time no successful experience and as of today they still have none with the exception of our now fully-funded development, which we accomplished in spite of them. We accomplished this only after asking them to move aside and allow us to take full control.
Relying on the commentary provided by the Regional Center as to their experience and successes, and assuming they actually were telling the truth and knew what they were talking about, we engaged them and handed over a check. That was the beginning of a very expensive series of lessons. We wrote the RC a check thinking we were going to receive as the contract with them stated “guidance and consultation” through the EB-5 process. The fact is we ended up doing 100% of what they were contracted to provide. Relying on the Regional Center’s “in-house immigration attorney and co-owner,” we began assembling a “team” to provide the PPM, the econometric model, the escrow accounts and search for investors. The team members were selected entirely by this self-elected guru, a soon-to-be-realized huge mistake.
The “attorney” from the Regional Center spoke to us with authority, continually reminding us of his knowledge and experience. He was rarely available for consultation because he said he was usually somewhere in the world speaking. He used this as further proof of his abilities, continually reminding us of his regular speaking engagements at various EB-5 seminars, as if he actually was experienced. My advice: when you seek “experienced” persons to help with your EB-5 project, do not make the mistake that just because they speak at seminars they are speaking from knowledge backed by experience, a combination you must have in your “team” to be successful. Apparently, they allow anyone who can stand and speak to spew forth their version of the needs to be successful at some of these seminars, even though the speakers may have no success in their own program’s résumé.
As our own very good real estate and tax attorneys began to try and work with the Regional Center lawyer (in this case I use the identification “lawyer” and hope I don’t offend real attorneys), they found they could rarely get the attorney to come to a meeting. They also discovered fairly quickly that when he did show up he was ill prepared to give any help and actually became a detriment to the processing, so much so that we “fired” him and “rented their Regional Center,” entirely restructuring the original “consulting agreement.”
Lesson learned: there are many poor Regional Centers, and in my opinion, only a very small number that are fully staffed and helpful around the country. Be careful, study, and ask lots of questions, and most importantly, check with all their references before signing on with them.
From Regional Center Chaos we moved to Private Placement Memorandum Confusion
We made our second mistake when we allowed the Regional Center to direct us regarding creation of the various documents that are needed to start the search for investors. We hired a firm the Regional Center immigration lawyer directed us to for assistance in creating a PPM. The firm we hired was a boiler-plate creator of PPMs, i.e., standard forms with no specificity to them. The “real” and specific language for our development still had to be created by our lawyers who already had PPM experience. However, the RC lawyer convinced us we needed to hire this PPM “creator” as our actual “5-star” legal representatives would not be able to comprehend the special content that should be included in an EB-5 compliant PPM, and that to be certain it complied to and met the special needs of EB-5 we must hire “expert” help.
VantagePointe Homes builds and develops assisted living facilities.
We now know that the RC lawyer’s definition of “expert help” was more in line with the “help” he gave and not what you and I would normally experience when receiving true “EXPERT HELP.” The company to which we were referred eventually suggested we pay them nothing more as it was obvious to them that our lawyers were much more capable than they were at crafting the language. In addition, they were kind enough to inform us that they really only provided basic forms; however by the time they told us this, we had already paid them $11,000 of an $18,000 fee. Lesson: it is never advisable to let the complexity of the EB-5 process cloud your good previous business experience, and more importantly, that of all your trusted advisors and team members. Many firms and consultants you will meet along the way are only interested in a fee and have no interest in whether you succeed or not.
Eventually, we had to scrap the PPM and let our own attorneys craft the document. The RC “lawyer” advised us to include a fee of $90,000 per investor for the administrative fee, the bulk of which would go to the RC which was co-owned by the RC “lawyer.” We were very fortunate that the “boiler plate” PPM firm advised us that this administrative fee was double the norm and we should consider reducing it. In reality, the fee should only be related to the services you or the RC provide and you should investigate what the fee pays for in terms of both your cost and that of the foreign investor partner.
Don’t leave the investor out of this, they are the most important aspect of the EB-5 process and are truly “on your team.” The investor needs your help. Never assume a fee is necessary just because you are told that it is, get to the facts and leave behind the myth. The lesson learned here is that no matter what you are told, unless you have previous experience with the person or firm you are dealing with, be sure to check the cost and/or expenses by comparing them to successful EB-5 deals. Never allow your experience to be trumped, trust your instincts, and look at the information and numbers thrown around by inserting them into your economic models. The only difference between EB-5 dollars and your normal capital raise is there are many more people involved in the EB-5 system that know little more than you, but are good at convincing you to lose sight of your common sense. Look at things you normally look at, such as the “cost of money.” In the end, the financial responsibilities are yours, not the “circus” magician.
A Crash course in how not to create an EB-5 Team
We assembled the first team, using guidance from the Regional Center. Do not assume that because you hire someone that they are acting in your best interest; usually they are, but if the advice you get is flawed, such as was our case, you will end up with team members that only want a fee for giving you something that later you will find you must scrap and do again using better third-party providers. We had to do just this for such work as the econometric models, the PPM, the escrow agreements and a colossal number of documents that can be overwhelming. Never forget that providers of bad advice beget providers of more bad advice.
We assembled a team to provide the econometric models and to identify the targeted employment area (TEA) site as it relates to being within a zone that is 150% of the national unemployment rate, allowing investors to pay $500,000 in lieu of the higher $1 million investment. We discovered that hiring an economist does not mean you simply pay for the report, sit back and wait and you get what you need and/or ask for. If you are not very knowledgeable about the nuances of the zoning and job creation calculations, you may pay for a report that initially says something that will not work for your specific development later, unbeknownst to you. This may relate to the total potential equity or debt you can raise from your foreign investor partners as well as your job creation calculations. We discovered, without the guidance of the RC, that there are several methodologies for calculating the zone you fall within and the job count you may use. Unfortunately, it was too late in the process for us to make changes and benefit from more accurate numbers.
The report we originally received, although correct, fell far short of depicting the best information to benefit us, the developer, and our foreign investor partners. Had we not developed good connections and previous experience with the county Industrial Development Board and the state authorities for Census Tracts approval, we would not have succeeded in having the site deemed to be within a TEA for the $500,000 investment. This again was work we were told by the Regional Center that their economist would handle. What we did not know was that the job creation calculations made by the RC’s suggested economist, although correct, were not reflective of the various methods allowed and did not include the most beneficial information for job creation. As a result, we ended up with a job creation of 62 jobs versus the correct or most beneficial count of 170 jobs. We therefore raised only $2 million in foreign investor partners when we wanted $3 million, and could have raised $4 million easily. However, because of the poor advice along with the omission of the second calculation within the econometric model we had to settle for raising $2 million dollars.
Engaging a Broker and Escrow Agent Should be done with Great Attention to Detail
We had become skeptical of ever achieving the goals of utilizing EB-5 as a source of equity funding via the association and continued problems we encountered relying on the original Regional Center. We restructured our contract with them as stated above and moved forward with a different relationship, one of our only renting the “conduit,” (the Regional Center) to USCIS. Although now in control of our destiny and under the guidance of good, well-meaning qualified persons, such as Michael Gibson, USAdvisors, and Dr. Scott Barnhart, Barnhart Economic Services, LLC, our economist, we still had residual fallout to deal with related to the poor advice from the RC. During the phase of I-526 review, submittal and processing, we were issued RFEs (Request for Evidence) from USCIS for all four investors, and the focus within the RFE were issues easily avoided with proper guidance and advice:
- Request for Opinions – this is something a good Regional Center would be able to provide, it cost us an additional $18,000.
- Request for amendments to the Business Plan – creation of the business plan was completed and provided to the Regional Center lawyer for his review and comments. The plan, as submitted, had numerous flaws regarding language that needs to be woven into the fabric of the business plan within the PPM. The omission of expected verbiage within the business plan resulted in an RFE that ultimately required the entire business plan to be rewritten. The cost to us was an additional $15,000 to redraft with the proper input and submit with their comments to USCIS, another cost that should have been avoided and included in the “fee” you will recall we already had paid the Center.
- Econometric model questions required that we hire a firm rather than allow the original firm to reply on our behalf. We hired Barnhart’s firm who reworked the entire econometric model, made comments to USCIS per their RFE request, and charged us $7,000. This was actually $8,000 less than what we had already paid for a report that was on the surface correct, but underneath was not what USCIS wanted or needed. This is the report that had it been correct we could have raised an additional $2 million dollars without delay.
We scrapped almost the entire initial work product as well as the third party vendors at some time during the process. Some of these were scrapped and reworked as late as the issuance of RFEs (Request For Evidence) from USCIS staff.
To avoid this type of problem, ALWAYS make sure that you paper the escrow directions with specificity so that there is no one other than the owners that controls the releases of these funds.
We Were Seduced into Assuming our Broker Agency was Actually on our Team
Just when you think you have overcome all obstacles and when you want to celebrate with your partners, both foreign and domestic, by breaking the administration and equity escrows and starting on your construction, we found out that we were not quite complete with our “lessons learned during our First EB-5 capital raise.” The brokerage firm we engaged had issues within their firm and the partners of the firm that were not involved at any point in the raising of the capital or any of the daily tasks suddenly became interested because they had to sign off on the release of the escrows. They discovered they had money coming in and wanted all of it not just a part of those fees. We were not a party to the arrangements made between the Regional Center and the broker. However, we became a “hostage” to be used in the efforts of the broker to take in all the administration fees and decide who gets what if any of the funds. We therefore became entangled in their dispute with their soon to be former partner, the Regional Center and the escrow agent.
To avoid this type of problem ALWAYS make sure that you paper the escrow directions with specificity so that there is no one other than the owners that controls the release of these funds. Do this in your original documents to show exactly who is to get what amount from the administration funds and control the flow of those funds. Always control the cash during the process and make plans to do so at the end of the process. There are too many opportunities to be involved with those that may take advantage of your lack of knowledge and in doing so create unnecessary agony at the time you should have nothing but Joy.
Our Non-EB-5 Experienced Design/Construction/Development and Operations Team
In closing, we fortunately were surrounded by our very experienced group of development and operations team personnel, we knew what we were doing and brought to the table a combined 97 years of development and operations experience. We knew what we were doing on the development, construction and operations side, we created a capital stack that stands solidly beside our foreign investment partners, both in the way of strong domestic equity and debt pieces complementing the foreign investors equity and making them feel comfortable that we were confident in our development. We created a comfortable ratio of econometric jobs created to investors and left more than a 50% cushion for error giving assurance and comfort to the foreign investment partners that we stood with them financially, understood their needs as it relates to citizenship and were truly their “PARTNERS.”
The entire journey from our first application some time in November of 2011 ending with our breaking of escrow sometime in late November of 2012 was approximately 12 months; however, prior to the first application we went through five months “learning” most of the lessons mentioned above.
We paid our dues and we are not leaving the “club.” We are already on our second, third and fourth developments that include EB-5 capital raise alongside conventional debt and our personal cash equity rounding out the capital stacks.
We are thankful to USAdvisors, Michael Gibson, without whom we would have walked away from the program. We are better off for having persevered and we have created a fabulous team along the way. In addition to the above mentioned developments, we are also working to help others make use of what we believe will be a significant source of capital funds in the future.
In closing, the good news is we succeeded! The story above does not have to be the journey you take and the fact is that there are a lot of very good and qualified people involved in this program. Stay close to the qualified folk and you will find friendships both foreign and domestic that will enhance your life. You will also enjoy an optional source of funding that may not meet all your needs and your timing, however, when this program can help, know there are good people here to help.
Ron Wilkinson (RWilkinson@VantagePointeHomes.com) is a developer with Vantage Pointe, Luxury Apartment Communities, Market Rate Assisted Living Communities, doing EB-5 Facilitation.