The Benefits of Vertical Integration in EB-5 Investments
In essence, the role of an EB-5 regional center is serving as an asset management firm. This is the closest description to their conventional business practices, because regional centers primarily deploy equity to projects, handle the management of funds, report on those funds, and hold all fiduciary responsibility to the investors.
How Regional Centers Make Money
Regional centers make money because they help investors with their documentation and the deployment of their own funds into the project. In most cases, the regional center will make money in the spread between the rate of return (what they promise to pay to the investor) and the rate at which they lend/invest the EB-5 investors’ funds into a project.
Longtime immigration consultant of Xecute Business Plan Solutions Bernard Rojano – who at a young age immigrated to the U.S. through the EB-5 program alongside his family – says it’s not common for regional centers to invest in the project together with the investor.
“Most investments to EB-5 regional centers are passive to the investor,” Rojano explains. “It’s not typically the case for the regional center to invest in the project. Usually, the investor is the one who is at risk.”
Passive Investments vs. Non-Passive
A passive investment is a common industry term: for example, when you invest in stocks and bonds, this would be a passive investment since you aren’t managing a thing, just giving an investment advisor your money, and they are placing your capital into bonds or stock, then you get a dividend or increase in value.
A non-passive investment is one in which you have equity, and when you make your investment, you are actually a participating member of the management team that handles the deployment of your own capital. Vertically integrated regional centers are non-passive since they have a say in the project for which they are raising money.
With EB-5 investments, one concern about the passive model is opening the door to moral hazard. A regional center could potentially raise money for the project that is willing to pay the highest fee despite the fact all the risk involved will be going to the investor.
Developers Having Their Own Regional Centers
One of the differentiators of Houston EB5 versus other regional centers is that Houston EB5 is vertically integrated. In most cases, the equity fund manager has nothing to do with the project and is not involved in the development; they are only involved in the banking.
“Being the developer and fund manager means taking care of the funds, reporting to investors, and doing deployment and all compliance work that a regional center needs to do,” Rojano says. “But in addition to that, they are shoveling dirt, putting up concrete, and completing projects.”
When asked if he sees it becoming more and more of a trend to see developers getting their own regional center, Bernard Rojano is quick to point out this used to be standard back when the program took off.
“When I first started 13 years ago,” Rojano says, “there were 12 regional centers in existence. Those 12 regional centers were all developers. None of them were fund managers.”
Around that time, hundreds of regional centers were formed with the intention of a developer raising money for their own projects. Eventually, the service became more institutionalized. In the last 4-5 years, many regional centers became fund managers who are separated from the projects.
“Now there are both models in existence,” Rojano says.
Why Investments Are More Secure with Vertically Integrated Providers
It’s natural to believe that regional centers are motivated to succeed when they’re investing in the project alongside the regional center, and this is correct. Oppositely, a regional center that is not also the developer can still make money even if the project itself fails.
“When vertically integrated, there is a little bit of skin in the game with interest to perform on both ends,” Rojano explains. “Whereas when you’re a fund manager, the developer can get weak on you and not deliver. Then you’re in trouble because you delivered your funds to a failing project, and they don’t have the relationship with the investors that you have.”
In other words, when investing in a vertically integrated regional center, if you lose your money, the regional center will definitely be losing money as well.
The Strength of a Great Vertically Integrated Regional Center
Having worked with hundreds of regional centers, Bernard Rojano can attest as to what makes one like Houston EB5 a secure option.
“The strength of Houston EB5 as a regional center is that they are an excellent developer with a track record of delivering with EB-5 funds as part of their capital stack since the beginning of their operations 10 years ago,” Rojano says. “They have consistently developed and finalized real estate projects through the years and done that by putting in their own capital and equity into the same project as the investors. That’s a lot to be proud of.”
Non-Real Estate Investments in EB-5 (Not Just E-2) Are Becoming More Common
Another unique factor about select regional centers is offering immigration investment through non-real estate projects.
“There are by far more real estate investments than non-real estate investments,” Rojano says. “Maybe 80-90% of projects are real estate, and by that I mean anything that has brick and mortar attached to it. Investments outside of that are ones that have no brick and mortar, like manufacturing, oil and gas, energy, construction services, and things of that nature.”
For example, Houston EB5 is currently offering both an E-2 and EB-5 immigration option through an investment in Moderno Porcelain Works, a national installer and fabricator of high-quality porcelain surfaces for the residential and commercial markets.
“This isn’t being done from scratch. An operating company like Moderno has a seasoned CEO who built highly successful surfacing companies,” Rojano says. “It’s being done with investor’s funds but they have experience on all these different levels. That’s unusual because most regional centers who try to vertically integrate do it without experience in any of those areas so there’s a chance one of those dominoes is not going to fall.”
Today, after a decade in existence, Houston EB5 has a suite of services and solutions available for multiple visa and investment categories, and in everything they do, they have experience. Those without experience might do a satisfactory job, but it means the investor is at greater risk.