Retrogression induced reinvestment risk
Could you please elaborate retrogression risk and the related reinvestment risk?
When the loan from the NCE to the JCE matures and the JCE therefore pays the NCE off, the NCE can return the investment funds back to the EB5 investors. However, if the EB5 investors I-829 has not been filed and they receive the said funds that could put their whole application in jeopardy. Until recently, most regional centers would place those funds back in escrow and wait for the investors to be ready to receive the funds. However, USCIS has become very vocal recently that this practice does not comply with the letter of the law for EB5. In their view, until the investors’ I-829 is filed, the investors’ funds have to be at risk. As long as the funds waiting for the investors are sitting in escrow, in USCIS’s view, these funds are not at risk. Therefore, the NCE’s have to redeploy the funds to other projects. Obviously, this could create reinvestment risk. When the investors’ I-829 is eventually filed, the funds could still be tied up in the new project and therefore the investors could end up having to wait longer than they originally anticipated. As a matter of practice, despite the announcement of USCIS that investor's funds can be returned at the conclusion of sustainment period defined as the two year conditional residency period, most if not all regional centers will opt to hold the funds until the adjudication of I-829 rather than its filing.
Retrogression reinvestment rules (aka redeployment) are still vague. As such it is very unclear to many NCEs as to what will be allowable if they cannot closely mimic the original project, which will be the case for many.
The rule as stated leaves considerable room for interpretation, with investors' immigration status hanging in the balance.
The irony in trying to interpret the rules is that broader interpretations (e.g. reinvesting into private loan funds for example), makes for a less risky investment (i.e. risk of financial loss) for the investors because of diversification, but arguably makes for a riskier choice from a legal compliance perspective. Conversely, narrower interpretations (e.g. redeploying to a new construction project where the original project was a new construction project) makes for lower legal compliance risk, but for higher financial risk. USCIS will hopefully clarify what's allowable very soon.
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