If you’re considering the EB-5 Immigrant Investor Program as a pathway to U.S. permanent residency, selecting the right investment project is crucial. With so many options available, it can be overwhelming to know where to start. Here are key factors to consider to help you make an informed decision and maximize your investment’s potential.
When applying for the EB-5 visa, it’s essential to take a personalized approach to selecting a project. This was the consensus expressed during a recent webinar featuring EB-5 professionals Jacqueline Trevino from PSBP Law, Ishaan Khanna from the American Immigrant Investor Alliance (AIIA), Trevor Anderson from HomeFed Corporation, and Braxton Bartlett from EB5LA.
The specialists emphasized that EB-5 investors should thoroughly assess project sponsors and regional centers, prioritizing those with a proven track record. They also stressed the importance of transparency and accurate documentation. Additionally, they noted that inherent investment risks are intrinsic to the process and advised against claims that guarantee returns.
To make a comprehensive and informed decision when selecting a project, these EB-5 experts recommend considering the following key factors:
Every EB-5 project is unique
Given the variety of projects and circumstances, a tailored approach is essential for making informed investment decisions when applying for the EB-5 visa.
“Every single project type is different,” said Khanna. “There are so many more fundamentals that matter. There’s a lot of non-real estate projects out there. There’s manufacturing, oil, gas, and commodities as well, which are all out there. The big thing that I would say is, look at the project sponsor. Investors should ask about: Have they done this before? Can they work within the margins? Are they relying on a favorable refinance if interest rates drop?”
Steer clear of evasive developers or regional centers
An investor must receive proper documentation and make sure it is accurate and legitimate. Attorney Jacqueline Trevino of PSBP Law emphasized the importance of appropriate business registration. They “show that the business is registered as needed, put together correctly, have business documents, agreements showing how much ownership you have of that, but also, if there was an investment required for that ownership,” she says.
A feasibility study is among the documents the investors must have access to. But they are time-sensitive and may expire based on market conditions. It’s essential to verify the credentials of the professionals who conducted it to ensure their legitimacy and expertise.
“Check who did the feasibility study. Do background on them, make sure that they are legitimate. If I go and provide a feasibility study for some project, and I’ve never done one before, you know, what good is that? Make sure you’ve got proper support professionals that are providing this data,” Anderson said.
The economic study of job-creation projects is another key document. However, it should remain unchanged over time.
“If you’re getting a job creation report done for a project based on a construction budget you’ve laid out. And then you go and start changing the dynamics of a project, it sounds like then you’re making material changes to the project itself, which is a super big red flag for investors,” Khanna cautioned.
Risk is part of the EB-5 investment reality
Trevino added that there are complexities involved in investment offerings and the assurances provided to investors in marketing materials and project documents.
“Any absolute or language that guarantees a particular outcome,” she said. “There are many factors that can contribute to an approval or a denial. Ultimately, the language in the offering documents that the investors are presented with cannot promise a return or outcome for their filing. Those contracts cannot guarantee a repayment or a certain outcome, because ultimately, every case is different, and there are many moving factors for every single case.”
Consider a variety of factors, not just track record
EB-5 investors will face challenges in evaluating real estate projects due to their unique variables. The developer’s track record is important, but it is not the only indicator of success; past success does not guarantee future outcomes.
“A track record just doesn’t mean they get everything right every single time,” Khanna said. “Track record is good, that means they know what they’re doing. Now, if it’s a first-time developer, or a first-time fundraiser who’s now getting into real estate development, I’d be wary about that.”
The professionals also agreed that while a solid track record reassures about a developer’s expertise, each project presents unique challenges that can affect its success.
“Every single project you look at has a different set of variables, different locations, different asset classes, and that’s where it can be very difficult to predict the outcome of a project,” Anderson added.
If you feel unprepared to evaluate the project on your own, ask for help
EB-5 investors take different approaches when making informed decisions.
“We see investors who are really interested in that, and then we also see investors who are just taking on the process themselves,” Trevino said. “Some people don’t even know that agents and brokers and things like that are options.”
Working with qualified professionals for EB-5 investment advice is paramount, Khanna said.
“Work with people who are licensed,” he noted. “There are a lot of investors who try to do some of that due diligence on their own. And for them, I would highly recommend, especially if you’re based in the U.S., talk to someone who’s licensed, someone who’s been doing this EB-5 advising thing for a long time.”
Braxton Bartlett of EB5LA notes that while some investors prefer to manage their own finances, others benefit from guidance from agents and broker-dealers, depending on their comfort level with investing.
“Agents and broker-dealers can be incredibly helpful to people who aren’t overly familiar,” he said. “It’s not a one-size-fits-all. It really just depends on you and your discretion as an investor, how comfortable you want to feel, and if you kind of need that extra little push and guidance.”
Anderson also recommends that investors conduct their own research and seek recommendations to identify capable EB-5 professionals. “Do some work for yourself, do some homework, ask around, because not all agents and or brokers are created equally.”
Keep an eye on the economic situation of the project
The investor’s involvement continues even after the investment is made. It is equally important to monitor the investment process and the project’s ongoing progress.
“If I choose to go ahead with this particular project, then I’m probably going to still keep an eye on that project, even after I’ve invested,” Khanna said. “I always encourage investors to look at past project updates. If the project was going well, if there were any delays.”
As for delays, he says investors must also account for unplanned events in their assessment.
“Delays happen. Acts of God can happen. But it is an important idea to keep track of what’s going on, how the money’s being spent, and if it’s being spent correctly. If there’s a fund administrator involved, keeping an eye on it and making sure the money is being used as it should be are important. A good project sponsor will usually keep their investors in close communication at all times.”
Anderson noted that having all the permits and a reliable contractor helps real estate projects progress smoothly.
However, some delays can indicate a problem with the project.
“It you see early delays in construction, that could be a bit concerning. If you’re not getting regular construction updates from the developer, again, that can be concerning. You have got to make sure you pick the right horse from the beginning, because it’s pretty hard to change course once you’re already invested,” he said.
If you get an EB-5 loan, understand how protected you are
In EB-5 investment financing, taking out a loan is a popular funding option for some. There are two primary types of loans: senior and mezzanine. Understanding the difference between these two is crucial for investors.
“A senior loan will be in first position. It’s going to have senior security; it’s going to be secured by the project itself, or maybe an alternative piece of collateral. So, the investor is protected, there’s an immediate safety net to protect investors in case of a default,” Anderson said.
Meanwhile, the mezzanine position is typically subordinate to a bank or lender ahead of the EB-5 investor, meaning the bank holds the senior position with respect to security, collateral, and property. Consequently, EB-5 investors are generally less protected. However, exceptions may apply.
“There’s plenty of success stories of people that have done their EB-5 process through mezzanine positions, or even preferred equity positions,” Bartlett said. “It’s not a one-size-fits-all horse. It works differently for everybody and their financial situation.”
Ensure EB-5 funds are invested directly in project development
There is a risk that the developer or regional center may mismanage the funds or use them for purposes other than their designated purpose, which could result in insufficient job creation and potential non-compliance with EB-5 program requirements.
The mandatory figure of the fund administrator was introduced by the Reform and Integrity Act of 2022 for regional center projects to ensure that the funds are released only when appropriate and are contributing to the project’s development.
“We need to be very careful that the EB-5 funds are going to the appropriate place, and that’s where a fund administrator can be a very useful tool,” Anderson said. “They’re going to make sure that those funds are only released from escrow, only released to the project, when and where appropriate.”
Watch out for conflicts of interests
Investors may encounter complexities and conflicts of interest in EB-5 real estate development. Proper due diligence and investor education when assessing opportunities can help manage these challenges.
An EB-5 developer can be vertically integrated, managing spending and fundraising. There is also an alternative model where developers and fiduciaries operate separately. Neither model is bulletproof. Conflicts of interest are usually associated with the combined model.
“I’ve seen both models work, and both fail investors at times. There have been developers and regional centers that have done good projects, and sometimes they’ve done projects that have failed. You’ve got to look at each individual offering separately,” Khanna concluded.
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