By Marko Issever
Selecting an EB-5 project is a complex task in the post-EB‑5 Reform and Integrity Act of 2022 (RIA) environment. However, before this law came into effect and during the COVID-19 pandemic, many exemplar-approved projects that initially appeared viable and promising ran into significant difficulties. Many today are unable to redeem investor capital.
In some cases, project sponsors and migration agents lured unsuspecting petitioners with flashy presentations, teasers, and impressive marketing materials, backed by convincing arguments. Today, with the active participation of broker-dealers, EB-5 investors are empowered to look beyond simple statistics such as job-creation buffer, tenor, and what type of project (rural, urban-TEA, or non-TEA) they are investing in.
The quality of diligence directly influences investor outcomes, the industry reputation, and the level of future regulatory scrutiny. All EB-5 stakeholders are concerned about project viability, as none wants to be associated with failed transactions.
Why EB-5 project selection matters more than ever
Typical EB-5 investors are not ultra-high-net-worth individuals. Most have a total net worth of between $3 million and $5 million. Therefore, the total financial commitment of an $800,000 investment, plus processing fees that could add up to over $100,000, is a sizable portion of their net worth. While obtaining a green card is their utmost priority, they cannot afford to lose their investment.
The law requires their investment to be at risk. They understand this requirement. Due to the RIA, investors can now rely on regulated intermediaries such as broker-dealers to identify financially sound projects, helping them distinguish essential structural protections from merely nice-to-have features. While the former criterion can help protect investors from losing their capital, the latter may not add much given the risk. Certain financial features may appear risky when evaluated in isolation, rather than within the context of the complete capital structure. Others could look attractive. However, the reverse could be true.
Consider senior position transactions versus senior loan transactions. Senior loans are any financing repaid ahead of the EB-5 capital. By contrast, a senior position is the EB-5 capital sitting at the top of the capital stack, with no other debt, senior or junior, ahead of it. On the surface, senior position transactions look safer as there are no financings ahead of the EB5. However, it could also be a red flag, as no reputable financial institution may be interested in exposure to the project, even at the senior loan level. Therefore, the existence of a senior loan could provide additional comfort to the subordinated lender if the other ratios are good. The existence of an already committed mezzanine debt provides EB-5 investors comfort because it enables the project to continue through the EB-5 raise.
However, the terms of the intercreditor agreement with the senior lender are crucial. Firstly, there should be one. Because mezzanine lenders typically hold a pledge of membership interests in the property-owning entity, rather than a direct lien on the real estate, they must have the contractual ability to step in if the borrower defaults. These cure rights, and the right to foreclose on those equity interests, are essential protections. The intercreditor arrangements must ensure that senior lenders cannot impair or extinguish EB-5 investor rights without prior notice and an opportunity to cure. Any EB5 loan that allows senior debt amendments without EB5 investor consent is poorly structured. If there is a foreclosure, the interests of the senior loan holder and the EB5 should be aligned. They should be able to foreclose equity interests and replace the sponsor if needed.
In other words, a well-structured senior loan arrangement can sometimes offer EB-5 investors greater protection than a senior position with no debt ahead of them. Rather than evaluating them in a vacuum, investors are well advised to assess each feature in the context of the overall capital structure and intercreditor protections.
Framework for evaluating an EB-5 project
A. Capital Stack & Financial Viability
- Sources and Uses:
A complete capital stack shows how EB-5 capital fits within senior debt, mezzanine, sponsor equity, and equity joint-venture partners. Investors should insist on seeing independent feasibility studies, cost schedules, and third‐party appraisals.
- Sponsor skin in the game:
The degree of tangible equity and risk the sponsor is willing to commit to the project defines sponsor skin in the game. A project with modest sponsor risk tends to raise red flags. Transactions should have developer equity of at least 20%. Senior position transactions that lack any senior loan from a reputable lender should have developer equity closer to 50%.
- Exit Strategy:
The exit strategy spells out how and when the developer will a) repay EB-5 funds, if structured as a loan, or b) have it appraised, if structured as equity. The offering documents must clearly outline these commitments with meaningful consequences for non-compliance. Most transactions rely on refinance or outright sale projections. In each alternative, the assumptions should be stress tested through scenario analysis to assess their viability.
B. Regulatory/immigration compliance status
- Form I-956F submission & status:
A project submitted and approved by the United States Citizenship and Immigration Service (USCIS) offers a structural advantage, providing evidence that the underlying business plan, job-creation methodology, and offering terms align with USCIS expectations. That said, investors should not insist on this feature when signing up for a project because many strong projects from reputable sponsors sell out before I-956F approval. The approval is acceptance of the methodology used and the assumptions made to create the jobs. It is not an explicit endorsement of the project by USCIS. All it says is that USCIS will consider the projected jobs created if the developer fully expends the planned funds and completes the development.
- Governance and transparency:
Although not required per se, the offering documents should reflect the existence of audited financial statements, established governance protocols, and credible, independent oversight. Under the RIA, to satisfy regulatory requirements, a project must have either audited financial statements or a fund administrator and an escrow agent. While both provide oversight, the former certifies compliance during past activities, while the latter ensures it for future ones. Fund administrators supervise investor funds throughout their lifecycle, from subscription and deployment to exit or capital return, while providing independent administration, proper fund segregation, investor reporting, audit trails, and robust compliance controls. The escrow agent is the trusted third-party that holds the funds in a segregated account and disburses them upon milestone conditions, such as construction start, pre-leasing, or certificate of occupancy, under the explicit supervision and guidance of the fund administrator. Ideally, a project should have both audited financial statements to provide the track record and a fund administrator/escrow agent to enforce compliance.
- Strategic decision‐making: Balancing immigration & investment risks:
A project may meet immigration eligibility but still fail as an investment, posing a significant risk to investors with limited resources to cover the EB-5 minimum investment and related processing fees. Conversely, a financially robust real-estate opportunity that fails to deliver the immigration benefits an investor seeks is, by definition, not a viable EB-5 investment.
C. Red Flags
Some red flags warrant heightened scrutiny:
- Obscured or incomplete financial disclosures
- Unrealistic job assumptions or aggressive multipliers
- Sponsor or developer entities newly formed with no track record.
- Offering documents promising guaranteed approvals, guaranteed returns, or capital preservation (which would trigger securities & immigration concerns)
- Limited independent oversight of funds or the absence of a third-party administrator
In-depth project viability analysis
Presumably, the economic report and the business plan, which are standard parts of the offering documents deck, should provide the following statistics. If not, every EB-5 investor has the right to ask the sponsors, such as the Regional Centers managing the New Commercial Enterprise (NCE) or the Job-Creating Entities (JCE) themselves, the following questions:
A. Capital structure & debt/equity ratios
Investors should select projects that are not over-leveraged and insist on real cash equity in EB-5 transactions where the EB-5 is subordinate to the senior loan. Often, the only equity developers contribute is the land. There is no cash to start the project. The project encounters a cash shortfall and, as a result, becomes overly dependent on the EB-5 raise. Without a fully subscribed EB-5 raise and with no mezzanine debt to bridge the funding gap, construction stalls, and the project ultimately fails.
LTV, after the senior loan retirement, provides significant insight into the likelihood of EB5 repayment. It is crucial to have access to an independent third-party forward appraisal report to calculate this ratio, and if possible, to subject it to stress testing. Key variables that can be stress-tested include construction costs (+10–15%), interest rates (+2%), leasing velocity, and reduced stabilized rental income and exit pricing (-5–10%).
B. Debt service coverage ratio (DSCR)/reserves & liquidity
For senior debt, the DSCR, which measures a borrower’s capacity to cover debt service from operating cash flow, should typically fall in the 1.20x–1.30x range, providing a 20–30% cash-flow cushion to cover required interest payments. The combined DSCR of senior plus EB-5 should be at least 1.05x–1.15x if EB-5 capital is subordinated debt. In practical terms, this equates to a 5–15% buffer to meet total interest obligations from available free cash.
It is an added benefit if the available reports demonstrate adequate interest reserves, ideally for the full loan term, or at least through construction, along with an operating deficit guarantee or reserve, and, for income-producing properties, capital expenditure reserves and development contingencies.
Taken together, these metrics help validate project viability, increase the likelihood of success, and reduce the risk of default that could jeopardize repayment of the EB-5 investor capital.
C. Waterfall structure (cash flow priority); Negative Pledge / Restrictions
The EB-5 due diligence should focus on the priority of repayments, the treatment of interest accruals during underperformance, the default interest rate, and whether the loan terms allow any equity distributions before full EB-5 payment, including any outstanding unpaid interest. The developer holding equity below the EB-5 in the waterfall should not receive any distributions until the EB-5 loan is fully retired.
By the same token, the negative pledge prevents the borrower from placing new senior liens that dilute EB-5. The due diligence should reveal no additional indebtedness without investor consent, no second liens ahead of EB-5 that dilute their collateral, and cross-collateralization restrictions. And finally, the loan terms should prohibit asset sales that weaken the EB-5 position.
D. Developer/regional center track record
In this category, we look at how many EB-5-related projects the developer has completed. We also consider the history of similar projects in terms of type, size, and geography. We verify both the Regional Center and the developer’s balance sheet strength, liquidity, past defaults, litigation, and bankruptcies. We also review their track record: the number of I-526E petitions filed and approved, green cards issued, I-829 approvals, and ultimately, how many investors have received a full return of capital.
When assessing the strength of an EB-5 structure, we also examine the nature of its guarantees. These include the I-526E denial guarantee, which clarifies whether it covers only project-related denials or also source-of-funds denials; building completion guarantees; and, in rare cases, third-party payment guarantees. The latter, where an outside entity pledges assets beyond those already tied to the project, is uncommon but extremely valuable.
DISCLAIMER: The views expressed in this article are solely the views of the author and do not necessarily represent the views of the publisher, its employees. or its affiliates. The information found on this website is intended to be general information; it is not legal or financial advice. Specific legal or financial advice can only be given by a licensed professional with full knowledge of all the facts and circumstances of your particular situation. You should seek consultation with legal, immigration, and financial experts prior to participating in the EB-5 program Posting a question on this website does not create an attorney-client relationship. All questions you post will be available to the public; do not include confidential information in your question.
