On Jul 22 2014 by H. Ronald Klasko
Preparing for the I‐829 Before It’s Too Late
I recently participated in a national webinar sponsored by NES, the largest EB‐5 escrow administrator. The webinar focused on I‐829s, and my presentation was entitled “Preparing for the I‐829 Bubble”.
I stated at the time, and I will restate now, that the readiness of regional centers and project developers for the I‐829 process is one of my most serious concerns for the future of the EB‐5 program. It is the reason that our law firm has developed a compliance group within the EB‐5 team. But more on that later.
Until very recently, the I‐829 process was the province of direct EB‐5s and a small number of regional centers which had investors in projects as far back as 2008 or 2009. The group of active regional centers at that time was extremely small and tended to be larger regional centers with in‐house staff prepared for the onerous task of auditing and preparing the documentation necessary for the condition removal process.
As more and more regional centers were approved, including smaller and less well‐staffed regional centers, the number of projects and investors attached to regional centers that have never gone through the I‐829 process have increased. One can only hope that these regional centers and project developers are prepared for the major task that is the condition removal process.
Regional centers have to decide no later than when their first investors are approved how they want to handle this process. Do they want to do everything in‐house? Do they want to outsource? Do they want their law firm to handle it? Do they want to hire an audit firm? The time of condition removal is way too late to make these decisions.
It is best if the audit process for the I‐829 starts long before any investors are approved. The process of monitoring and documenting the investors’ flow of funds should commence when the investors invest. The process of monitoring construction expenditures should commence whenever the construction commences.
There are two main aspects to the condition removal petition. One is documenting that each investor made the investment and sustained the investment in the new commercial enterprise. Regional centers must have a system to trace the money from the investor to the escrow account to the new commercial enterprise and ultimately to the project. Regional centers and project developers need to either develop their own software to track this information or else buy the software or outsource the process.
Usually the biggest issue is documenting job creation. In most regional center projects, especially loan model projects, there are no direct jobs. Documenting indirect and induced jobs is a matter of documenting inputs to the economic report. For construction jobs, this means documenting construction costs, certain soft construction costs and furniture, fixtures and equipment. For operations jobs, this may mean documenting revenues, occupancy, direct employees or other inputs that the economic report utilized.
If all of the inputs were met or exceeded, there is no need for an additional economic report. However, if any of the inputs were not met, a new economic report may be necessary to determine how many indirect and induced jobs were created given the actual expenditures, revenues, etc. It is not necessary to prove that the jobs were created exactly as planned or that all of the inputs to the economic model were achieved. It is only necessary to prove that the necessary number of jobs were created, even if that is proven on a completely different basis.
We have seen in our practice interesting issues relating to construction timeline. There can be problems if construction is longer or shorter than planned. If the construction was projected to last more than 2 years, which resulted in the ability to count direct construction jobs, and the construction actually lasted less than 2 years, direct construction jobs cannot be counted at the I‐829 stage. This can cause a big problem. On the other hand, if the construction timeline was projected to take less than 2 years, and it actually took more than 2 years, direct construction jobs can be counted, which can make up for a shortage of operations jobs. However, if the elongation of the time period was the result of extended periods of time during which little or no construction was taking place, questions might be raised.
I mentioned above that our firm has developed a compliance group to deal with these issues. In some cases, this group provides ongoing support to regional centers and project developers who are performing these functions in house. Other clients choose to outsource this function either to an auditing firm or to our law firm. In either event, our firm stays actively involved because the burden falls on us to actually prepare the I‐829 template for all of the investors in the project. It is highly inadvisable for a regional center or a project developer to expect our firm or any other firm to be able to take raw, unreviewed and unmonitored data and turn it into an I‐829 template on short notice.
Finally, regional centers and project developers have to understand that the I‐829 process is a sequential process, meaning that the 21 to 24 month window opens for each investor on a different date. Investors and their attorneys are very eager to have their I‐829 petitions filed as close to the beginning of the 3 month window as possible. The staggered filing dates can actually come in handy in situations where all of the necessary expenditures or revenues or direct jobs have not been created at the time that the first investor must file. However, when that is the case, the data must be monitored investor-by‐investor to show which investors got credit for which jobs.
Thorough documentation, advance preparation, and providing regular updates to the law firm and to investors are key components of a plan to ensure that the I‐829 bubble does not burst.