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Why do Regional Centers use mezzanine financing?

Why do Regional Centers use mezzanine financing? Isn''t mezzanine financing risky?

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    Reza Rahbaran

    Immigration Attorney
    Answered on

    Mezzanine financing is very common in real estate transactions. Almost all real estate development projects will have some element of mezzanine finance since construction loans only finance 50% - 75% of the project.

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    Shahzad Q Qadri

    RC Creator
    Answered on

    Not all do. Risk is an inherent part of any investment.

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    Lei Jiang

    Immigration Attorney
    Answered on

    This kind of financing is commonly used in real estate. Since most regional centers have real estate projects, you should not be surprised.

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    Rachel Lew

    Immigration Attorney
    Answered on

    The reason why regional centers use bridge loans from banks is that they need the money to develop the projects while investors'' invested capital is tied up in escrow, pending the adjudication of their I-526 petitions. They are hoping that after investors'' I-526 approvals, they can use the money invested by investors to pay back the banks. It is risky because if the new commercial enterprise does not amend its business plan to include such arrangement, USCIS most likely will not attribute that money obtained from the banks which was used to create jobs to the investors, even though investors'' capital was used to pay back the banks. Therefore, the regional centers must amend its business plan and Private Memorandum Offering to include such financing arrangement. According to USCIS memo, if done correctly, it will then attribute the bridge loan used to create jobs to the investors.

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    Jeffrey E Campion

    Immigration Attorney
    Answered on

    Mezzanine financing like any financing can be risky. It all depends on the guarantees that you have and who the developer is. At the same time, from a job creation perspective, it could actually be an advantage because the investors can count ALL the jobs created not just the component from the Mezzanine money. So, it normally results in only using indirect or induced construction jobs which actually minimizes I-829 job creation risks.

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    Ed Beshara

    Immigration Attorney
    Answered on

    The Loan/Debt model is very popular with Regional Center projects. The projects can be EB-5 financed without the investors owning the project and there is a clear exit strategy by the repayment of the loan. In some cases the investors are in first position in respect to the repayment of the loan.

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    Fredrick W Voigtmann

    Immigration Attorney
    Answered on

    All qualifying investments for EB-5 must involve risk. There is financial risk and immigration risk involved in each EB-5 case. The wise investor, however, will seek to reduce, but cannot eliminate entirely, both types of risk. Some regional center projects do involve certain capital stacks that appear to be less attractive than others in terms of where the EB-5 investors are placed in the order of priority. It is up to each EB-5 investor to review and do the due diligence from a financial analysis perspective for each and every regional center investment being considered. Some projects may involve more financial risk, but have the possibility of a higher return. Just like any investment opportunity, there are good ones and bad ones. Let the buyer beware.

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    Daniel B Lundy

    Immigration Attorney
    Answered on

    Regional Centers don''t necessarily use mezzanine financing. There is ordinarily a difference between the regional center and the project that is receiving EB-5 funding and creating the jobs, although they can have common ownership. Mezzanine financing is financing in between the developer''s equity in a project and traditional bank financing. It is frequently used to help the developer reach the loan to cost (or sometimes loan to value) ration required by a bank to provide funding. For instance, a bank may be willing to loan up to 60% of the costs of developing a project to a developer, provided that the developer can provide the remaining 40%. To reach the 40%, the developer can use his own money or equity, or can use some type of financing in addition to his own equity or cash. This additional financing typically comes in the form of equity investment from other investors or mezzanine debt. A developer may not want other equity investors in a project, because he may not want to share control or give up ownership rights to a third party. In this case, a developer might use mezzanine debt. However, because the bank providing the traditional bank loan (which we usually refer to as the senior loan because it is usually first in priority to get repaid) may not want any other creditors having a security interest in the real estate (i.e. a mortgage), a mezzanine loan is generally secured by some other form of collateral (usually a pledge of the ownership interest in the entity that owns the land). Because the senior loan gets paid back first, and because the mezzanine loan is not secured by an interest in the land, mezzanine debt usually has a high interest rate and is short term in nature. EB-5 investment works very well as mezzanine debt because it is available at a lower cost than traditional mezzanine financing, and sometimes significantly lower. The resulting lower financing costs can result in lower overall project costs and indebtedness, and can make a potential sale or refinancing more likely/easier (which in turn can lower, to some degree, the risk of default). Mezzanine debt is usually thought of as more risky than a traditional senior loan because it is not secured by a mortgage on the land, but that does not always mean that it is "risky." Mezzanine financing is a common part of the capital stack in a development deal. There are two main reasons that EB-5 funding is not always used as a senior loan/first mortgage: EB-5 funds are very rarely available at a lower cost than traditional bank debt (often due to fees charged by agents and brokers who help find investors), and the number of jobs created by a project is often not high enough to allow EB-5 funds to cover enough of the project costs to allow the developer to fund the remainder with his own cash and equity. Additionally, most investors do not want to invest in a project that is 100% financed by EB-5, even if there are enough jobs created to allow this, because they feel that the developer needs to have ?skin in the game. Ultimately, whatever form that EB-5 financing takes, an investor should do proper due diligence and consult with appropriate financial advisers before investing in a project.

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    Neville M Leslie

    Immigration Attorney
    Answered on

    All investments have some element of risk. They find this to be the best structure for the development of their projects.

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    Robert West

    Immigration Attorney
    Answered on

    The simple answer is this type of financing is easy to obtain and little or nothing is put down to secure the financing.

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    Philip H Teplen

    Immigration Attorney
    Answered on

    Business has risk. Mezzanine financing is perfectly acceptable; however, before an investment is made, it is essential to do a detailed analysis to assist in determining risk, return and ability to refinance to buy out investors. We can certainly help you.

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