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EB-5 Sanctioned Private Placement Offerings - 100% LTV Ratio Non-Recourse Commercial Real Estate Development Financing

Everyone wants to get into the EB-5 program and access the lower-cost financing the joint-venture program allows.  The most common questions are on the costs, program rules and odds of success.  This page deals with all of these issues.  If you want to look at the typical structure of the deal, click here

Rules of the Road

There is no such thing as a free lunch and there is no such thing as a no-cost/no-risk private placement offering.  There are significant costs, significant risks and significant rules.  Your realization must start with the fact of understanding there are qualifications, because; if the deal doesn't work out for the developer, the financing is 100% non-recourse and the developer can just walk away (except for cases of fraud).  On the other hand, a project failure is cataclysmic for the foreign national - if they lose their money, they immediately lose their green card and have to go back home.  Our firm's ability to profit from this program is based upon maintaining our relationship with the licensed representatives of the People's Republic of China.  If we refer a transaction that bombs out our ability to profit in the future could be eliminated, so our initial underwriting analysis is for our benefit and at your sole cost and risk.

As a result of this fact of life, not all projects qualify and Rainmaker will not work on any project seeking qualification for the EB-5 program without being paid for it.  Rainmaker Underwriting is a for-profit consulting company and it is our intention to profit from our relationships until such time as this program is no longer sanctioned by Congress.  The majority of our compensation is paid out after the closing of the private placement offering and subsequent development of the project, so the quality of the project is very important to our window of opportunity.  Time is of the essence and we do not want to risk our opportunity window on projects that have insufficient financial resources, projects that have insufficient documentation or project teams that we believe (in our sole judgment) won't be able to deliver the project earnings that are at the core of our economic opportunity.  In all cases, priority will be given to projects and sponsors that have the necessary financial resources to close, have a project that can meet commercial underwriting benchmarks and a project team that can conform to the process and requirements of the program.

The program has limitations on the number of applicants the U.S. government (USCIS) will allow into the United States each year and that means the practical limitations of the program each year are around $1.5 billion and Rainmaker Underwriting is not the only joint-venture producer for this program.  This is strictly a first-come, first-served program and you need to understand that Congress could decide to cut off your access to this program with or without giving any kind of prior notice even though this program became the law of the land all the way back in 1990.  It is not likely the program will end any time soon, but it must be understood that Congress runs this show and not us.  We expect no problems, but Rainmaker accepts no responsibility for the actions of any other party (including agencies of the government).

The minimum project budget we will accept is $5 million and the maximum project budget we will accept is $50 million.  If your project budget will not certify to be at least $5 million then we can't help you; it's a dollars and cents issue.  If your project budget is greater than $50 million then we will help you with structuring the rest of the financing so that the deal is in compliance, but $50 million is the limit for this program.  If your project will have additional phases over time then there may be exceptions based upon those funding requirements that we will review with you.  In any case, we will provide you with definitive information - nothing is left to chance or not covered.

The funds are not given to the developer as a blank check.  Once the project is pre-qualified and all required due diligence exhibits have been provided, Rainmaker Underwriting will issue the draw schedule for the funds that is based upon our analysis of the project draw schedule and the approved schedule of values.  There are reserve funding requirements and there are hold-backs to ensure that all contracts are completed and all goods and services delivered, installed, erected and/or constructed (as the case may be).  All projects require a design/build project agreement unless the developer is going to personally guarantee (and have the balance sheet to back it up as evidenced by posting a cash bond equal to no less than five percent (5.00%) of the construction contract Gross Maximum Upset Price) the construction phase funding and there will be no exceptions to this requirement as we are not going to expose the foreign nationals to the risk of second-dollar change order cost exposure and/or lawsuits between the developer, the contractor and the project architect regarding second-dollar change order cost claims.  

If you think you will be able to bury profit in this funding or "rape the building", then we have bad news for you; you are going to not be able to do so and we will ensure that any fraud is prosecuted to the fullest extent of the law.  Again, Rainmaker Underwriting will not risk its relationships and ability to profit from said relationships regarding this program for the sake of your project and/or your ambitions under any circumstances.  If the choice is our future ability to profit or our relationship with you, we will immediately sacrifice you.  The bottom line is to keep everything above board at all times and the problems will be few.

If your project site is not entitled for the intended use then the project won't receive any distributions of funds until you have the land entitled for the intended use as we will not be exposing these foreign nationals to the risk of losses because the developer is in a zoning fight with the county or city zoning board and there are no exceptions to this rule.  All reasonable costs for zoning and entitlements are part of the eligible basis for the joint-venture funding as the underwriting for development costs is the same process and uses the same standards you would see in any other institutional underwriting.  Legitimate costs are covered.  If you have inflated or "padded" costs then the fraud carve-out will apply and this will automatically disqualify the deal (if it is still in underwriting) or end the joint-venture (if the deal has closed escrow) and the carve-out will be the developer's personal responsibility for repayment.

Your project team is of utmost importance.  Part of the due diligence review is a substantive review of the capabilities of your project team.  If you have an incomplete project team Rainmaker Underwriting can help you put together a project team to get the job done or you can do it yourself, but you will have a complete project team or you won't get past the pre-construction phase underwriting until you do have a complete team.  If there are weaknesses in your project team we will tell you why we think a given team member is weak and what additional measures will be required to ensure performance (if any) as the due diligence review is as much for your benefit as it is for our peace-of-mind.

People want to know about the timing.  From the time you have the complete due diligence presentation to substantiate your project, the process takes as long as it takes - the quality of the project and amount of the funding dictate whether it can be funded in as little as 90 days to as long as 180 days.  There is no guarantee of funding as the market will dictate participation and you need to understand this clearly.  The more risky the project appears to be for the foreign nationals who will be providing the capital, the less likely they will be to select your project for funding.  The process works differently in China than it does in the United States.  Part of your advance costs/capital outlays go to licensed immigration consultants in China who solicit participants.  They are mainly soliciting client company families of the immigration law firm (these are the people who have money), but they get paid a portion of their fee in advance which is not the custom in the United States where we typically pay placement, origination and syndication fees at the closing of escrow.  Each investor (again, a Chinese foreign national) is putting up $550,000 (of which $50,000 goes to these licensed consultants in China) and the custom is to pay each consultant a sum of $10,000 to $50,000 in advance depending upon how many investors the consultant is expected to produce for the transaction, but this is not a guarantee.  As you are well aware, everyone wants to come to our country so there is a significant impetus for them to participate, but the transaction requires some funding incentives for these people to work on your behalf.  Generally speaking, you will pay somewhere around $1,000 in advance for each investor to be recruited and each investor is putting up a net of $500,000 in your project.  If your project has a budget of $5 million, then you would expect to pay at least $10,000 for this purpose (though the more you pay, the more consultants can be put to work and this would (obviously) increase your odds of success, but only to a certain degree).  These consultants pay a lot of money to the government to be able to work in this program, so the payments are made to those consultants that have a demonstrable track record.  In this regard, you have a lot of say in this matter and while we recommend that you fund at least $50,000 for this purpose, you get to decide how much you put into your transaction to provide incentives to these consultants to sell your deal (again, this is their process and you don't have much say in the matter as the regulations and compliance requirements are substantial inside the People's Republic of China).

The Costs

From a standing start, the typical senior housing project budget would have an expectation of a MINIMUM budget of around $500,000 to close escrow (if you have a different kind of property development check with us but this number is a good starting place), plus the cost of securing site control.  Your costs in the transaction include the following:

The preparation of the private placement offering memorandum, the subscription agreement, the legal opinions and associated third-party reports the securities law firm requires for private placement offering and the EB-5 regional center application process that are requirements of the program are your responsibility to fund.  The total costs for this mountain of documentation is $100,000 in most cases.  If you have special considerations and/or issues that must be dealt with then the costs only go up from there, but your expectation should be for a cost of $100,000.

The completion of all due diligence exhibits required for your project.  Rainmaker Underwriting's experience in these matters suggests the cost to be a floor of $350,000 plus whatever the costs are for obtaining site control.  If you are unsure about this process then you should talk to us because this is definitely a floor number and makes some assumptions as to your abilities and the costs of services that may vary widely and over which Rainmaker Underwriting would have no control.  This assumes market terms on some services where there is the expectation the provider will defer some compensation to the closing of the funding escrow (if not, you would have to have more funds available to you).  This is very much a transaction-driven issue and the costs of contracting for legal control of the project site and permissive zoning for its intended use must also be factored into your budget.  A quick consultation with Rainmaker can help you clear up your budget concerns and judge whether or not you have the necessary financial resources to close escrow.

The funding of the EB-5 related syndication costs for the immigration consultants in China would be expected to be approximately $50,000 (per the above), but you need to be realistic with this based upon your project budget.  The more you provide, the better you are going to be to a certain extent as over-funding these people may have the opposite effect.  Remember; you want to give them an incentive to do their job for you and recruit investors.  If you pay them all of their fee then our concern would be for a potential conflict-of-interest, so common sense dictates action.

This budget does not take into consideration any of the following:

Consulting services you may have Rainmaker Underwriting provide that are outside the usual envelope.  In other words, the $300,000 due diligence budget assumes the cost of a market feasibility study, but it does not assume any costs for a Certificate Of Need if one is needed.  Costs associated with a Certificate Of Need are part of the eligible basis, but if your project requires a Certificate Of Need you have to obtain that in advance and defray those costs subject to reimbursement through this joint-venture funding.  If you want to have Rainmaker prepare the market study then you pay the fee associated with that contract and that is part of your eligible basis at close of escrow, but you fund and expense these costs in advance.  You will also have the usual engineering consultants (site, civil, structural, MEP, etc.), design consultants (architects and interior designers), construction consultants (contractors, valuation consultants, etc.), specialty consultants and property management consultants to fund and provide their required reports.

Cost of site control.  You can obtain site control with a purchase and sale agreement, option agreement, executed letter of intent, by providing evidence of fee-simple ownership or an executed ground lease for the real property.

If you have a consulting firm prepare a third-party report that doesn't meet the usual and typical underwriting standards for institutional investments, then there is no reimbursement for that report.  If the report is supposed to be an arm's-length report and you pay for it upon completion then the provider has a conflict-of-interest and there would be no reimbursement for the report as there would be the expectation that the provider prepared the report to your specifications so the provider would get paid and the opinion may not be the real opinion but the product of conjuncture.

If you have to retain extra consultants or report providers for unusual conditions, then the due diligence costs would increase.  For instance, the budget contemplates a Phase I environmental report, but does not contemplate funding for a Phase II remediation report and abatement costs.  Other examples are specialized hydrology, sound, soil/rock conditions, demolition or the like.  If you are unsure then talk to us and we'll help you put together your budget.  Again, we don't provide services for free, but we can answer questions.

Generally speaking, the due diligence review takes us ten (10) days to complete and there is a report that is generated covering all of the project information you provide us and whether or not we think it is deficient.  If it is deficient we will stipulate why it is deficient, what remedial steps are necessary and if it is a measure we can help you fix what the cost would be to have us help you fix it.  This does not mean you have to have Rainmaker Underwriting fix anything for you; this is your project.  For those things we do not provide, we will provide you with an estimated cost (based upon our experience) and this is an estimate and not a guaranteed cost of any kind - the costs are what you and the provider negotiate.  The initial due diligence assessment final report will include a key milestone development schedule, schedule of costs and cash flows over the projected interim period and a final cost estimate of the remaining costs you would be expected to incur to document your project's readiness to proceed - as this is the "gold standard".  We are looking for projects that need the money and are otherwise ready to go with current due diligence reports, designs and cost estimates and budgets in hand.

Once you have completed the review and put together the required due diligence exhibits for the project, the next step is to complete the private placement offering process.  Generally speaking, it takes 60 days for the offering document to be prepared and there are comments and revisions that would be expected from you (the issuer) and there will also be reviews for the EB-5 approval process that you will have to sign off on that happen along the same time line.  During this period of time, the in-country immigration consultants are also being tasked to start the solicitation process (in conformance with their laws - not ours) so that this can all happen as quickly as possible.  Once the documentation is done the EB-5 participants will start to be admitted via the subscription process.  In most cases, the subscription process adds another 30 to 120 days to the process based upon the particulars of the transaction, capital market considerations and the relative size of the budget.  Escrow closes as soon as all the required subscriptions have been received.  All offerings are for a stated sum and no offering is a "mini-max".

Odds of Success

The potential for a successful offering process outcome for your project is predicated upon an understanding and assessment of the following issues:

Current capital market conditions.  The EB-5 program offers these foreign nationals a broad array of opportunities.  Granted, they have to go through these licensed immigration consultants, but you are not the only deal out there and if your deal looks largely more risky than other opportunities to generate the same stated benefit requirement in the current capital markets, then your project could suffer a corresponding lack of investor interest and support.

Immigration consultant support.  As stated above, this program is controlled in China by people who have been licensed by the Chinese government and who are not subject to our laws or business practices.  It is important to provide them with an incentive, but it would not be wise to overindulge these people for the simple reason they would have no compelling reason to perform if they have already received their fees.  This is a balancing act that the immigration legal team will advise you upon and you should give careful consideration to their guidance.  Either way, in the end, you are responsible for the outcome.

Jobs support.  Projects that generate more jobs are going to be the projects that attract the most investor support.  The more jobs the project supports (direct, indirect and induced) the more investors will be attracted to the deal as their green card requires their investment to support at least 10 new jobs.  Senior housing facilities have an advantage here as they are big job generators, as are manufacturing facilities, hotels, motels, retail and mixed-use projects.  If we can't document jobs for your project, there could be problems in selling it so talk to us about this issue if you are outside these areas of endeavor.

The next piece is the structure of the resulting deal.  Click here for that information.

 

What Goes Into An Underwriting?

The Rainmaker approach is truly a comprehensive assessment with 66 exhibits collected on every project that cover every aspect of the development, construction, operations and regulatory matters.  Collateral, credit and capacity underwriting reviews are conducted using CREFC underwriting standards in addition to a complete default risk analysis on term, maturity and technical default risk profiles.  Our typical underwriting report on a new construction project will easily exceed 500 pages and catalogue all transaction documents, plans and specifications.

Rainmaker Underwriting, LLC can trace its history back all the way to 1989.  Incorporated in 1993, Rainmaker Marketing Corporation evolved over time into a full-service business to business consulting firm.  Rainmaker Marketing Corporation’s initial specialization was in issues and documentation needs corresponding to the capital funding cycle for commercial real estate development projects with a primary focus on senior housing and health care related properties.  Today, Rainmaker Underwriting, LLC serves all types of commercial income-producing property development program financing requests with a combination of feasibility studies, due diligence services, structured finance consulting and a focus on commercial underwriting review services.  Rainmaker Underwriting, LLC’s service area includes all of the continental United States, Canada, Mexico and the Caribbean Basin.

281.537.1200

Email: clinton.lovell@rainmakerunderwriting.com

Project Feasibility Studies, Commercial Real Estate Development Finance, Outsourced Underwriting Services, Due Diligence Documentation & Project Management Consulting

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