Real Estate Due Diligence for EB-5 Projects

By Matthew Brown

Real estate projects dominate the EB-5 market today. Understanding what separates solid projects from shaky projects can help protect the EB-5 Investor and allow them to confidently invest to secure their green card. The most successful projects possess the following factors:

Excellent Location – The single most important factor in successful real estate development is the location of the project. For EB-5 projects, it is not enough for the project to be located in a Targeted Employment Area (“TEA”). The best EB-5 projects are those located in TEAs that are also exceptional real estate. Look for locations with the following features:

  • Rising land values in the area
  • Proximity to uses that will drive demand
  • Successful or established neighborhoods
  • Multiple supportive development projects underway/recently completed

Strong Developer Track Record – Investors need to understand who will be developing the project and the depth of their experience. Specific elements that should be considered in evaluating the quality of the developer include:

  • Length of time in business – Ideally, at least ten years, which demonstrates that the developer has weathered at least one economic downturn
  • Experience with the type of project being proposed
  • Track record not only with EB-5 projects but also with conventionally financed projects
  • Track record in successfully completing projects
  • Track record in returning capital to their investors and lenders
  • Longstanding relationships with contractors, lenders, and key team members
  • Quality of the completed projects

Solid Financial Structure and Preservation of Principal – Preservation of capital is the most important financial aspect of an EB-5 investment. The most secure real estate investments must be able to withstand an economic downturn. The safest structure for an investor is an equity investment with low leverage, where the EB-5 investor actually owns the project with limited debt. Key project features include:

  • A low overall debt ratio (less than 50%) to weather any downturns
  • A secured position on the property for Investors
  • Project documents that enforce an alignment of interests between Developer and Investor
  • Financial structure that motivates Developer to make decisions that benefit Investor

Require Developer Guarantees – For real estate projects, the only way that jobs will be created is if the project is completed. In addition to looking at the developer’s track record, developers also need to provide Completion Guarantees on the project to ensure that the project will be completed and opened. These guarantees are typically required by banks or lenders, and require the developers to put their company (and often personal) assets at risk.

General Contractor (“GC”) Experience – The GC is critical to the project being delivered on-time and on-budget. Investors should understand the GC’s track record, bonding capacity, and experience in the local market. If a GC has not been selected for a project, investors should take that as a warning sign that there may not have been adequate analysis of project cost or schedule. The GC should be working with the project team at least 12-18 months before construction begins to develop a realistic project budget.

Guaranteed Maximum Price Contracts (GMP) – A significant area of risk in any real estate development project is the control of construction costs. Investors should look for projects that feature initial cost estimates from an experienced GC and these initial estimates should be converted to a GMP contract prior to the start of construction. A GMP contract will lock in the price of construction and protect investors from cost increases during construction.

Land Use Approvals– Because every city has its own unique land use regulations, the developer should have experience working with the local government to permit and entitle projects. Investors should look for projects that have the necessary land use approvals to build the project, including the type of use, building height and area, and the amount of parking. When reviewing projects, ask to see copies of land use approvals or proof that the project can be built under local zoning rules.

Market Analysis – Understanding the market opportunity for the project is critical to evaluating the quality of the project. Investors should understand the “demand drivers” for the project and the strength of the local market:

  • What is driving business?
  • Is demand increasing in the near-term and mid-term future?
  • What is the developer’s track record in successfully identifying market trends?
  • Is there an independent/third-party market analysis available?

Financial Projections – Every real estate project includes forward-looking projections of financial performance. Understanding who developed these projections is important. For instance, if it is a hotel, was it the hotel operator that will also have to achieve those projections? Or is it from the developer or another third party that will not actually be running the hotel? Look for projections that provide room for future growth, and avoid projects that require top-of market occupancy or absorption and aggressive rents or rates.

Exit Strategy – All EB-5 projects have the goal of returning the EB-5 investors’ money within 5-7 years. For real estate projects, the best way to evaluate the strength of the exit strategy is to apply the factors outlined above. Projects should have low debt burdens (50% or less), and future project value should be based upon conservative projections and solid market data. Keep in mind that just because an EB-5 loan product has a set time for repayment, this is not the same as a guarantee of repayment—the project still has to be successful in order to generate the value to repay the loan.

Hotel A, Portland, Oregon: An EB-5 Due Diligence Case Study

This year, Oregon’s first EB-5 project—a 225-room Hotel A—was completed and opened in Portland’s Pearl District. Since the project opened in April 2014 – on budget and a month ahead of schedule—the hotel has exceeded initial financial performance projections by over 60%. The project demonstrates how proper structuring and a strong management team can deliver optimum results to EB-5 investors.

The Power of a Great Location – If the number one rule of successful real estate development is to find the best location for a project, the Pearl District is one of the best places for a new hotel in Portland. Great locations help insulate a project against economic downturns, and strengthen the value of the property and return of investment. Hotels like Hotel A need to be close to demand drivers and located in districts where business and leisure travelers want to stay.

The Pearl is a great example of the perfect TEA—prime real estate in an improving area that still qualified as a TEA. Five years ago the TEA had 42% unemployment, while today that number stands at less than 10%. The Pearl emerged as Portland’s most dynamic new neighborhood, and can be thought of as the City’s own version of Xintiandi in Shanghai. Filled with restaurants, art galleries, shops and parks, the Pearl was a neighborhood in the final stages of transition, and is located near demand drivers like the Moda Center (home to the NBA Portland Trail Blazers), the Convention Center, the riverfront park, and the downtown business district.

Identifying Underserved Market Opportunities –Taking advantage of high market demand, limited competition, and increasing market rates is key to successful real estate development. Hotel A is located in the fastest-growing urban district in Portland (the Pearl District). With average hotel occupancy above 80% in Portland over the last few years combined with steadily increasing room rates, Portland was clearly in need of new hotel projects to serve pent up demand.

An Experienced Development Team –On Hotel A, the general contractor and architect both had extensive experience with hotel projects and had successfully completed numerous projects in Portland. The lender was very comfortable working with EB-5 capital and understood the relationship between their loan and EB-5. The experience of these team members ensured a smooth process from financing to design/permitting to construction.

Partnering with Local Government – Local government plays an important role in making sure that a project can proceed smoothly. Developers who have a successful track record of partnering with local government are able to use these relationships to the investor’s benefit. In Portland, the developer was able to move the project through the permitting process with the political support of the mayor, city council, and development commission. The jobs created by the project motivated local political leaders to take an active role in ensuring that the project was a success.

Working with Problem Solvers – Regardless of the amount of advanced planning and organization, every project has problems that will need to be solved. Investors should look for development teams that know how to overcome difficult problems and who actively work to remove barriers that come up during the course of the project.

During the construction of the Pearl project, the developer was able to turn a potential problem into a win-win solution. When the City of Portland sought to place a homeless camp on a parking lot a block away from the new hotel, the developer worked out an alternative solution:

  • The hotel project purchased the lot from the City
  • The City used purchase proceeds to find a more permanent solution for the homeless in a more appropriate location
  • The lot is being used for hotel valet parking, generating additional revenue for investors.

EB-5 Equity, Lending, and Low Leverage – Preserving and returning an investor’s initial capital investment ($500,000) should be the primary goal of any EB-5 project structure. The EB-5 Equity model, when properly executed, does exactly this, by putting the EB-5 investor in the ownership position and limiting overall debt on the project to less than 40%. Hotel A was financed using 14% debt and 86% EB-5 equity, which is a very safe structure for protecting the Investor. Further, when a modest-sized loan is placed on the project, investors also benefit from the lender’s third party oversight and completion guarantees.

Alignment of Interests – EB-5 Investors and developers financial interests need to be aligned to protect the investor. The developer should be motivated contractually to make decisions that are in the investors’ best interests. This means the developer should suffer financial penalties if they take actions that are contrary to the objectives of the EB-5 investors (e.g., getting green card approval and returning of capital at earliest possible date).

Examples are:

  • Developer and Investors are financial partners in the project.
  • Through an equity structure, Investors own the property and the hotel.
  • The Developer shares in profits only if the project is profitable.
  • Developer is penalized if exit strategy is not fulfilled within 5-7 years.


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