The #FeesMustFall protests in South Africa have put the spotlight squarely on parents, as to whether or not the country will be able to offer global Standard education in the year’s to come for their kids. The disruptions, which include the destruction of the very thing being protested for, may impact the current academic year to a point where a whole generation is put a year behind, and would deliver a cost greater than purely financial. A long term option for the high net worth individuals isa $500 000 Dunkin’ Donuts investment. It may sound bizarre, but it’s a program managed by LCR Capital, whereby individuals can obtain green cards for themselves and immediate families to the United States, with such an investment. The US government makes 10 000 of these visas available annually. And an added benefit of the program is it offers holders a greater chance of entry into one of America’s Ivy league colleges, and cheaper. For more on the program Alec Hogg caught up with co-founder Rogelio Caceres. – Stuart Lowman
This special podcast is brought to you by LCR Capital, whose co-founder Rogelio Caceres is with us on the line from New York. Rogelio, there is a lot more interest now amongst South Africans in trying to find ways on the one hand of getting themselves perhaps a little safer, on the other hand getting their children educated away from the chaotic South African universities. It’s interesting that you’re launching into South Africa something called an EB-5 visa from the United States. How long has this visa been available?
Well it has been around since the early 1990’s. Since then hundreds of thousands of investors from all over the world have obtained US Green Cards and permanent residency by investing their capital to new American businesses that create American jobs. It’s very popular, but very poorly understood in the areas of the world outside of China.
Outside of China, we’ll get onto that in a moment, but what exactly does it entail?
Through a $500 000 investment into a new American business, an investor, his or her spouse, and any children up to the age of 21 all obtain US Green Cards on a conditional basis within about 18 months of their investment. If that investment creates and sustains ten or more American jobs for a period of two years, those Green Cards become permanent and the investor and his or her family all have a path to US citizenship. At the end of the five-year investment period, if their investment is a prudent one and a safe American business, that capital is typically returned in full with a nominal rate of interest. Therefore, it’s a way to obtain Green Cards; it’s the fastest and most secure way to obtain a Green Card according to magazines like Fortune and Forbes.
The problem of course for South Africans is what do they know about starting companies in America?
Well certainly starting a business in any country is a challenge for sure. The most popular way for investors to obtain Green Cards is to deploy their capital through a government approved financial firm, firms called regional centres that have obtained a federal license by the government to operate in this industry. My firm, LCR Capital Partners is one of those firms. Typically what investors do is they deploy their capital as a passive investment in a fund or a real estate project, allow the investment firm to take care of the paperwork, the underwriting, the monitoring of the investment and be it with that mechanism meet the requirement or law without having to actually go out and start the business themselves.
Rogelio, just explain a little more if you would, you are then government approved, you have to jump through some hoops?
Yes, this programme is regulated by two US government authorities, the Department of Homeland Security on the immigration side and the Securities and Exchange Commission on the investment side, so it’s a quite arduous process to go through. Typically, the waiting period to obtain approval is nine, 12 months. LCR was fortunate to obtain their approval in little over three months back in 2014, but once approved, the regional centre has the ability to attract for direct investments and reach out to foreign high net worth investors from countries all over the world to present their projects and then welcome them to the programme through the scheme.
You’ve already done that in China as you mentioned earlier.
Yes, well China for us or for the industry as a whole represents around 85 percent of all investors globally. In fact, last year according to the Department of State over 8000 visas were issued to Chinese investors. As a point of comparison, most of the rest of the world is far behind. The second largest country was Vietnam with a little over 250 investors. South Africa, had less than 30 investors, which obtained their Green Cards to the EB-5 Programme. That is not a function of a preference for Chinese investors; it’s simply a function of lack of awareness.
Most of the industry has focused on generating awareness in China through their marketing efforts. LCR is one of the few that took a different route. We started welcoming investors to a direct office that we have in Sao Paulo in Brazil and now in India and very recently opening up an office in Cape Town, so our efforts now are to focus on investors outside of China because we think there’s a massive opportunity for folks to take advantage of this programme.
So just to start with, it’s $500 000, that’s it if the investor is from, or the South African gets approval from exchange control to invest $500 000 in to the US, you can take it from there?
Yes, so on the fee structure side each regional centre charges a standard management of around $60 000. There are additional fees to Immigration Council, firms like Fragomen and others that process the form and do what’s very important, which is a source of funds analysis. There are five key requirements of the EB-5 programme, one of which is that the investor proves the legal source of funds. This is obviously meant from the US government perspective to prevent any type of money laundering or illicitly gained funds from entering the country and that’s something that we are very focused and keen on, so that’s one of the five requirements to obtain a Green Card for this programme.
I guess from a South African perspective, that would come with the territory, given that the exchange control requires also that South African investors have to show where their source of funds come from, so that wouldn’t be too big a hurdle if you have the money.
Exactly, yes and that’s an additional benefit that South Africa has that additional layer of control there. The other requirements are also pretty standard and what investors love about the programme, it is clearly outlined upfront what those requirements are and there’s no room for political favouritism or preference on what country you’re from, etcetera. Three of those requirements are in the investor’s control, so beyond the legal source of funds. Obviously the investment has to be a $500 000 investment upfront into a new American business or fund in our case and of course, there’s a standard background check to ensure that the investor does not have a criminal background or has not violated US immigration laws.
The other two requirements are the responsibility of LCR, so we present for each investor, a new business plan that creates ten or more American jobs and in our case through our franchise investments our business plans create over 20 jobs per investors, so more than two to one of the requirement and the final requirement is that the investment be in a new American business, that it be a risk investment. It cannot be for political sensitivity purposes so primarily an investment in government bonds or something that’s guaranteed, it has to have an element of risk to it. What LCR has done is mitigate that risk substantially by virtue of the structure of our investments, the fact that they’re secured loans and other factors.
Standing outside of the United States, you see quite a lot of political turbulence going on in the country with the presidential election. Are both of the major parties in favour of this? Why I ask this is, is there any risk of the EB-5 visa being squashed or done away with?
Well, it’s rare to find a general consensus in Washington DC. Increasingly we all know the environment is quite politically charged and divided, but the EB-5 Programme is one of the few programmes that has broadened by partisan support. It was put into law by a Democratic President, Bill Clinton. Its’ been re-authorised seven times by both Democratic and Republican presidents and in fact, the last time they went up for a vote in the US Senate in 2012, a hundred senators to zero voted to re-authorise it, so it has broadened by partisan support. Why, because it creates American jobs, two it costs nothing to the taxpayer and three, most importantly, brings entrepreneurial investors, accomplished investors from all over the world into the US to create businesses through their investment and they add to the overall American fabric of society.
The one thing, however that both Republicans and Democrats do agree on is that the investment amount is probably due for an upgrade. It has been $500 000 since the programme’s inception back in the early 1990’s and now where you compare it to alternative residency programmes around the world, programmes like in the UK for example, which is $2.5mn or Australia, which is even more expensive as $4mn is the minimum investment.
Republicans and Democrats say, “Well, this is a great programme, but perhaps it has to be indexed to inflation, so currently the investment programme is being debated so that probably by the end of the year that amount will go up to around $800 000, is the current estimate. So what we’re focused on for South African investors is if they feel this is a good programme for them and they like what we have to offer on the investment side, to consider making the investment before the end of the year so they capture these benefits at a much lower investment amount.
You also play a big role in two other ways. Let’s start with where the money goes into. You did mention earlier that you focus on franchises. In this case, it’s one particular franchise.
Yes, our background is in management, and is very strong on the franchise finance side, we’ve developed and lent over $1.2bn of loans to build over 2000 stores across multiple brands including Dunkin’ Donuts, Burger King, Pizza Hut, and Subway. What we did in 2014 was arrange to become a regional centre and go through that process to allow us to really you know, leverage the international backgrounds of the management team. I’m originally from El Salvador; our CEO is originally from India. We have many other first generation US immigrants on the management team from countries like Brazil, the UK, Japan, and Mexico and so through this international background we focused our efforts. On the franchise side, our strong background is in the Dunkin’ Donut brand, it’s a brand that we know very well. Our CEO formerly was an operator of over 80 stores around the United States.
Our Chief Development Officer is the former VP of franchising for Dunkin’. It’s a brand that we understand well and more importantly, it’s a very successful brand, it’s the seventh largest restaurant company in the United States, it’s a publicly traded firm with a market capital of over $4bn. Most importantly from an investor point of view, has a proven financial and operational business model, 60 years of operating history, a long track record of success, so much so that it is now the number two coffee chain in the US versus Starbucks.
Its market share is around 39 percent versus Starbucks, which is a little bit over 50 percent, so a very strong track record of success and very strong job generation. What we’ve done in our case to simplify things is we pool capital together into geographically focused funds that then lend capital on a five year senior secure basis to partially finance the building of new Dunkin’ stores.
Our first fund, which closed successfully last year, welcomed investors from many countries around the world that first invest funds, was toward the New York Metropolitan area and it was to build new stores in New York, New Jersey, and Pennsylvania primarily. Now we are in the middle of launching three separate funds, all which will close successfully by the end of this year. The fund that we’ve reserved for South Africans is a fund focused on Florida, and it’s called the American Opportunity Franchise Fund Number Two that lends capital again to Dunkin’ operators for them to build new stores across the state of Florida.
So whoever comes into this investment, if they live in Florida will be able to go and have a little taste of their own Dunkin’ Donuts store, but I guess the fact that it goes into a fund means that it also reduces or increases your diversification and reduces the risk.
Well, one quick clarification, although this particular fund deploys capital into the State of Florida, that does not require the investor to live there, that’s one of the benefits of the Regional Centre Programme is regardless of where your project is based or where the job creation is occurring, the investor had the liberty of living anywhere in the country, you’re not quite tied physically to where the investment is, as opposed to the Direct Programme, which is a programme where they actually have to start the business themselves and they obviously have to live nearby there. On the diversification of risk perspective that is correct, our funds vehicles are unique and beneficial as opposed to most of the industry.
Most of the industry is focused on single project real estate investing, where all investors are pooled together into a single project to help complete a mixed-use condo or an office building and things of that nature. In our case, we pool our investors into a fund that then lends to build up to, in our case, 70 different Dunkin’ stores around the particular geographic area and part of the use of funds is also used to purchase land that generates rental income under the same very stores and provides and additional level of collateral and security. By investing in one fund, their risk is mitigated across a performance of multiple stores around a geographic area, in this case Florida. Thereby if any one store were to fail, they still have the benefit of exposure to many other stores and when each store according to our projections creates over 30 jobs direct, indirect and induced jobs that it’s quite s strong level of security and risk mitigation.
Pretty much a win-win and you wonder why other countries haven’t followed the same principles, but just to get back to the investment. You make your $500 000. Do you get a return on it or is the capital returned to you at a point?
Yes, so the answer to those two questions is yes and yes. The first thing I like to mention that this is obviously a dollar-based investment and depending on the currency dynamics of any particular country, it is a way to offset any expected future depreciation, in this case, in the Rand by purchasing Dollars today at the current exchange rate and five years from now the likelihood is that when you get that capital back in Dollars, you’ve avoided a, in some cases, substantial depreciation in your local currency. So there is a real local currency return there that should not be minimised, two, it depends on the safety of the investment.
Our investments are a loan, so they’re not equity investments like most of the industry, so we lend the capital with high levels of collateral associated with it. Attached to a brand like Dunkin’, which is a public and traded firm and we do so on a five-year basis. Our expectation and the track record of the brand supplements that is that these loans become due in year five, these loans are refinanced out into the secondary market, and all that capital then returned to the fund. The fund then distributes those loans, that principal return back to each investor, so on the interest rate of the return, which is a nominal return.
The real outcome here is not to generate a high IRR or high rate of return, that the rate of return or the return on this investment is a Green Card, is the ability to have a complete family of three, four, five kids plus the investor and the spouse all obtain Green Cards, again within 18 months, be able to move to the United States and enjoy all the benefits of that transition and then in year five return their capital in full. That’s the true objective here.
Given the chaos that’s going on in South African universities at the moment, there would be lots of parents listening carefully to this. What is the deal when it comes to US universities? We do know, as foreigners in any country, you’re expected to pay more. Are there any benefits on the EB-5 visa in that regard?
Yes, so there are both the full investments for parents to consider this for their kids. In fact, as we look at other countries like Brazil and India, it’s primarily not been used as an investment vehicle to transition the entire family from their home country to the US, but rather as a gift to the non-breadwinner to then sponsor their kids and then have their kids primarily obtain the benefit of the Green Card. Why do this? There are multiple reasons. For folks that are, for kids that are applying to US universities whether it’s for their undergraduate training or their graduate training as the MBA programme or other programmes, there’s a marked difference in acceptance rates between a person with a Green Card or a US citizen and international students. This is to avoid competing in the international student queue, which typically limits any one university to no more than 20 percent of their student bodies.
So rather, than compete with the world’s best students from South Korea and India and China and other countries, this puts them in a different pool of applicants, which has a marked difference in acceptance rates. For example, last year at MIT the incoming freshman class, the acceptance rate for an international student was less than one percent, I think it was 0.03 percent, versus a US-based person of over eight percent acceptance rate, so a dramatic difference in acceptance rates. Then it goes to the cost of the tuition. In many cases the difference can be over $200 000 per student over a four-year period.
That’s obviously a significant benefit in savings, but what I’d like to highlight most is the benefits after college, so many international students have a great education and are eager to get their training at top US companies across the United States or you know, start their own business to get some experience under their belt before considering going back to their home countries. What’s happened now is that there has been a tremendous influx in international students going to the US universities. It’s never been higher, there’s over a million students from around the world currently on US campuses.
That’s caused a constraint in terms of obtaining the required sponsorship by an employer to operate, to work here legally. It’s called the H-1B visa. It is required in order to work for a company like Proctor & Gamble or Ford, Google, Goldman Sachs, etcetera. The problem is that there’s too much demand. Last year over 250 000 applicants applied for the 65 000 slots, so it’s about a one in four ratio of getting accepted. Then what happens is, you might have a very good track record academically in your school, but because you’re not able to get a visa, you’re no longer able to work here legally, which is the worst outcome for someone that’s spent four to five years at a US university and not able to really reach their potential.
So to net things out, whether it’s higher acceptance rates, whether it’s lower tuition rates, access to scholarships that aren’t available for international students while they’re in school or the ability to work freely and work for any company around the country and not have to be subject to the lottery-based H-1B employment visa, the Green Card has powerful benefits for children looking at the United States for their higher education.
What about the tax issue? We often hear that if you have a Green Card in America all of your earnings have to be taxed in the United States. Is there any difference here?
Yes, the US is one of the few countries in the world that subjects its residents to global taxation based on their global income. However, it’s widely known there are several legal ways to mitigate that impact through the appropriate structuring and planning and so we’ve never lost an investor because of that issue. With the proper planning in that 18-month period that is typically the one that occurs between the investment and the obtaining of the Green Card with the proper planning with US experts, you’re able to mitigate and minimise any differential quite substantially.
So you’re on your way to South Africa, you’re doing this in partnership with Grant Thornton and is it Fragomen Immigration Specialists. How are you reaching out to people, how are you actually going to be engaging?
Well, we have a full set of events scheduled across the country starting on the 25th of October in Johannesburg; we’ll be hosting all of our events at Grant Thornton offices, Tuesday and Wednesday in Johannesburg, Thursday in Durban, and Friday the 28th in Cape Town. I will be partnering with Grant Thornton, leading the tax immigration, Texas, US Tex specialist as well as with Fragomen, a leading immigration specialist and we’re getting word out through our many different mechanisms, leveraging our business school networks. A lot of us went to Harvard Business School for our MBA’s so we’re leveraging the alumni network, leveraging our contacts and getting the word out to consider learning more about EB-5 Programme by attending one of our seminars at these locations.
Just to close off with Rogelio, if you put in more than $500 000, does that give you a better chance of actually getting this Green Card given that there’s only 10 000 available every year?
No, it’s a flat fee. There’s no kind of preferential rate for that, it’s a $500000 investment that puts you in line, in the queue. The good news is that for South Africans and other countries there is a shorter waiting period. While in China, because of the overwhelming demand of the programme, a longer queue has developed. So for Chinese investors the waiting period now is around five years from the moment they invest which is the moment that they get their ability to enter the United States for the programme, but for investors from South Africa, Brazil, India, France, the UK, all other countries that waiting period is much less.
So as soon as 12 months, but to be conservative we’d like to say 18 months, but after that, they have the full benefits of the Green Card and are able to travel back and forth. They are able to live anywhere in the United States, have all the benefits on the university side, and able to get financing and start their own business and really enjoy the American Dream.
Rogelio Caceres is a co-founder of LCR Capital Partners and this special podcast was brought to you by LCR Capital Partners.