Beware the promises from single real estate developers to access the American Dream
With the deadline of 21 November 2019 looming for those wishing to apply for an EB-5 Investor Visa for the US, when the required investment will increase from US$500 000 to US$900 000, there are possible perils at stake for those who do not fully comprehend the schemes that are attracting South African investors. The pitfalls need to be understood if they are to be avoided.
The Managing Director of the Africa division of Atlantic American Partners, in his recent visit to Cape Town has sounded a note of warning. Daniel Ryan explains: “If investors do not properly investigate or understand the schemes that are being promoted to them as potential investors, their money could be at risk. Several people have lost their entire investment and have also, therefore, not been successful in their Green Card application. The numbers of people negatively affected in this way could increase as investors rush to secure an EB-5 Visa at the current investment level and before the deadline when it will increase by 80%.”
The vast majority of EB-5 projects in the US involve investment in a single commercial real estate development asset, which is usually promoted by an individual property developer or corporation that is invariably more keenly focussed on their own financial gains than protecting the financial interests and risk reduction of the EB-5 investors. Without an oversight equity fund management protection methodology (such as AAP provides in its model), the investment could be at risk. In some cases, where the single asset property developer has gone out of business or run out of money, the EB-5 investor has then not only lost their entire investment but also the ability to apply, therefore, for a Green Card – which is, of course, the main investment attraction of the US EB-5 Visa scheme.
There are in fact only two US schemes, out of hundreds, that offer a Fund Diversification Model that manages the risk through a private equity bank. Atlantic American Partners (AAP) is one of those two organisations offering not only a proper return for investors but also maintaining a 100% track record of securing green cards for its successful applicant investors.
AAP has pioneered this model for the EB-5 industry, whereby investors own a limited partnership position in a portfolio of the assets – i.e. not in just one property asset – and AAP is able to do this because it is not a developer. Each fund includes multiple projects in different asset classes, built by different developers, in different geographies. Much like a mutual fund, this approach diversifies investment risk and helps to prevent against loss of capital. AAP’s current fund AAFF-III will have a diversified portfolio of three new commercial real estate investments to include one luxury residential apartment community, one luxury hotel, and one state-of-the art, high-end student housing community.
Ryan continues: “Another consideration is success rates and consider what ‘insurance’ options are available so that the investment is protected and that the aim of the investment is realised – in terms of securing green cards and indeed in repaying the initial investment plus receiving an annual return over the period of investment.”
For the past ten years, AAP has been running its diversified fund model for EB-5 investments through its private equity bank (which has 46 years’ experience). With ten funds successfully completed, and 33 projects successfully completed, AAP is now on its eleventh fund; it boasts a 100% track record, having helped over 650 families with the immigration process to the US. All investors that complete the entire process, after the fund has been fully liquidated/sold, and all immigration approvals have been received, thereafter receive their initial investment; and during the process a return on the principal investment amount over the period of that investment – of between 1.5% and 2% annually, based upon net available cash flow – and when the fund is fully liquidated, receive a limited partnership interest capital gain of 25% of the net profits after the fund has fully liquidated and all costs accounted for.
“This is what investors want to hear”, adds Ryan. “They want assurance that we are not the developer but a private equity fund manager that protects the EB-5 investor and acts as “trustee”, that we will monitor the investment to make sure 10 jobs are created per investor (which is the EB-5 Law). They would also like assurance that they will receive their principal investment back after the full investment period and sale cycle that they may also receive an annual return on that money in the interim; plus a share of the profit once the funded projects are completed and the fund is fully liquidated. And they want a proven track record company guiding them along the way to obtain all approvals for temporary and permanent Green Cards as a reward for their investment – this is the mainstay of the EB-5 Visa programme, after all.
“We believe potential investors need to be aware of the benefits and the pitfalls with the EB-5 entity/project/company and thoroughly research the options before they rush into anything before the November deadline and run the risk of either losing that investment or making it completely redundant.”