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What about Distressed Properties

What about Distressed Properties?

Many EB-5 prospects are asking about purchasing distressed properties at 1/3 or 1/4 of the previously assessed value, finding tenants for these properties, and then reselling them later at a substantial profit.  In the meantime, because the cost of purchase is so low, substantial income and also be earned on the rents received before they are sold. 

Is this an appropriate model for the EB-5 program?  As usual, the answer is "it all depends" but here are some guidelines to help you make a decision.

1.  If it is an existing building, there won't be any jobs generated by new construction.  However (see the next topic) that may not be a negative, because the USCIS often takes a jaundiced view of counting temporary construction jobs.

2.  You will only get credit for new jobs, so for practical purposes the building should be nearly or completely vacant.  You need the job credits by filling up the buildings with new tenants.  If there are existing jobs there, you can only count them if you can prove they are part of a troubled business, which is often difficult to show.

3.  Many new jobs can be created from retail, office, and industrial buildings; far less from residential.   For practical purposes, there will be a few jobs from operating the residences, but the numbers only work out if you can buy the properties with substantial leverage (e.g., only 20% from EB-5 money, the rest borrowed from banks). 

4.  You want to be in a TEA; however, if the building is vacant, it may well be in a high-unemployment area, so this is not generally a very high hurdle.

5.  In summary, then, you want to buy a vacant retail, office, or industrial building at 1/3 to 1/4 of its previously assessed value, find new tenants, collect the rents, and then sell out for a substantial profit in the next five years.

6.  And now for the tough part:  virtually every client asks us, how can I write a business plan and have you generate an economic report if I don't have the properties yet?  I need EB-5 money to pay for them, so it seems like a chicken and egg problem. So here's the answer.  Choose several likely properties and get USCIS approval on that basis.  You will then be approved for those specific industries.  If the properties fall through, you can then file an amendment for the specific property that is different from the one you originally planned to purchase.  This method is OK with USCIS as long as you inform them of the change. 

   

H&A ASSOCIATES, P.C     John D. Hu, Esq.http://www.hoolaw.com/

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