Comment: Immigration security may conflict with investment security

Immigration security may conflict with investment security

Introduction: There is a fundamental tension between immigration risk and financial risk. This is counterintuitive. This issue rarely came up before 2019; but it is more common in today’s post-RIA market. Below, we explain this counterintuitive tension between immigration risk and financial risk, and with an example, suggest how it can be calculated, and possibly minimized/eliminated.

• EB5 investors face two kinds of risks: immigration risk (will they get their permanent green card?) and investment risk (will they get their money back?). 
• Immigration risk is tied to whether the project will create the jobs needed for their investors. The widely used measure the EB5 market has been using to measure immigration risk is “job buffer”. For example, a 50% job buffer means that 15 jobs per investor are created.
• Investment risk: The EB5 market has been using the percentage of EB5 funding in the entire capital stack as a measure of investment risk. For example, if EB5 capital was 20% of the entire capital stack, the EB5 market assesses that it is safer than if EB5 funding was 80% of the capital stack.

In order to see the tension between these two risks, let us present an example with a 50% job buffer under 2 different scenarios:

• Scenario A: EB5 is 80% of the capital stack: Job creation is based on the total spending. EB5 investors themselves are generating 12 jobs by themselves (120% of jobs they need) and only 3 jobs are created by non-EB5 capital. So, should non-EB5 capital not materialize (and therefore not be spent), this will not affect the green cards in any way, immigration risk is minimized/eliminated in this scenario.
• Scenario B: EB5 is 20% of the capital stack: EB5 investors themselves are generating only 3 jobs by themselves (only 30% of the jobs needed) and 12 jobs are planned to be created by non-EB5 capital. If the non-EB5 component of the capital stack does not materialize (and therefore cannot be spent), the jobs needed by EB5 investors will not be created, in other words, immigration risk in this scenario will be very high.

In Scenario A, investment risk is high and immigration risk is low, and in Scenario B, investment risk is low and immigration risk is high. This is an illustration of how the two risks inherent in EB5 (immigration risk and investment risk) can be inversely related. To ensure that both these risks are minimized, agents and investors should carefully consider any specific project’s particular numbers and determine whether that project is closer to Scenario A or closer to Scenario B. The key point is that it should NOT be assumed that (1) low investment risk is also low immigration risk, or that (2) low immigration risk is also low investment risk. Many EB5 agents/investors rarely make mistake (2) above, BUT often make mistake (1) above - these mistaken agents/investors believe the fallacy of size - that companies with deep capital resources will also necessarily have lower immigration risk. As we see from the Scenarios described above, that may or may not be the case, each project should instead be considered on a case-by-case basis.

Conclusion: The possible inverse relationship between immigration risk and investment risk should be closely examined for each project before making an EB5 project selection decision.

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