This is a guest blog post by Steven Blayney, a qualified U.S. and Australian lawyer who resides in Hong Kong. Mr. Blayney has 2 years experience marketing an EB-5 regional center project in China.

Franchise area developers searching for innovative ways to finance franchise development may potentially profit from the U.S. Citizenship & Immigration Services’ (“USCIS”) EB-5 visa program. Under the USCIS EB-5 program, foreign investors that invest in a qualified business in the U.S. may obtain U.S. permanent residence for themselves and their families (“Green Cards”).

The requirements of the EB-5 visa program are simple: First, the foreign investor must invest US$1 million in a for-profit new business in the U.S. (The investment amount is reduced to US$500,000 if the new business is located in a rural region or high unemployment area.) Second, the newly-created business must create at least 10 full time jobs for U.S. citizens or U.S. permanent residents.

(In this article, the term “Area Developer” means a party obligated under a Development Agreement, or other agreement, to construct and operate more than one unit franchise in a defined territory.)

EB-5 Financing

The beauty of EB-5 as a potential financing mechanism for franchise area developers is that foreign investors investing under the EB-5 program are not typically concerned with the rate of return on investment. The foreign investors’ principal concern is to obtain a U.S. Green Card for themselves and their families.

In many cases, as long as they receive their Green Cards, foreign investors are content to receive merely a return of principal at the end of the 5 year investment period without interest. Some investors may even be content with a partial return of principal provided that they receive the Green Card.

The relatively low-threshold investment amount and the high job creation requirement makes the EB-5 program potentially well-suited to finance high-employment, low-wage franchise businesses. For example, many quick service restaurants require an investment of $500,000 to $2 million depending upon whether the franchise is a free-standing, in-line, or convenience store restaurant. Such businesses could be financed relatively quickly since they only require soliciting 1 to 4 EB-5 investors.

Small Franchises and EB-5

Small franchise businesses are potentially attractive to EB-5 foreign investors for several reasons.

First, since qualified franchise businesses can be capitalized with a small number of EB-5 investors, in contrast to huge, complex property development or infrastructure projects which may require soliciting hundreds of EB-5 investors, such franchise businesses do not require lengthy start-up periods. Short start-up periods are advantageous to EB-5 investors since the sooner the business becomes operational and the employees hired, the sooner the EB-5 investors may obtain their Green Cards.

Second, as established businesses, information regarding franchise businesses is, generally speaking, more readily available, and more reliable than information pertaining to new, green field businesses.

This phenomenon is important for two reasons: (a) readily-accessible and reliable information bolsters the credibility of franchise business plans relative to new startup businesses; and (b) established brand name franchise businesses, particularly franchisors that have registered their Franchise Disclosure Documents with state franchise regulators, are inherently more credible with USCIS officers when considering EB-5 visa petitions.

One important issue for USCIS officers in assessing EB-5 visa petitions is whether it is likely that the business will create 10 full time jobs per investor. For many franchise businesses, the jobs issue is a foregone conclusion since USCIS officers need only look at the number of jobs required to run a typical unit franchise business.

Regional Center EB-5 or Direct EB-5?

Generally speaking, there are 2 types of EB-5 projects: regional center EB-5 projects, and direct (i.e non-regional center) EB-5 projects. The basic requirements of both regional center EB-5 projects and direct EB-5 projects are the same: The foreign investor must invest either US$1 million or US$500,000, and the business must create 10 full time jobs per investor.

EB-5 regional centers must apply to USCIS for approval of their regional center status. Direct EB-5 projects do not apply to USCIS for approval.

The only real benefit for going through the onerous, lengthy, expensive process of applying for USCIS approval as a regional center is that EB-5 regional center projects may count both direct and indirect jobs towards the 10 full time jobs per investor threshold jobs requirement. As one might expect, the benefit of being able to count indirect jobs towards the job count is very popular with large institutional project developers (typically property and infrastructure developers) whose projects are unlikely to be able to create the requisite number of direct jobs.

Regional center EB-5 is also very popular with regional center advisors, who earn considerable sums from providing consulting services to deep-pocket project developers.

The benefit of being able to count indirect jobs towards the job count and other issues relating to the administration, operation, and marketing of regional center projects is a very lengthy topic and beyond the scope of this article. Suffice it to say that, according to recent media reports, the USCIS EB-5 regional center program is currently effectively shut down pending an internal DHS Office of the Inspector General probe of USCIS’ administration of the EB-5 regional center program. (See “Investor Visa Probe”, The Daily, September 10, 2012: http://www.thedaily.com/article/2012/09/10/091012-news-investor-visa/)

In my view, many of the problems with regional center EB-5 projects relate to the overall complexity of the program and the issue of whether USCIS has the resources to administer such complexity. This is very bad news for the foreign investor who simply wants to get a Green Card and get on with his life.

For such an investor, the relative simplicity of direct EB-5 projects is an important advantage over regional center EB-5. For direct EB-5 projects that are low-wage, high employment franchise businesses, showing jobs is a slam dunk since they can readily produce the W-2 and I-9 forms showing the jobs.

Thus, unlike regional center EB-5, there is no obligation for the franchise business to hire expensive economists, lawyers, accountants, and other consultants to produce opaque, convoluted economic impact reports to substantiate sometimes tenuous claims regarding indirect jobs, which in many cases USCIS is likely to challenge.

All the franchise direct EB-5 business has to produce are the W-2 forms and the I-9 forms. The ability of direct EB-5 franchises to produce such incontrovertible evidence to substantiate job creation greatly minimizes the risk that USCIS will reject the foreign investor’s Green Card application downstream.

From the perspective of the project developer, direct EB-5 has a clear cost advantage over regional center EB-5 since there is no need to hire expensive economists, lawyers, accountants, business plan writers, etc. And there is no need to incur the cost to set up a regional center and hire persons to manage and oversee the regional center. As a result, direct EB-5 is much cheaper than regional center EB-5.

Conclusion

For franchise area developers looking for new ways to finance the development of unit franchises in their territory, the USCIS direct EB-5 program may be worth considering. Direct EB-5 offers a potentially low-cost method for financing franchise development since the foreign investors are typically only interested in getting a Green Card and may not be interested in the rate of return on investment.

If you are interested in learning more about direct EB-5, and about how to market your direct EB-5 project to foreign investors, please contact me.

Thank you.

Steven Blayney, Attorney (admitted in Washington State)

BlayneyConsulting8888@gmail.com

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