Real Estate as a Capital Contribution for EB-5

Real Estate as a Capital Contribution for EB-5 By Joseph P. Whalen (July 6, 2012)There is a bit of confusion surrounding real estate in the EB-5 context. Folks aremixing apples and oranges. To be more precise, folks are confusing various EB-5issues and purposes. Most EB-5 Regional Center (RC) projects involve building,remodeling, or refurbishing some particular property in order to provide a properplace to conduct new business or expand and/or stabilize existing business. SomeRC projects involve EB-5 investors having a stake (ownership interest, even if inthe minority) in the new or expanded business (or in rescuing a “troubledbusiness”). Other RC projects may simply involve providing financing to adeveloper who is doing something to create or preserve jobs. Whatever the casemay be, it has to happen somewhere!There are different ways in which the “place” where the business will happenbecomes part of the particular EB-5-RC-affiliated project. The parcel of land,office building, factory, hospital, clinic, nursing home, resort, ski slopes,department store, restaurant, mall, or whatever exists somewhere. The place is notfree for the taking, it must be owned by someone. It may already belong tosomeone involved in the RC-affiliated project or it might have to be purchasedspecifically for the RC-affiliated project in order to fulfill a greater purpose.That real property may be supplied by a project partner, the RC itself, a RC-affiliated non-EB-5 investor, or probably the best approach might be for an EB-5investor (or more than one such investor) to acquire the desired property and use itas his, her, or their “capital contribution” to the overall RC-affiliated project. Theparticular investor(s) who contribute(s) the place for business surely would haveestablished a specific very strong nexus to the RC-affiliated job-creating projectand would have solid evidence of their “capital investment” in said “project”. Theassociated EB-5 investors who contribute additional cash or some other tangibleassets will also have a very strong nexus. When the combined efforts of theaforementioned EB-5 investors along with his or her non-EB-5 investor partnerssome of whom hopefully at least some will be domestic investors come together tocreate and/or preserve jobs then everybody wins. Page 1 of 2

So, I suggest that we look at the real estate as part of the overall EB-5 RC-affiliatedproject as depicted via the Business Plan for that particular project as a “capitalcontribution” of a limited number of EB-5 and/or non-EB-5 project partners. Thereis sufficient nexus to show that without a place to do business; there can be nobusiness, or job creation (or preservation). The consideration of the cost of realproperty need not be and in general, cannot be, included in any economic input-output model as a means to forecast jobs. Job creation is not the real property’sdirect purpose in any development.While the actual location will have a distinct influence on the data available for useas input into any economic model its influence is qualitative in nature rather thanmerely quantitative. You will get more customers at a major crossroads in adensely populated and interesting place surrounded by major attractions than on aback road deep in the middle of a sparsely populated and rarely visited “nowherespecial”. The survey data used as input as well as extrapolations or job creationpredictions, and associated multipliers and various projections based on them, areinextricably tied to a specific place. Such data is commercially available based onlocation, specific industry types and numerous other variables.In closing, it seems to me that some confused people who were not clear on thetrue purpose of the “Pilot Program” or the intricacies of economic modelssucceeded in confusing others. I am afraid that folks who don’t know what they aredoing are doing them anyway and making matters worse. Specifically, certain non-economists are buying software and trying to produce their own economic analysesfor EB-5 and proving the old adage: garbage in-garbage out. Additionally, folksare asking economists to produce economic analyses without being specific aboutthe items demanded for EB-5 compliance purposes. That last problem is becausethe folks asking for EB-5 economic analyses don’t know what is required and thuscannot relay proper specifications to their economists. That is exacerbated byhanding over Business Plans that are not up to the task and are insufficient for EB-5 purposes. If folks need training, they should get it and save themselvesheadaches. That’s my two-cents, for now. Page 2 of 2

Real Estate as a Capital Contribution for EB-5

by Joseph Whalen on Jul 06, 2012

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