How the rent-a-center model works, why some Regional Centers use it, and why some think it isn’t worth the trouble.
At JTC’s April 2024 webinar, “The New Era of EB-5: New Frontiers for Regional Centers,” one of the topics investigated was the use of the rent-a-center model for EB-5 since the enactment of the EB-5 Reform and Integrity Act of 2022 (RIA). The panelists had different views regarding whether renting out a Regional Center is too risky considering all of the RIA’s new obligations. Let’s explore how the rent-a-center model works and some of the pros and cons for Regional Centers, developers, and investors.
What is the rent-a-center model?
The EB-5 Regional Center Program allows investors to pool their EB-5 investments for deployment in large-scale job-creating projects. A Regional Center must apply for designation with U.S. Citizenship and Immigration Services (USCIS) and pay the necessary fees, as well as comply with all rules of the RIA. Regional Centers are approved to operate in and sponsor projects in a specific geographic area.
If a project falls outside of a Regional Center’s approved geographic area, the Regional Center would be forced to file for an amendment or new designation with USCIS, which could be very expensive and time consuming. Alternatively, some developers or out-of-state Regional Centers choose to “rent” a local Regional Center. The Regional Center allows the renter to utilize its designation for a single project under a specific arrangement. Compliance and EB-5 investor relations are generally the responsibility of the renter, meaning the Regional Center is largely being used in name only.
Benefits of the rent-a-center model
At the Webinar, Irina Rostova, FINRA-Registered Broker Dealer and Founder of EB-5 Support.com, pointed out that there are situations where the rent-a-center model makes sense.
“If there is an excellent project that is coming up in an area where maybe an issuer doesn’t have a center registered, then they can work with a local Regional Center and rent that Regional Center in order to be able to have a project in that area,” she said. “That’s speaking about, obviously, experienced issuers that know how to do the fund management and also do the fundraising.”
Rostova made it clear that just because the rent-a-center model can be advantageous, that doesn’t mean it’s always a good idea.
“I’m more wary in situations where you have a developer who’s not experienced in EB-5,” she said. “It’s an additional risk for those who are renting out their Regional Center.”
Risks of using the rent-a-center model
Joseph McCarthy, Principal & Co-Founder, American Dream Fund, offered a word of caution at the webinar regarding the use of the rent-a-center model. At issue is who will be held responsible for any violations that occur during the rented period.
“USCIS enacted penalties really on the one group that they had jurisdiction over, which is the Regional Center, and the financial penalties can be quite substantial,” he said. “It can be conduct of other groups besides the Regional Center that the Regional Center nevertheless takes on liability.”
If the renter violates rules of the RIA, the Regional Center being used can be held responsible. The penalties for RIA violations can include fines or even termination of the Regional Center. According to McCarthy, that’s just too much risk.
“The risks far outweigh the benefit,” he said. “It’s just not something that we would consider.”
A Regional Center renting its designation out to another issuer could risk termination if the renter violates the RIA. If the Regional Center is sponsoring multiple projects and gets debarred, those other projects would be equally penalized due to their affiliation with the Regional Center. That’s why investors need to understand the rent-a-center model just as issuers do: if an investor’s Regional Center is engaged in a rent-a-center agreement on another project, it could present added risk to the investor’s project, and is therefore worth knowing about and taking into consideration.
Reducing risk in EB-5
Because of the potential for the renting party to violate RIA rules and the difficulty in overseeing every aspect of the operation, some Regional Centers employing the rent-a-center model look for other ways to ensure compliance.
“Put some directives in place where you can monitor what’s going on,” said Rostova, explaining that the particulars of the agreement between the Regional Center and the renter are key.
“You must have in place, first of all, an excellent Regional Center affiliation agreement, and that Regional Center affiliation agreement has to dictate who can be part of the team,” added Osvaldo F. Torres, Corporate, Securities & Finance Attorney, Torres Law, P.A. “It always comes down to experience and the quality of the professionals involved.”
Regional Centers can stipulate that the renting party use third-party fund administration among the professionals they employ. According to Jose Rincon, Vice President, Business Development at JTC Group, developers may not like the added compliance requirements, but “they will be able to present a better product to the investor,” which is what matters most.
“My agreements require that the Regional Center approve the immigration attorney, the securities attorney, the fund administrator, etc.,” said Torres.
Many of JTC’s rent-a-center clients want to make sure that their partners are employing best practices, and find the best way to do that is by requiring that the project be designed to incorporate the role of JTC as third-party fund administrator. That way, they know proper records are being kept per the RIA, transfers of EB-5 funds are being scrutinized, and an experienced team is in place that knows the law and what is required.
From the discussion at the webinar, it’s clear that there is a lot of risk involved in the rent-a-center model, and that it really comes down to who is renting, the specifics of the agreement, and how comfortable the Regional Center operator is with the associated risk. JTC’s rent-a-center clients have come to rely heavily on the extra level of security because they can ensure the entity renting their Regional Center is engaging in the same top-quality EB-5 administration that has helped them remain compliant. Stipulating the use of JTC as third-party fund administrator has proven to be a common requirement found in rent-a-center agreements.
To learn more about JTC’s EB-5 services for Regional Centers, click here.
