28 Jan The Importance of a Due Diligence Assessment for Developers and Business Owners

In Part 1 of this two-part series, we reviewed many of the key questions that investors should ask concerning the legal, economic, and financial aspects of EB-5 projects. In this post, we will cover what business owners and developers need to assess before committing resources to pursuing EB-5 capital for their business ventures.

Project developers and business owners seeking EB-5 capital should conduct a thorough due diligence assessment at the outset of the venture to determine whether the particular project is marketable to investors and consumers, financially feasible, and EB-5 ready. Conducting an in-depth due diligence assessment prior to the development of a business plan can save developers and business owners much time and money.

e-Council Inc. is highly experienced, both directly and in conjunction with our EB-5 strategic partners, in conducting Due Diligence Assessments that can guide business owners and developers in pursuing EB-5 capital for their projects.  e-Council Inc.’s Due Diligence Assessments includes each of these essential elements, and so should yours:

• Initial Jobs Analysis: All EB-5 investments must create or preserve a minimum of 10 full-time, permanent direct or indirect jobs (indirect jobs are only applicable in a Regional Center context) within 2½ years of the investor’s admission to the U.S. As such, the number of jobs a project can created determines the amount of money that can be raised through EB-5 investment. To ensure that the project is EB-5 ready from a jobs perspective, a qualified economist must use USCIS-approved input/output models to demonstrate the creation of at least ten qualifying jobs per investor. In a project involving a large group of investors, it is important that the number of jobs projected by the economist’s report provides a cushion of at least 20% over the ten-jobs-per-investor minimum to avoid potential job-creation shortfalls at the I-829 stage.
• Market Feasibility Studies: It is important to perform an objective, unbiased evaluation of the project vis-à-vis the greater market sector. Such an analysis can determine whether the project is likely to gain market share by leveraging unmet demand. Market feasibility studies should include an examination of the target market, industry data and trends, strengths and weaknesses of the project offering, and some financial analysis, as well as operational and economic factors.
• Competitive Analysis: The current project must be compared to existing and envisioned competitors to ensure availability of adequate market share for the new business. A competitive analysis should demonstrate the key differentiators of the new business or project vis-à-vis its competitors to support its feasibility as a successful offering in the market.
• TEA Analysis: Projects located in a Target Employment Area (TEA) are more likely to attract investors because of the lower EB-5 investment threshold. For this reason, demonstrating that a project is located in a TEA is almost a prerequisite for any EB-5 raise. A TEA is defined as an area that, at the time of investment, is either a rural area as defined by the statute or an area that has experienced unemployment of at least 150 percent of the national average rate. In order to qualify for the reduced minimum investment of $500,000 instead of $1 million, projects must be located in and principally doing business in a TEA. Maps and census data can be used to demonstrate the rural status of a particular city, whereas a TEA designation letter issued by state government agencies can support the status of areas facing high levels of unemployment.
• Assessment of Management Team: It is important to demonstrate that the project developer has a solid and consistent track record in the field, as demonstrated by their years of experience, professional backgrounds of the management team, and a list of successfully completed projects.
• Financial Analysis of Capital Stack Resources: In a project involving multiple investors, EB-5 capital should not be the sole source of capital for the project. Investors are generally attracted to EB-5 projects involving multiple layers to the capital stack with a debt to equity ratio not exceeding 70:30. In addition to the developer’s own equity contribution, other sources of capital may include: private equity, bank loans, pre-sales of property, etc. An initial financial assessment will analyze the project’s capital structure and other critical financial information (pro forma and proposed use of the EB-5 Loan proceeds) to determine marketability, financial viability and fitness of the project within the EB-5 Program
• Determination of Relationship with Regional Center (RC): Developers can affiliate with an RC or create a new one for the current and future projects. If affiliating with an existing RC, developers and business owners should ensure that it has been approved by USCIS by requesting a copy of the USCIS designation letter from the RC itself. Additionally, the developer or business owner should review the designation letter to confirm that their project falls within the RC’s approved area and industries. If not, the investor should inquire how the RC plans to seek USCIS approval of the expanded area and/or industries. (Approval can be sought through an advance amendment filed with USCIS or with the filing of an investor’s I-526 petition in reliance on the May 30, 2013 USCIS memo.) Before affiliating with such an RC, the developer or business owner should feel comfortable that the requested expansion is reasonable under the circumstances and likely to be approved.

Covering all of these bases can be overwhelming and time consuming. e-Council Inc.’s  attorneys, researchers, and other professionals specialize in providing due diligence services and creating Matter of Ho compliant business plans for the EB-5 program. Working with eCouncil Inc. on all of your business plan and due diligence projects eliminates the need for outside services from unrelated sources; all of our diverse service providers have been vetted and are immediately available.

To inquire about our Due Diligence Assessments or to choose from a wide range of complementary EB-5 services such as our best-in-class Matter of Ho-compliant business plans, please contact us at info@ecouncilinc.com.

e-Council Inc.’s website, newsletter and other forms of communication contain general information about legal matters. The information is not legal advice and should not be treated as such. You must not rely on the information on this website as an alternative to legal advice from an attorney or other professional legal services provider. For specific questions about any legal matter please consult with an attorney or other professional services provider.