Due Diligence Guide for Economic Impact Studies

Due Diligence for Economic Impact Studies compares the data from the economic analysis and the data from a business project’s documentation to check for consistency and discrepancies. Due Diligence is the practice of evaluating and auditing the financial, economic, legal, and fiscal aspects of a person or a company before a decision or agreement is made. An Economic Impact Study examines the economic effect of a new activity or event in a specific area such as a city, county, statistical area, state, or country. 

Due Diligence for Economic Impact Studies is required for matters such as EB-5 Projects to help investors assess the risks involved in the project as well as its economic effects in terms of total revenue, profit, jobs, and personal income. Due Diligence for Economic Impact Studies on EB-5 Projects involves the investigation of factors such as job cushion, market feasibility, financial projections, regional center, and input validation. Conducting an Economic Impact Study Due Diligence allows investors to make an informed decision before engaging in a business project. 

What is Due Diligence?

Due Diligence is the process of reviewing, evaluating, investigating, and auditing an individual or business entity. Due Diligence allows for acquiring all relevant information relating to the financial, economic, legal, and fiscal aspects of the individual or business before an agreement is set in place. The Securities Act of 1933 promoted the practice of Due Diligence in the United States to protect investors through financial transparency and fraud prevention. Investors typically perform Due Diligence to assess and reduce their exposure to risk. 

Why is Due Diligence Important for EB-5 Projects?

Due Diligence on EB-5 Projects involves the assessment of a potential EB-5 investment before an immigrant investor makes a decision. EB5 Due Diligence helps immigrant investors determine whether a project is suitable for their immigration and investment goals. An EB5 Project is a new commercial business that results from the capital of immigrant investors. EB5 Projects under the US Immigrant Investor Visa Program allow foreign citizens and their dependents to obtain permanent residence in the United States. EB-5 Visa Projects have to stimulate the U.S. economy by creating and sustaining jobs. EB-5 Visa investors are able to obtain information on the economic impact and job-creating capacity of potential projects through Due Diligence. Our guide on How to Choose an EB5 Project details all the factors that you need to account for when conducting Due Diligence on EB5 Projects.

What are the Types of EB-5 Due Diligence?

EB-5 Due Diligence consists of components that cover the business, management, financial, and economic impact of the EB 5 Project investment. These are the types of EB-5 Due Diligence that need to be done when choosing the right EB 5 Visa Project investment. 

• Due diligence on the management reviews the EB 5 Projet’s stock ownership, shareholders, and organizational structure.
• Due diligence on the financials of the EB 5 Project involves auditing financial statements, tax returns, income statements, balance sheets, and cash flow projections.
• Due diligence on the business is the evaluation of the business plan, the EB-5 Projects market feasibility, contracts, construction schedules and costs, and the inspection of the project site.
• EB5 Regional Center Due Diligence is an assessment of the economic entity that is approved by the U.S. Citizenship and Immigration Services (USCIS) to pool capital from immigrant investors. 
• EB5 Due Diligence compliance review ensures that an EB-5 Project follows the rules and regulations of the EB-5 Program, particularly for job creation and Targeted Employment Area (TEA) designation.
• Other components of EB-5 Due Diligence include a review of conflicts of interest, an assessment of company documents, and an investigation of the project’s affiliations. 

What is an Economic Impact Study?

An Economic Impact Study (Analysis) is an examination of the economic effect of a new activity or event in a specific region such as a city, county, statistical area, state, or country. An Economic Impact Study measures economic effect in terms of total revenue, profit, jobs, and personal income. An Economic Impact Study (Analysis) is done to address the public concern and interest in the potential effects of a business, project, or policy.   

Why is an Economic Impact Study Important for EB-5 Projects?

An Economic Impact Analysis for EB-5 Projects aims to prove that the new commercial enterprise is able to produce the required 10 full-time jobs per investor. The EB-5 Economic Impact Analysis is reviewed and approved by the U.S. Citizenship and Immigration Services (USCIS) based on methodologies and data that show how many direct, indirect, and induced jobs will result from the EB-5 Project. Direct jobs result from the new commercial enterprise itself while indirect and induced jobs are created from the positive economic impact of the EB 5 Project.

What are the Types of EB-5 Economic Impact Studies?

EB5 Economic Impact Studies commonly utilize an input/output model which is a quantitative economic model that takes into account the relationships between the various industries in an economy to ascertain the EB5 Project’s overall economic effect. The most commonly used Economic Impact Study models for EB5 Projects are Impact Analysis for Planning (IMPLAN) by MIG Inc. and Regional Input-Output Modeling System (RIMS II) by the U.S. Department of Commerce through the Bureau of Economic Analysis. 

How Does Due Diligence for Economic Impact Studies Work? 

Due Diligence for Economic Impact Studies checks the consistency of the data from the economic analysis with the data from the project’s documents. Due Diligence for Economic Impact Studies on EB5 Projects screens discrepancies between the business plan, market feasibility study, private placement memorandum (PPM), and economic analysis. 

The following sections look into the important factors to be considered when conducting Due Diligence for Economic Impact Analysis of EB-5 Projects.

Market Feasibility and Financial Projections 

Due Diligence for Economic Impact Analysis evaluates the financial estimates and the EB 5 Project’s commercial viability. The Economic Impact Study Due Diligence report shows how jobs are potentially overestimated if the revenue input projections are aggressive and overstated, or if the market feasibility is more favorable than it should be. 

Due Diligence on Economic Impact Study verifies all data including construction budgets, expenses, and projections. Construction expenses must be supported by other documents such as the construction contract. EB-5 Projects on hotel construction or assisted living facilities will have to have specific market studies to come up with exact figures for lesser scrutiny from USCIS. 

Impact Area Under Study

A project’s geographic location determines its economic impact multipliers within the input/output modeling. In general, the multiplier increases as the region or population increases, which means more jobs will be created. The area where the project’s goods and services are acquired as well as the area where its employees reside both determine the EB-5 Project’s location and impact area. Due Diligence shows whether the Economic Impact Study supports the impact area it uses and reflects the multipliers being utilized. The multipliers are typically supported by commuting patterns or the general movement of goods and suppliers in the area.

All these demonstrate where the materials and labor for the project are originating making it logical to employ this area to study. For example, a small restaurant that uses statewide multipliers would tend to be questioned by USCIS regarding its ability to have a statewide impact. An oil and gas EB-5 Project on the other hand has a more reasonable statewide impact area. 

Regional Center

The Economic Impact Study Due Diligence also checks whether the impact area is within the scope of the EB5 Regional Center that the project is affiliated with. The regional center must be at least near the impact area of the EB5 Project if it is not within its geographical scope. 

Input Verification

The Due Diligence report on Economic Impact Analysis further breaks down the type of inputs used in the study. Inputs such as legal and title, service and warranty, or homeowners association-related expenses in residential EB5 Projects are not necessarily desirable to include due to the possibility of Request for Evidence (RFE) issuance from USCIS. 

Job Cushion

Due Diligence on Economic Impact Study shows the job cushion of an EB 5 Project. Job cushion reflects the number of jobs that exceed the minimum of 10 jobs required for an EB-5 Visa. Generally, higher job cushions are positive indicators for EB 5 investors. A job cushion higher than 30% is desirable for EB-5 Projects. The Economic Impact Analysis Due Diligence report details where the jobs will come from. It is safer to have the jobs come from construction rather than relying solely on operations to create a job cushion for each EB5 investor in the project. 

What Should be Checked When Conducting Due Diligence for an Economic Impact Study?

The checklist for Due Diligence of an Economic Impact Study for EB-5 Projects should include the following.

• Review of any existing or potential conflicts of the Economic Impact Analysis, business, plan, and other supporting documents on matters such as job creation numbers, revenues, and other figures.
• Identification of the initial changes modeled in the Economic Impact Analysis.
• Initial change data are verified as appropriate by the economic analysis.
• Discussion of the timeline of the EB-5 Project and estimated job creation concurrent with the projected Form I-829 (Petition by Investor to Remove Conditions on Permanent Residence) approval.
• Proper discounting applied by the Economic Impact Study.
• The EB-5 rules are followed in economic impact modeling. For instance, construction is managed appropriately to prevent tenant occupancy difficulties. 
• The economic impact modeling shows the impacts required by USCIS.
• Discussion of impact model and multipliers.
• Shows reasonable job creation and feasibility of other impacts.
• Sensitivity analysis is created to show how varying revenue levels, occupancy rates, or overall construction costs affect the number of jobs created overall.

FAQs about Due Diligence on Economic Impact Studies