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CORONA IMPACT ON EB-5 INVESTORS

The corona pandemic has led to fears across the globe. Real estate, stock markets, bonds, private equity investments, crude oil and various other commodities, have all tumbled beyond rational possibilities. While for some, rather many, corona is a matter of life vs death, for others, the situation is equally alarming on their financial front because net worth built by people over their life-time seems to have eroded by more than half in less than 150 HOURS.

Amongst various classes of investors who are impacted due to COVID-19, one super niche segment is EB-5. The world-wide count of EB-5 investors active as on date would hardly be something, definitely not in hundreds of thousands. This is what makes this segment tiny but probably which will have to prepare itself to take the worst hit; because for many this is not going to be a matter of return of investment but something that will jeopardize the chances of removal of conditions leading to failure of obtaining a lawful permanent residency.

EB5 India Advisory Pvt. Ltd. believes that the corona unrest in United States of America will impact EB-5 investors in the following ways:

  1. Unexpected delays in Construction: Whether a lockdown is imposed mandatorily or whether some practice it voluntarily, either way, the pace at which construction will happen is going to be impacted. This is not just about the ability of laborers to visit sites; it is fundamentally about the momentum that construction activity would lack for inter-connected reasons.

    For those projects where construction activity had not even started at the time of soliciting your EB-5 investment, be assured, that there are more chances than not of the project not being able to even kick-start its construction for a foreseeable future. Again, as stated above, “construction” as an activity, is not about putting labor & machines on site. There are inter-connected action points prior to, & consequent to, construction taking place. For e.g., a developer having identified & purchased land, and having obtained all necessary licenses and permissions as well as the approvals, may not be able to progress merely because the project may lack capitalization or the very business model may not liable viable anymore.
  2. Failure to generate Jobs: This can be divided into to major segments; Direct EB-5 investments wherein the investor needs to look after job creation for his own project by hiring, & more importantly sustaining, the required personnel; and RC investments wherein it is the prime responsibility of RC to “spend eligible monies” and hence create jobs. We will not talk about the former here because that is essentially your job to create jobs, and one may create them even at the cost of losses if that is what it takes. As far as the latter is concerned, there is nothing you as an investor can do. The only way an RC can create jobs is if the project continues leading to eligible expenses (payment of wages, procurement of steel, cement, tiles, bricks, consultancy fees, equipment rentals, directly linked administrative expenses, etc.). Needless to specify, if the project development per se is status quo, then the number of jobs which were supposed to be created on the basis of RIMS or any other model which RCs tend to follow, would NOT happen – PERIOD! There are some naïve investors who would say, “how can a developer do this, and why would he simply stop a project?”; well the answer he is, he can and the project would obviously stop because no one is going to keep pumping money on a business that no more likes viable, at least in the short to medium term, simply to make your American Dream come true. This in my opinion is not going to be the test of morality but a test of strong developers’ vs others; companies with strong balance sheets and back-ups which are able to sustain storms.
  3. Failure on part of RC to Lend Funds: This couldn’t be more ironical. Generally, in the real estate play world-wide (not just EB-5), it is a universal fact that developers are always looking for more and more funding; the very nature of the business demands so! Post COVID-19, there is a possibility that a Regional Centre may not longer be able to lend the funds; not because they didn’t want to, but because the borrower no longer wants to. This could happen for the most unorthodox and unexpected reasons. The harsh truth remans that in absence of lending, there is no “spending”, and that takes us back to point 1 & 2 above.
  4. Force Majeure: For those who do not know the term force majeure, it refers to a highly unexpected, sudden, & uncontrollable catastrophic event due to which otherwise presumed conditions no more continue to hold true. There is no thumb rule that only cyclones or earthquakes or tornadoes be classifiable as an event that invokes the clause of force majeure. In a very general sense, events leading to national emergencies are likely to cause a force majeure. Again, not all businesses can take the shelter of force majeure as the very way an event impacts industry is different for different businesses. As an example, it is force majeure for a shipping company or a tourist cruise in the event of a tornado which lead to breaking of ships and disrupted sea-journeys for a long time; this is however not an event leading to force majeure for a road transport company.

    The corona pandemic has impacted every single life and businesses across the board, world-wide. In terms of its direct impact on EB-5, various possibilities exist. Developers may cancel their projects, RCs may no longer wish to honor a loan agreement, 3rd party vendors may change terms notwithstanding a binding contract, banks may withdraw, and a variety of other things could happen which otherwise may not have happened (at least without a penalty). The invoking of force majeure clause gives either party a legal right to not oblige the otherwise agreed upon terms, without facing penal action.

EB5 India Advisory Pvt. Ltd. takes pride in its due-diligence capabilities & assures all its applicants that its clients will not bleed severely. This is because simulating catastrophic situations while assessing feasibility of a business is the first step we have always taken before short-listing relatively safe project. You will be happy to self-realize that as time passes by, and the weak ones fall out.

This article was written on 29th April, 2020 on eb5expert.in

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