Analyzing USCIS Administrative Appeals Office (AAO) EB-5 Source of Funds Rules for Using Loans as Investment Funds

By:  Bernard Wolfsdorf, Esq., Vivian Zhu, Esq., and Joseph Barnett, Esq.

EB-5 law and regulations require a foreign national to “invest,” or be actively in the process of investing, “capital” in a new commercial enterprise, which is defined to include “indebtedness secured by assets owned by the alien entrepreneur”.

In July 2016, the USCIS Administrative Appeals Office (“AAO”) issued three decisions regarding these terms and the use of loans as investment funds in support of a Form I-526 Immigrant Petition by Alien Entrepreneur.  This blog analyzes the AAO’s approach and provides insight on how to properly structure personal mortgage and loan agreements to obtain the required “lawful” EB-5 capital.

Introduction

The AAO has jurisdiction over appeals from decisions on most immigration petitions and applications that are entered by USCIS regional service centers and district offices, including EB-5 adjudications of Form I-526, Form I-829 Petition by Entrepreneur to Remove Conditions on Permanent Resident Status, and Form I-924 Application for Regional. Center Under the Immigrant Investor Pilot Program.

In April of 2015, during an EB-5 stakeholder engagement, USCIS indicated that proceeds from a loan may qualify as capital used for EB-5 investments, as long as the indebtedness is secured by assets owned by the alien entrepreneur and the alien entrepreneur is personally and primarily liable for the indebtedness (i.e. the immigrant investor is responsible under the loan documents for repaying the debt) in accordance with 8 CFR §204.6(e).  In addition, USCIS indicated that a petitioner must demonstrate that the value of such collateral is sufficient to secure the amount of indebtedness being used to satisfy the minimum required investment amount.

Matter of W-R-Z- (July 7, 2016)

In Matter of W-R-Z, the AAO specifically mentioned USCIS’ interpretation of “capital” and “indebtedness” during the April 2015 EB-5 Telephonic Stakeholder Engagement and agreed that  the investment of cash obtained through a third-party loan is not simply an investment of cash that needs no further examination. The AAO also explained that “to classify an investment of loan proceeds as a contribution of cash would permit third-party loans that are secured by the assets of a new commercial enterprise,” which is expressly excluded from the definition of “capital.”

Matter of S-K-P-(July 7, 2016)

In Matter of S-K-P-, an alien entrepreneur obtained a third-party loan secured by gold, silver, and diamonds that were gifted to him by his father.  The AAO cited Matter of Soffici, which illustrated that when a petitioner’s capital is derived from proceeds of a third-party loan, his contribution of the funds constitutes an investment of indebtedness, not cash, and he must therefore show that his personal asserts sufficiently secure the loan.  The AAO also indicated that the petitioner needed an appraisal to show the value of the collateral at the time he secured the third-party loan to demonstrate that the loan was sufficiently secured.

Matter of Y-G–(July 11, 2016)

In Matter of Y-G-, the AAO reviewed the Form I-526 of an alien entrepreneur who used property of a third party (her son) as collateral for her EB-5 loan.  The immigrant investor signed as the borrower and directly received the loan funds, and her son signed as mortgagor.  The petitioner contended that even though the property was registered to her son, that she maintains full control over the property and remains personally and primarily liable for its disposition.  Nevertheless, the AAO ruled that because the property securing the loan was not owned by the Petitioner, she had not established that her investment funds qualify under the definition of “capital” at 8 CFR § 204.6 (e), even if the loan instrument listed her son as a co-signer of the mortgagor.

It appears that if the son had signed as the borrower and mortgagor, and then gifted the loan funds (cash) to the immigrant investor, this case would have been approvable, and the petitioner’s investment capital would have been deemed to be cash instead of indebtedness.  The AAO ruled that only the title holder (registered owner on the deed) can sign the mortgage loan contracts as borrower and mortgagor, regardless of who paid for the property or who is the de facto controller/owner of the property.

Conclusion

With long I-526 processing times and even longer visa waiting times for Chinese EB-5 investors, it is critical to prepare a proper Source of Funds package that complies with USCIS regulations and AAO rulings.  If you have any questions about documenting your EB-5 source of funds or want to schedule a professional consultation to discuss your EB-5 case, please contact a Wolfsdorf Rosenthal LLP attorney.

This post is designed to provide practical and useful information on the subject matter covered based on current law, regulation, and policy; changes to the law, regulation, or policy may modify what can be done when an EB-5 project fails.  Further, this blog is provided with the understanding that no legal, tax, accounting, or other professional services are being rendered or provided.  If legal advice or other expert assistance is required, the services of a competent professional should be sought.

By | 2016-07-28T10:34:31+00:00 July 28th, 2016|Uncategorized|Comments Off on Analyzing USCIS Administrative Appeals Office (AAO) EB-5 Source of Funds Rules for Using Loans as Investment Funds

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