issuers ’ general obligation or guaranteed security interests , the conclusion may not be so clear . Take , for example , the Seattle 520 Bridge Replacement Project that raised $ 47.5 million from 95 EB-5 investors in Washington state bonds to replace the aging State Route 520 , a floating bridge across Lake Washington . This is the first occasion in which EB-5 investor funds were used as part of the capital stack to fund a public infrastructure project , and though not without controversy , the exemplar ultimately received approval .
The significance of the Seattle bridge project funding lies in the distinction between the two basic types of municipal bonds : ( 1 ) general obligation bonds (“ GOB ”), which are secured by the full faith and credit of the issuer ; and ( 2 ) revenue bonds secured by tolls and charges from the facility built .
Inasmuch as general obligation bonds amount to the issuer ’ s personal guarantee of the return of all or part of the capital invested and the EB-5 regulations prohibit such a guarantee , GOB with the usual 20 year maturity date per se violate the requirements of the EB-5 program . However , a shorter maturation term opens the door to a more nuanced discussion .
Revenue bonds in the “ at risk ” discussion , on the other hand , are more straightforward . The revenue bonds used in the Seattle bridge project met the “ at risk ” requirements because , by their nature , revenue bonds contain variables that are unpredictable .
In the Seattle bridge project , however , the capital stack combined both GOB and revenue bonds as sources of funding . The project developers relied on the argument that the GOBs posed sufficient risk to investors because of a shorter maturation term . Because EB-5 investor funds were scheduled to be returned in five years , rather than the typical 20 , the full recovery of the capital was not certain . This means that the EB-5 investors bear the risks of liquidating the bonds and seeking returns prior to the maturity date , which precludes any guarantee of return .
In addition , the project was structured in such a way that the bonds were purchased by the limited partnership from the primary bonds market . In five years , the limited partnership would sell the bonds on the secondary market based on current market value . The EB-5 investors may not be able to recover the $ 500,000 investment amount because bond price is subject to market rate fluctuation . Thus , the investors face both a chance to gain and a risk of loss in relation to the return of capital . The investors thus bear liquidity risks ( finding a buyer on the secondary market ) related to the return of EB-5 capital , including interest rate risks , default risks and other financial risks . Furthermore , if a project is not completed for any number of reasons there remains a risk of loss for the investors .
The authors spoke with the Washington Regional Center and learned the exemplar petition of the bonds structure was approved by USCIS in August 2013 . At the time of writing this article , I-526 submissions were still pending .
Investments guaranteed by property ownership Another situation where the “ at risk ” requirement has been tested is in structures that guarantee eventual property ownership to investors . Some potential EB-5 investment project offerings include a “ reservation agreement ,” so that in the event that the project fails , the investor will still be compensated with a unit of the existing real estate . Unlike the example above , this sort of practice has been found to violate the investment “ at risk ” requirement .
The authors have examined several project scenarios employing an arrangement where a portion of the investors ’ funds would be utilized to purchase already-constructed vacation suites requiring renovation and remainder of the EB-5 funds would be used for the construction and renovation of the common areas . The Administrative Appeals Office ( AAO ) has deemed a similar case as not in compliance with EB-5 regulations , stating that such a proposal “ is a marketing strategy to attract buyers for vacation suites rather than investors of capital in a new commercial enterprise .” 3
The AAO denied the structure because guaranteeing ownership of a property unit through investment is a form of guaranteed return which does not meet the investment “ at risk ” requirement . Looking back to the guidance offered by Izummi , for the capital to be at risk , there must be a risk of loss and a chance for gain . The promise to guarantee the investment by property ownership negates the risk of loss element .
Determining risk When trying to determine whether such an investment is actually at risk , the following should be taken into account :
( i ) What is the evidence under 204.6 ( j )( 2 ) that the investor has placed the required amount of capital at risk for the purpose of generating a return on the capital placed at risk ?
( ii ) Is there or will there be evidence of funds transferred or committed to be transferred to the new commercial enterprise in exchange for ( unredeemable ) shares of stock ?
( iii ) Is there or will there be evidence of any loan or mortgage agreement , promissory note , security agreement , or other evidence of borrowing which is secured by assets of the investor , other than those of the new commercial enterprise , and for which the investor is personally and primarily liable ?
The project proposal should be crafted in such a way that the component parts are viewed as a whole enterprise in which the investors are making their investment and for which jobs are going to be created , and the investor needs to establish that the risk at which his / her investment is placed is tied to the successful development of the whole project . The proposal must avoid the appearance that the investors will be making individual investments in separable aspects of the development of the property ( e . g ., purchasing private property ).
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3
Administrative Appeals Office Decision W09 000 980 ( April 26 , 2011 ). www . EB5Investors . com 19