Understanding the importance of funding strategies and key challenges faced by EB-5 investors  

By Vivek Tandon 

An EB-5 investment will likely rank as one of the most significant financial decisions in the investor’s life. Apart from the size of the investment—$800,000—the decision can potentially transform the lives of not just the applicant but also his or her immediate family members.  

Identifying the right funding strategy for an EB-5 investment may often get eclipsed by seemingly more vital decisions like project selection, Source of Funds analysis, or even finalizing funding to get the EB-5 process rolling.  

However, comparing different funding strategies is a highly significant part of the process that can impact tactical and strategic aspects of the EB-5 application decision.  

CHALLENGES UNIQUE TO EB-5; ROI IS NOT KEY  

An EB-5 investment decision may differ from a conventional investment decision in that the investor’s primary objective may go beyond, or even completely exclude, the requirement of generating attractive returns on the investment.  

Yet, the EB-5 decision has an opportunity cost, and the right funding strategy is essential to minimize it and ensure the decision to apply for the EB-5 visa remains a value proposition for the investor.  

Apart from facilitating an objective assessment of the pros and cons of the decision of the EB-5 investment decision, comparing different funding strategies can help the investor make an informed choice based on a thorough understanding of subjective factors unique to the investor’s personal and financial situation.  

Along with tackling the confluence of multiple objective and subjective factors, identifying the right strategy is further complicated because its success or failure is a forward-looking exercise that, although impacted by it, may operate independently of the success of the EB-5 investment decision.  

CHALLENGES UNIQUE TO EB-5, MAINLY THE  RISK OF LOSS OF INVESTMENT  

The choice and suitability of the funding strategy are also impacted by the investor’s risk tolerance, especially the possibility of not recovering the EB-5 investment.  

Again, this requires careful analysis of existing factors along with judicious and conservative assessment of future risks. One must consider the best and worst-case scenarios to balance the opportunity cost and various potential risks of the EB-5 decision and make an informed choice.  

THE CONUNDRUM SIMPLIFIED—SELL OR LOAN 

The investment strategy conundrum can present itself through a simple question—sell or loan?  

Nobody is likely to have $800,000 sitting idle in the bank. Most investors have these funds locked in different types of assets—physical, financial, or digital. One question virtually every EB-5 applicant must tackle is whether to sell the asset or opt for leverage to retain ownership by bearing the interest cost of the debt.  

An investor who prefers selling the asset over a loan stands to lose the potential appreciation in its value in the future. Conversely, the decision to sell may seem prescient if prices fall, and the EB-5 investment decision helps the investor avoid losses that would have accrued had he or she chosen to continue owning it.  

The decision to sell property or equity investments or stock units of a U.S. blue-chip tech company can always, in hindsight, seem like a poor EB-5 funding strategy if the lost capital gains exceed the cost of servicing the loan, had the investor opted for the same.  

Here, the investor is up against the natural human tendency to want it all—to provide for the worst-case scenario and simultaneously enjoy the best-case scenario’s results. For an EB-5 investor, this often means the triple benefits of retention of asset ownership, permanent residence in the US, and successful recovery of the EB-5 investment.  

REGULATORY RESTRICTIONS AND LEGAL CHALLENGES 

Factors that can further complicate this decision include legal, regulatory, or other practical hurdles involved.  

Restrictions on remittance of borrowed funds outside the country or the mandate to use borrowed funds for specified purposes, which generally exclude the option of foreign remittance for an EB-5 investment, can effectively render some strategies moot even if the investor is cognizant of all risks involved and is prepared to accept the same.  

Such regulatory obstacles can create the additional risk of an investor discovering such restrictions only after having reached the point of remitting the funds to the US.  

Even known and seemingly minor identifiable legal restrictions can create issues that can significantly challenge the EB-5 investment decision.  

Routing funds through immediate family members is a tried-and-tested strategy for helping an investor finalize the EB-5 investment in a timely manner without violating Path of Funds restrictions. 

The inability of all family members to participate in this strategy or to fund the investment fully despite using this strategy can result in delays in funding the investment and securing a path to the green card as soon as possible.  

For an Indian EB-5 applicant forced to stretch the investment timeline to the next financial year, the challenge caused by the Path of Funds requirements can increase the risk of being impacted by a future backlog and even lead to a significantly lengthier wait for the green card status.  

Also, for an investor outside the U.S. or somebody with a child close to the age of 21 years, such funding strategy challenges may raise fundamental questions about the necessity or utility of applying for the EB-5 visa in the first place.  

TACKLING THE UNKNOWN UNKNOWNS 

Sifting through different funding strategies can expose the investor to unknown risks beyond his or her control. The decision to sell a property to fund the investment is based on numerous assumptions about valuations, demand and supply factors, parallel economy compulsions, and timelines.  

An informed EB-5 strategy must acknowledge the potential impact of unknowns and the possibility of these factors compelling significant changes to the investor’s original EB-5 plan.  

This means the preliminary process related to funding strategies must inherently provide for the flexibility that all these variable factors demand. Yet, the investor must also have a clearly defined framework or roadmap that can be implemented to convert the planned EB-5 investment decision into reality.  

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.