How are EB-5 loans usually positioned in a capital stack?
How are EB-5 loans positioned in the capital stack? Is it common for EB-5 loans to take the first position? How much of the capital stack do they typically cover?
There is no fixed or standard rules on the issue. It all depends on the agreement between the parties or even the project. However, the common situation you will run into in EB-5 is that most EB-5 loans may be positioned in a capital stack second to the traditional bank financing, and typically, before the position of the equity investors. In some projects, the EB-5 loans would have a first position in the capital stack. This would be most desirable if you could obtain such an agreement.
I have seen them in the first position most often. The percentage of overall capital stack can vary. Many of the more experienced EB-5 project offerors limit the EB-5 funding, sometimes as low as 20 percent. Personally, I like seeing no more than 30 percent (give or take) as EB-5.
There are no rules governing where a loan needs to be in a capital stack or the percentage of the capital stack. However, in recent years, the percentage has been moving steadily downward because of the length of time it takes to get a green card through EB-5.
It varies by project. Ideally, they should take first position, and in today's competitive market, they really should. Ideally, not more than 30 percent to 40 percent, but, again, this varies.
There is no rule really, but the rule of thumb we use is that any time the equity is less than 20 percent that means the developer is not putting enough. Anytime the senior loan is above 60 percent that could potentially be too much leverage. Typical capital stack is 60 percent senior debt, 20 percent EB-5 and 20 percent developer equity. EB-5 comes behind the senior debt but ahead of equity. Keep in mind, though, that when we are talking about the EB-5 loan that is not the funds that the EB-5 investor is making. Those are typically preferred shares in an NCE, the newly created entity. The EB-5 loan is the loan made by the NCE to the JCE, the job-creating entity. This loan ranks in between the senior debt and the developer equity. From the EB-5 investor's standpoint, it is always better to have more equity rather than less equity contribution by the developer, as that provides the cushion in a downturn in the markets for the EB-5 investor. For a given amount of EB-5 investment, of course the less debt there is (that is, the senior loan), the better off you are. That said, if the EB-5 is in the first position because there is no senior debt at all, that in itself could be a red flag for the project because it could be an indication that no reputable senior lender would want to take any exposure whatsoever to the project. It does get a little complicated with all the moving parts.
Regarding your question about how are EB-5 loans positioned in the capital stack, the answer depends on trends at the time of financing. There was a period a few years ago that if the job-creation numbers could sustain raising a large sum, the EB-5 loan was often in the senior position, thus representing a significant portion of the capital stack. The current trend, which has remained consistent for about two years now, is that the EB-5 loan is in the second position representing not more than 30 percent to 35 percent of the capital stack.
EB-5 loans may be positioned in a capital stack second to the traditional bank financing, and normally, before the position of the equity investors. In some cases, the EB-5 loans have a first position in the capital stack, which would be most desirable.
