EB5 Investors Magazine Volume 3 Issue 3 | Page 89

such as limited partnerships and non-traded real estate investment trust (“REITS”). While these markets can successfully provide liquidity for some investors, they are not familiar with the complex ins-and-outs of EB-5 investments, and have no experience dealing with the cultural issues associated with working with foreign investors. Even so, we certainly can learn from these markets by taking the best practices they have taken years to establish, and using those practices to fold in the more complex requirements of the EB-5 immigration process. To say that the EB-5 process is complex is an understatement. The process is also often fraught with seemingly competing mandates. On the one hand, the United States Citizenship and Immigration Services requires foreign investor’s money to be at risk with no guarantee of returns on investment. On the other hand, however, the SEC and FINRA are looking at EB-5 offerings and scrutinizing them for compliance with traditional securities issues such as Know Your Customer, anti-money laundering, suitability, and best execution and policies and procedures that are in place to protect investors. So far, the consensus is that these mandates can co-exist while an EB-5 investor is moving through the immigration process. But what happens after an investor receives an I-829 approval, which effectively satisfies the immigration aspect of their investment? Or what happens when an initial five to six year timeline extends into seven or ten years because of changes in the real estate market? After an investor receives an I-829 approval, an investment made to satisfy their needs from an immigration perspective, may no longer be consistent with their investment needs. The question of aligning an investor’s needs with access to liquidity is a common and often repeated issue in the various markets mentioned above. A common misconception is that sponsor’s and investor’s needs will not change over the life span of the EB-5 program. That is scarcely the case with any investment, especially one that is illiquid. EB-5 investors may have different needs after receiving their I-829 approval while, at the same time, project sponsors might have changing needs based on shifting timelines driven by market conditions, like construction delays or for EB-5 specific issues like retrogression. Other equity markets have experienced these types of delays. For example, changes in legislation severely hurt limited partnerships in the early eighties essentially removing the tax incentive that enticed investors in the first place and leaving them with an investment that no longer matched their investment needs. The crash of 2009 added several years to the life span of many REITs because the underlying assets were devalued to such a point that they could no longer be sold to meet liquidity needs. In The Stanger Report, A Guide to DPP, NT-REIT & NT-BDC Investing, a journal published by RA Stanger & Co., Inc. that monitors trading activity for the illiquid alternatives markets, there are limited partnerships that are still trading 20 years into their life cycle. Some non-traded REITs are in their 10th year for offerings that were sold as five to six year holds. Likewise there are EB-5 projects that are into their second one-year optional extension with some equity based projects well past their original liquidity projections. There are countless reasons that can contribute to this delay, but the biggest reason is that all of these investment mechanisms are beholden to the fluctuations of the real estate market. The expectation is that as the EB-5 market matures it will be no different, since the primary mechanism used to satisfy the requirement of an at-risk investment that also creates jobs is real estate. A Solution for EB-5 Investors That being said, most investors in limited partnerships, REITs, and other illiquid real estate investments are not seeking liquidity because they are dissatisfied with the in vestment. They are instead trying to address life events that have made waiting no longer a viable or best option. The majority of these life events fall into what are called the 3Ds: death, disability and divorce. A fourth, disaster, is often added for good measure. Statistics provided by Central Trade & Transfer, LLC , an online liquidity provider for the alternative investments space, suggest that over 90 percent of requests for liquidity fall into one of these four categories. Medical expenses, college funds for children or grandchildren, and foreclosure prevention are also often listed as reasons for selling. Anecdotal evidence suggests that at any given time, six percent of investors in illiquid investments need liquidity for reasons similar to those listed above. It stands to reason that post-I-829 approval EB-5 investors would experience the same needs at some point, too. One of the first investors to try and sell their EB-5 qualifying investment by accessing liquidity options that were normally reserved for the REIT secondary market indicated that they were “ecstatic” at having received their permanent green cards but were now in a position that they could no longer wait for the project to go full-cycle. The brokered transaction between them and a qualified buyer allowed them to receive cash for their investment and respond to life events that were dictating a change in their plans, part of which was using the proceeds to buy a house and thus bring closure to their immigration journey. This family’s experience is a prime example of how an EB-5 investment after doing what it was intended to do, secure green cards, became a burden that became heaver the longer the liquidity expectations went unmet. A Secondary Market Signals the Maturation of the Industry As life events put pressure on investors, investors put pressure on the sponsors. When sponsors are unable to provide liquidity through their own channels, secondary liquidity options provide an important pressure-release valve. Although not all investors who need liquidity are“needy”, the ones who are can be a drain on sponsor resources and, if not taken care of, can affect other investors. Allowing a needy investor to gracefully exit restores balance and harmony to the long-term goals of the project and keeps the frustrations of one investor from bleeding over to others. Allowing an EB-5 investor to exit the project on their own terms can provide similar benefits to EB-5 project sponsors. WWW.EB5INVESTORS.COM Continued to page 88 87