Authored by: Gregory Wing

EB-5 investors have been struggling for years how to assess EB-5 Project Risks. Assessing just three of the Seven C’s assessments (of the 27 that are in the EB-5 Project Scoring Index) would have been sufficient for any EB-5 investor to dismiss the Chicago Convention Center project as inappropriate for EB-5.

Let’s review the three assessments…

Assessment # 1: Local Market Need
Based upon the available data, there was very uncertain market need for a convention center – hotel cluster in the Chicago O’Hare sub market.

Reviewing hotel room data… the Chicago area market in 2011 (when the project launched) had over 39,000 hotel rooms available and demand was a little over 29,000 hotel rooms. The O’Hare airport area sub market where the project was to be built is not as as strong as the Chicago downtown area and room RevPAR (average revenue per available room) in 2011 when the project started marketing to EB-5 investors was at approximately $118.00 in the city and about $72.00 in the O’Hare area.

The fact that the project would need a RevPAR of $289.00 at stabilization (compared to $72.00 average RevPAR for the area in 2011) should have generated lots of EB-5 investor concerns and caution.

Bottom line: where is the hard data (market study) that validates that the O’Hare sub market had enough demand to support hotel guests filling 363,000 room nights – per year – who would pay $289.00 per night (on average). Does that even seem reasonable?

Without strong evidence of local market demand for the proposed project (a convention center draw – that would fill 995 hotel rooms), any experienced financier would have immediately dismissed this project – as someone’s fanciful dream.

As a result, the Local Market Demand Assessment earns a grade of 4.5 “Unproven local market opportunity for business”, See grading box below – from the EB-5 Project Scoring Index. The grade is based upon a 0 to 9.5 scale (9.5 being an extremely safe grade – for a project). A grade of 4.5 would be considered unacceptable – high risk of failure.

Assessment # 2: Revenue Forecast
Based upon available information, the project’s revenue projections would be considered very inflated (not believable). For more publically available info… go to: www.eb5info.com to see Michael Gibson’s write-up on the project’s revenue projections.

Clues to test the believability of the revenue assumptions can be found by: 1) investigating the success of the competitive projects in the immediate area, 2) reviewing the signed agreements with the hotel franchisers (they also do due diligence), 3) seeing the commitment letters from the other debt or equity providers , and 4) by reviewing the project’s appraisal – from a noted industry expert.

Based upon available data, the RevPAR need of $289.00 for 363,000 room nights per year seems very optimistic. Absent had verifying data and all of those “clues” noted above to attest to the revenue forecast, one must grade this Revenue Assessment with a “Not Sure”.
See below. A “Not Sure” earns a grade of 5.5 – high risk of failure. See grading box below:

Assessment # 3: Prior Successes
Even the most cursory review of the data made available should have alerted investors (and their Agents) that serious discrepancies existed in the competence and expertise of the Sethi development team. Had the Sethi team ever developed a convention center based project of this scale – successfully? NO.

Also, evidence supports the facts that their hotel operational competence should have been questioned. The Chicago Tribune Stated: “He wants to build a soaring hotel convention center in Chicago’s Norwood Park neighborhood on land now occupied by his family’s budget hotel, where rooms go for as little as $33 a night and weeds grow at the bottom of an empty swimming pool.” Further, the Tribune states: “Last year [the family’s Chicago O’Hare Garden Hotel] was cited by Chicago building inspectors for defective carpeting, holes in the walls and ceiling.”

Wyndham hotels terminated a franchise agreement with Sethi and his father in 2011 and sued them in federal Court for $355,000 for failing to maintain sanitary conditions at their hotel.

A good EB-5 investment RULE – NEVER invest in a project where the developer has not already successfully completed at least 3 identical projects (that you can visit), where you can validate the timely employment creation AND the successful repayment of investor funds. Backing the first or even second project development attempt by an unproven team is no place for an EB-5 investment.

Because this would be the first time that the Sethi development team tried to complete such an extensive project, we would give this Assessment a grade of 5.5 – which denotes “high risk of failure.”

In Summary
As a lender for over 20+ years having lent billions on real estate based projects, we would NEVER finance a 28 year old developer who claimed 15 years of project development experience!!! For us… the “Character” or his integrity would be in serious question. Other factors, including: the lack of proven prior success with a project of similar size, unproven demand for the project and questionable revenue projections should have been enough to disqualify the project from serious consideration. The average grade for this project is less than a 6.0 – on the PSI scale. That equates to a “high risk of failure” on the PSI scale.

Recommendation
We recommend that any project with a PSI grade under 8.5 should probably be dismissed as inappropriate (too risky) for EB-5. A grade above 9 would be deemed a relatively safe and appropriate EB-5 project to consider investing in.

If you use just the three Assessments noted above – you can quickly eliminate almost all of the projects that are inappropriate for EB-5 project consideration. Using all the Seven C’s assessments on your final two or three projects being considered is a very good way to help ensure success.

For more information on the Seven C’s for EB-5 Risk Analysis, please go to Seven C’s webinar or our web site: Education Fund

As a lender for many decades, we believe that knowing borrowers “Character” is extremely crucial. We just won’t lend money to a person or business that has questionable character. However, good character does not materially affect our decision to fund their project.

Clues that help us determine Character include: personal and business credit scores, management’s personal and business reputation, whether management is “greedy” or do they give back to other organizations, bank and supplier reference letters, etc.   The bottom line question is, have they previously honored and fulfilled their commitments?  Further, Is it likely that they will do so in the future?

The Enron debacle is a good example of what can go wrong when an team of competent and experienced professional’s gets together, but have questionable Character. Our view is: if we would be willing to lend the principals many thousands of dollars on a “handshake”… they pass the Character assessment. Otherwise, we pass on the financing… and  so should an EB-5 investor.

Lenders and financiers usually determine the future prospects for a market to see if societal shifts or other issues could impact future market demand.

Take for example the video rental business that enjoyed success for many years. Going to a video store was in vogue for several decades. However, most of those businesses are gone or bankrupt now because technology (video on demand) obsoleted their business model.  If you had purchased a video business (and the building), you would likely be unable to refinance the building or sell the business now… as a video store.  If that business and building been financed via EB-5 years ago when times were good, the EB-5 investor would now be stuck.

Understanding long term market trends for a project can be very important in the selection process.  Recently, market forecasters have predicted a substantial decline in the future demand for retail space, as retailers move to on-line, direct from manufacturer, shipments.  Therefore, macro market changes can dramatically reduce the refinance (or sale) opportunity for a project (thereby trapping EB-5 investor funds) if the project is in a declining market.

The link to the table (below) shows how assessment #2 (out of 27) is scored using the EB-5 Project Scoring Index.

National Market Assessment

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Thanks for reading, and if you have any questions, please contact us.

Greg Wing, Managing Partner of Education Fund of America

If the developer is convinced (and we like industry and national trends) then we may commission a third party market study with them. If the study proves that demand does exist, we move to the next step. Bottom line, we will not evaluate a loan or investment opportunity unless we are convinced of the need or strong demand for a project. How do we get convinced? Most often with a Market Study.

What is a Market Study?  It is a study prepared by professionals who can astutely assess how all the competitors are doing in the local area.  For example, it we were to finance an Assisted Living Facility or an Apartment complex, we would need to see the occupancy rates for the competing properties above 93%. That occupancy rate may enable our new project to succeed without eroding prices or occupancy rates.  An occupancy rate below 93% get’s an automatic “no interest” from us.  Why? because the market is too soft.

All EB-5 projects can (and should) provide similar market ratio or demand rating.   Those ratings determine the initial “go” or “no go” for a lender.  Therefore, every EB-5 investor should make a similar market demand assessment.  If the local market demand is not VERY strong NOW, walk away from the project… fast.

This is #1 in a series of information on whether an investment in an EB-5 project is: safe, secure and predictable.

 - What is the project’s probability of success (as presented in a business plan) and,

- What are the protections if something goes wrong?

This is the first in a series of posts that attempt to help EB-5 investors better understand the key elements that determine whether an investment in an EB-5 project is: safe, secure and predictable.

Credit analysis or risk assessment is a proven methodology that lenders employ.  Conducting credit analysis or risk assessment on a project without a reference to follow is like having puzzle pieces in a box – with no reference picture to look at. Wouldn’t that be frustrating!

Using best practices from the professional banking and investment communities can provide the puzzle picture for EB-5 project investing. You still have to put the puzzle together, but you at least know what the picture should look like.

To start our EB-5 project best practice process discussion, I offer that there are at least 27 puzzle pieces that fit into seven major groupings. Four of the groupings help assess the probabilities of success. The other three groupings measure the protections in case something goes wrong.

If understanding EB-5 project risk is important to you, please read the following daily blog posts at Education Fund of America’s blog below. We also invite you to visit our Learning Center, and please contact me at any time for questions. Thank you!

Gregory Wing is the Founder and Managing Partner of Education Fund of America. He is also President and CEO of Bedford International, a firm that in the last 20+ years provided more that $5 billion in loans and investments into businesses located in all 50 States.

Until now EB-5 investors have not had a reliable investment framework to determine the business risks of their investment. Today’s launch of The Seven C’s of EB-5 Investing methodology and the EB-5 Project Scoring Index by Education Fund of America (EFA) is the culmination of over 30 years of related financing experience, created by Co-Founder and Managing Partner of EFA, Greg Wing.

“The Seven C’s of EB-5 Investing methodology helps foreign nationals seeking a Green Card to determine the optimal EB-5 business to invest in,” says Managing Partner Greg Wing. “For decades banking and investment professionals have used the Five C’s of Credit Analysis to guide their business lending decisions. To meet the specific EB-5 program requirements, we expanded the Five C’s to Seven C’s.”

Greg discovered the need for a reliable business assessment methodology while meeting with EB-5 investors in China. They asked if there was some better guidance available to assess investment risk and project selection. A free educational webinar and White Paper on the Seven C’s that addresses those needs is now available.

“We believe that applying the Seven’s C’s for EB-5 project selection will significantly improve the probability that investors will secure their Green Card and get their investment returned.” Greg concluded.

In addition to helping foreign nationals from China, India and other countries assess EB-5 risk, EFA finances public charter schools – that inspire children to greatness and move them from being indifferent to inspired.

The Seven C’s of EB-5 Investing

A webinar and white paper are now available for foreign nationals and immigration attorneys to learn about the Seven C’s methodology for EB-5 investing at www.edufundamerica.com.

Managing Partner Greg Wing

Greg Wing is a national speaker, published author and recognized expert on corporate finance and specialized corporate tax matters. He is founder of Bedford International and co-founder and a Principal of Green Card Fund (GCF). Greg co-founded EFA to be a specialized financing entity that exclusively finances charter schools via the United States’ EB-5 program.

Education Fund of America

Education Fund of America (EFA) is financing the best public charter schools in the United States while providing EB-5 investors with a fast and secure path to U.S. citizenship. EFA works closely with immigration attorneys and their clients. The credit analysis methodologies used by the firm are based upon the White Paper The Seven C’s of EB-5 Investing, and you can read more here: www.edufundamerica.com.

EFA is part of the Bedford International family of companies founded in 1991, more here: www.bedfordint.com. Bedford has provided over $5 billion (USD) in loans and investments to real estate based companies located in all 50 states. Bedford Lending was approved in 1996 by an Agency of the U.S. Government to underwrite and provide U.S. government guaranteed loans to healthcare, multifamily and hospital properties. EFA is directly affiliated with Green Card Fund, a USCIS approved EB-5 Regional Center www.greencardfund.com.

Click on this link for more information on Education Fund, Charter Schools, the EB-5 program and the immigration process. Learn more about the Seven C’s of EB-5 Investing, too.

In the Education Fund of America Learning Center you will also find a Question & Answer section. Please visit today and learn more about how we are creating the best public charter schools in the United States while providing EB-5 investors with a fast and secure path to U.S. citizenship.

1. Understanding the probability of getting their money back, and
2. Receiving a desired rate of return on their loan – investment.

The EB-5 investor has two additional objectives.

The objective of the EB-5 investment is not motivated by securing a rate of return on the funds invested or loaned.  The motivation of an EB-5 investor is based upon the desire to secure a United States Green Card.

The primary determinant in securing the Green Card is that the investment will generate the required number of jobs (10) in the time allotted (generally within 24 months).  This requirement places an additional burden on the investor to assess the risk of whether the project is capable of securing the jobs within the required time frame.

Not understanding how to assess the job creation risk has caused some EB-5 investors to put more emphasis on secondary and tertiary risk assessment priorities – investment guarantees, etc.

Education Fund of America has developed the 7 C’s to assess risk for our projects. Investors can also use these 7 C’s to help them assess the risks of different EB-5 projects. Watch for more information in this blog. Thank you.

This internal company assessment system is used by the Credit Committee of Education Fund of America to determine the risk of an EB-5 project. The primary risk for any EB-5 project comes in 3 areas:

1. Creating a sufficient number of jobs for the project to comply with the USCIS’s requirements (10 jobs),

2. Creating an investment payback within the 5 year requirement, and

3. Providing sufficient business success to pay a return on investment.

Watch for our next post for more on the 7-C’s and how this assessment process better understands, manages and reduces project risk.