When investing in an EB-5 project, collaboration between broker-dealers and project sponsors is crucial for ensuring due diligence, legal compliance, and investor protection, ultimately leading to a more solid investment that aligns with their immigration and financial objectives.
During a recent Eb5investors.com webinar, industry professionals Andrew Wall, a broker-dealer from Dynaxe Capital, Trevor Anderson from regional center HomeFed Corporation, and EB-5 attorney Christian Triantaphyllis from Jackon Walker law firm, emphasized the importance of understanding a project’s financial foundation in relation to its eligibility as an investment that meets the program’s requirements.
They also advised investors to assess the project’s capital structure, including the equity investment from developers, and the positioning of EB-5 funds relative to other financing sources.
Who can advise the EB-5 investor when selecting a project?
They recommended consulting immigration attorneys and broker-dealers to review project details. A lawyer can help to evaluate EB-5 eligibility but can not give investment advice.
Wall said broker-dealers should “focus on assisting the investors in selecting their project and understanding the offering so that there’s no surprises in the future.”
Triantaphyllis noted that immigration attorneys should make sure that their clients “can get a green card out of the project that they’re investing in.”
Additionally, they emphasized that when inquiring about the financial structure and due diligence aspects of the project, investors should receive a thorough understanding and detailed information.
First position and developer presence: What to look for in an EB-5 project financial structure
The panelists agreed that important factors for the financial structure include having a clear capital stack with a significant amount of project sponsor or developer equity and maintaining low bank debt.
Triantaphyllis said that key questions investors should ask when reviewing the project documentation are: “‘How’s the deal structured? Why was this project selected? Is there anyone out there who can help me? Look at this from a financial and due diligence perspective beyond the immigration requirements.”
Regarding the project’s financial structure, the panelists emphasized the importance of having a clear capital stack from the outset. It is essential to include a significant portion of sponsor equity and to be aware of the bank debt in the structure. They recommend prioritizing structures where EB-5 funds have strong security in the first position.
“Within the EB-5 space, you’re going to see a variety of different capital stacks and financing structures,” Anderson says. “In all cases, we want to see the developer putting in a substantial portion of equity. We want to know that the developer believes in the project, and they’re putting their money where their mouth is. We want to see the developer highly invested.”
He also clarified that while bank debt in a capital structure isn’t inherently negative, it is generally considered less desirable. “Typically, there will be some bank debt, and there’s nothing wrong with that per se. However, in a best-case scenario, we prefer projects that don’t have bank debt. We want the EB-5 investors to be in the first position.”
Wall added that investors should want “that first position to be in an asset that has value.”
The first position in the capital stack allows EB-5 funds to be more protected if the market or project outcomes deviate from the initial planning.
“Sometimes things happen, we can’t control the market,” Anderson said. “We can’t control the outcome of the project, but making sure that the investor is in a first position and well protected by significant developer equity is the single best way to protect the investor’s interest in a project.”
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