By Quynh Lai
In EB-5 immigration investment decisions, the investors are concerned with two important things: receiving a green card and getting a refund of their investment. There are several things an investor should do research about when it comes to an EB-5 project, including the developer, capital stack, job creation and the exit strategy.
The developer’s experience and creditability will cover both the immigration risk – how to secure an unconditional green card for the investor, and the investment risk – how to secure the refund of the investment. The capital stack and exit strategy of a project will describe the investment risk. The job creation of a project will show the immigration risk.
WHAT AN INVESTOR SHOULD KNOW ABOUT THE EB-5 PROJECT DEVELOPER
In reviewing a developer of an EB-5 project, it is important to check the experience and credibility of the developer. The developer should be well established and have experience in the field. They should not be a firm just set up to do an EB-5 project. A few rare and good EB-5 projects have developers that are public firms. This is a strong point in selecting an EB-5 project because public firms have to meet high standards from the U.S. Securities and Exchange Commission (SEC). They also have to file quarterly and annual reports with SEC. SEC’s oversight and strict public reporting requirements provides comfort and transparency to investors and convenient access to financial and business filings online. If the developer of an EB-5 project is not a public firm, the investors need to spend more time to do research to make sure the firm knows what they are doing, have a solid experience and good position in the field.
WHY UNDERSTANDING THE CAPITAL STACK IS IMPORTANT TO AN EB-5 INVESTMENT DECISION
The capital stack will give the investors an important ratio of investment. The ratios are loan to value: a percentage of EB-5 loan, a percentage of developer equity and a percentage of other loans of bank loans. The loan to value ratio is an important ratio to consider because it shows if the project depend too much on a loan to develop and if the developer has put a high equity portion to the project. The capital stack also gives the investor a clear understanding of the EB-5 investment position. It is good if the EB-5 investment is a first position loan and fully collateralized by first trust deed of the project itself or additional land. If the capital stack includes a senior loan, the EB-5 investment will be in second position.
The high developer equity cushion and the first position of the EB-5 loan give more security for the refund of the EB-5 investment.
WHAT AN INVESTOR SHOULD UNDERSTAND ABOUT JOB CREATION
In reviewing job creation of a project, an EB-5 investor has to read through a project’s Indirect and Induced Employment Impacts prepared by a professional third party. The project should have a surplus job creation that well surpass the employment conditions for the approval of the green card needed by USCIS. It is best if high percentages of the jobs created are direct construction jobs, which mean that job creation is not dependent on an on-going business.
A GOOD EXIT STRATEGY
The exit strategy stated in the Private Placement Memorandum (PPM) gives investors a clear picture of the refund EB-5 investment strategy and resources. Most EB-5 projects have to show that their cash flow significantly exceeds the EB-5 loan or that they have a reasonable and obtainable refinancing plan in place.
However, it is more secure if the exit strategy in worst case scenario, meaning if the project operation and project cash flow fail, is covered by a first position loan and fully collateralized in the outstanding EB-5 loan by a first trust deed.
There are many more items that EB-5 investors should focus on when reviewing and deciding to invest in an EB-5 project. However, the first and most important items should be the developer, capital stack, job creation and exit strategy.