We are hearing horror stories about EB-5 not being at the right spot in the capital stack. How much EB-5 is too much, how much is too little?
We are hearing horror stories about EB-5 not being at the right spot in the capital stack. How much EB-5 is too much, how much is too little? How much equity should be there providing cushion for the EB-5? How about the senior debt? Is it good to have it ahead of the EB-5 in the waterfall? Is it better not to have senior debt at all? Could you provide a primer on that please?
There is no fast rule but the rule of thumb we use is that any time the equity below the EB-5 in the capital stack 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 wants to take any exposure whatsoever to the project. It does get a little complicated with all the moving parts.
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