Despite the EB-5 program’s popularity, many investors are concerned about the safety of their investments, especially in light of recent bank failures. Let’s examine the safety of EB-5 investments and explore ways investors can mitigate their risks.
EB-5 investors must be careful not to be lured away with promises of high yield and high returns while forgetting their most important criteria in project selection: job creation and return of capital.
With the passage of the RIA of 2022, there are two additional points worth considering when evaluating projects:
a) Adjudication of applications in the I-526 / I-526E and I-829 stages is historically the lowest it has been, creating unprecedented backlogs in processing. Therefore, investors should consider where they apply for the EB-5 project they select. If, at the time of filing, the investor is on US soil with a nonimmigrant visa, the RIA of 2022 also allows for the concurrent filing of I-526E (EB-5 petition) and I-485 (Application to Register Permanent Residence or Adjust Status), I-131, Application for Travel Document (Advance Parole/Travel Authorization) and I-765, Application for Employment Authorization (Employment Authorization Document – EAD). I-765 and I-131 get adjudicated much faster than the I-526E granting the investor most of the benefits of a green card in a fraction of the duration.
b) Investors born in retrogressed countries such as mainland China, India, and Vietnam should also consider selecting projects from one of the set-aside categories, such as Rural, TEA, or infrastructure, for eligibility of priority processing and retrogression considerations avoidance.
BACKGROUND INFORMATION ON EB-5 INVESTMENTS
The EB-5 program is a federal program. It allows foreign nationals to invest in job-creating projects in exchange for a green card. The benefits of investing in EB-5 projects include a clear path to permanent residency and the opportunity to earn a return on investment. However, like any investment, there are risks associated with EB-5 projects. These risks include losing the invested EB-5 capital if the project developer misuses the funds or not getting the green card if the project fails to create the requisite number of jobs. By utilizing the services of a licensed broker-dealer, investors can select safer projects and stay away from those that would expose them to undue risk.
RIA demands EB-5 stakeholders to be responsible. In addition to an escrow agent that disburses the capital, Regional Centers must now use the services of a Fund Administrator who is responsible for tracking not only the EB-5 funds but all the payments throughout the life of the EB-5 investment, further reducing the possibility of fraud and misuse of the funds.
BANK FAILURES AND THEIR IMPACT ON EB-5 INVESTMENTS
In recent years, several banks serving regional centers and their EB-5 projects have failed. When a bank fails, it can significantly impact EB-5 investors who have invested in EB-5 projects. Additionally, investors may not be able to secure permanent residency if the project fails before creating the requisite number of full-time jobs for two years. The failure and collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank have made past and future EB-5 investors nervous.
While bank failures are never desirable, if they do happen, we must understand who can get hurt. Nearly all the recent ones were by banks who acted as Escrow Agents, Fund Administrators, or Trustees for the EB-5 funds held in a separate account not permitted to be co-mingled with the banks’ general assets backing their liabilities. Therefore, in a failure situation, the funds were accessible by the Regional Center monitoring the New Commercial Enterprise (NCE) they create that typically lends the EB-5 funds to the developers through the Job Creating Enterprise (JCE) they control and manage. If the funds had already been disbursed to the JCE, by and large, the failure would have had no serious consequences. Similarly, even if the funds were still with the bank, absent any fraudulent behavior by the bank, as long as the bank kept them in a separate account, they would still be secure.
In many cases, the banks act as senior lenders, and if they fail, that could have unpleasant consequences. However, if the failed bank had already lent out the funds before the failure, that would have little or no effect on the project unless its lenders could accelerate payment of its loans early. The project owners would then potentially need to find alternative sources of funds to refinance and pay off the failed bank creditors calling the senior loan of the project. If the failed bank had committed to the loan but had not disbursed the funds yet, that could potentially result in a liquidity crunch for the Regional Center which would then need to search for a new lender to replace the failed one. That could be problematic. They might not find an alternative bank or lender willing to take the risk at a reasonable cost of funds, thereby jeopardizing the project’s viability. By working with established lenders, an experienced securities counsel, and a broker-dealer and ensuring that the fine print in the lending documents does not expose the project to unforeseen risks, the Regional Center and the developer could mitigate these unexpected eventualities.
MITIGATING RISKS IN EB-5 INVESTMENTS
While there is no way to eliminate all risks associated with investing in EB-5 projects, investors can take steps to mitigate many of these risks. For example, investors should conduct thorough due diligence on the project and the project developer before investing. Additionally, investors should work with reputable regional centers having a track record of completing EB-5 projects. Finally, investors should have a clear understanding of the risks involved and should only invest funds that they can afford to lose.
The federal government is also working to make the EB-5 program safer for investors. For example, the government has implemented new regulations that require greater transparency from project developers and regional centers. Additionally, the government has increased oversight of regional centers and imposed stricter requirements for project approval.
No matter how wealthy they might be, no investor wishes to lose money. Therefore, they should do their due diligence before committing to invest. Consider three ratios to form an objective opinion on the capital structure. They are:
- Equity as a percentage of the total project cost:
This ratio should be as high as possible, indicating significant skin in the game by the developer. If the developer has a high stake in the project, chances are higher that they will pay attention to the project and make it successful.
- Loans and EB-5 together as a percentage of the Forward Appraisal of the project:
This ratio should be as low as possible, indicating that, once completed, the project value will cover the liabilities. As a sub-category here, let’s look at another ratio, by definition, smaller than this one. That ratio is senior loan as a percentage of the forward appraisal of the project. Make sure that these two ratios are close. The senior loan-to-forward appraisal ratio is significant because senior lenders with expert lenders thoroughly study the project viability before committing to the loan. Therefore, if their ratio is, for example, 60%, the ratio for the EB-5 exposure should be 70/75%, and that senior lenders must have had internal models mandating sufficient buffers to mitigate their risk.
- EB-5 as a percentage of the Forward Appraisal after Repayment of Senior Loan
This ratio should be as low as possible, indicating that once the developer repays the senior loan, the remaining value of the completed project will be able to cover the EB-5 capital comfortably. The lower this ratio, the higher chance that the EB-5 capital will be safe.
While associated with investing in EB-5 projects, there are risks, and investors can take steps to mitigate these risks. They can increase their chances of a successful investment by conducting thorough due diligence and working with reputable regional centers and service professionals. Still, they should only invest funds they can afford to lose. Additionally, Congress and the federal government have taken steps to make the EB-5 program safer for investors by implementing new regulations and increasing oversight based on the RIA of 2022. While recent bank failures have highlighted some of the risks associated with EB-5 investments, it is essential to remember that many successful projects have provided investors with a path to permanent residency and returned their capital. Ultimately, whether or not to invest in EB-5 projects is a decision each investor must make based on their own risk tolerance and financial goals. By taking a cautious and informed approach, investors can minimize their risks and potentially reap the benefits of the EB-5 program.
Marko Issever
Marko Issever, the founding CEO of America EB5 Visa, leads EB-5 capital-related activities at Riverside Management Group, connecting international investors with EB-5 issuers. He recently launched CBP Invest, a global immigration company, advising clients in second-country citizenship in countries like Grenada, Turkey, Portugal, Spain, Malta and Greece. Previously, Issever was a managing director at BNY Mellon, leading the firm’s financial institutions derivative sales business globally. Issever speaks Turkish and Ladino Spanish fluently. He earned his MBA in finance from The Wharton School of the University of Pennsylvania. He is a graduate of Bogazici University and Robert College, located in Istanbul.
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