EB-5 Investment Voice
Mona Shah & Associates Global Podcast Series
Reported by Hermione Krumm, Esq.
EB-5 Investment Voice is the only Podcast series that focuses on and the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah, Esq. welcomes guests from the industry, including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.
The EB-5 program has been running for quite some time and EB-5 investors have seen it all. They hear a lot of promises all over the board, including, among others, money-back guarantees and job buffer assurance. However, unless an investor does his/her own due diligence to ensure an alignment of financial interests and feasible financial projections, there is a danger that one might not get their money back, and as a result, putting their immigration status at risk.
In this episode, Mona welcomes Devin Williams, the President of EB-5 GLOBAL, to explain how to identify projects with an alignment of financial incentives that benefit both the developer and the EB-5 investor.
EB-5 GLOBAL is a firm with a different approach to EB-5. Since its inception in 2011, EB-5 GLOBAL has completed six projects with outstanding financial performances and has a 100% approval track record with USCIS. A graduate of Harvard Business School, Devin has 23 years of experience in investment banking and finance, which greatly contributes to EB-5 deals she managed to make.
What Constitutes a Good Deal
- In the early days of EB-5, there was a lack of sophistication in terms of available projects. In the last three years, the quality of deals has improved; however, Devin argues that this doesn’t necessarily make the playing field safer for EB-5 investors.
- Devin contends that a good deal stems from an alignment of financial interests: it means what’s beneficial for the developer is also good for the EB-5 investor, either from the income they receive or from the likelihood of getting their capital back in a timely manner.
- Misalignment of Interest: Investors must examine how the Regional Center makes its money. In the case of a debt project (the majority of the projects on the markets follow a debt model), the way a Regional Center makes money is the spread between the amount of interest the developer is paying and the amount of interest the investor is receiving. Say, for instance, there is a 6% loan and the investor is getting 0.5% in interest – all the remaining interest amount will go to the Regional Center, which shall then remit the funds, at least a portion thereof, to defray offering expenses including finders’ fees and etc. A Regional Center generates revenue as long as the loan is outstanding. While the EB-5 investor wants their capital back as quickly as possible, the Regional Center has a financial incentive to keep the loan outstanding for as long as possible – this is a classic case of misalignment of interest.
Why is the Interest Paid to the Investors So Low?
- Investors often question why the interest paid to them is so low, in some cases as low as 0.025%. Devin explains that EB-5 is a very symbiotic program where the US government, developers, EB-5 investors and third-party agents all have a stake. Developers choose the EB-5 route because it is a cheaper source of capital and, as Mona adds, non-diluted as far as equity is concerned and usually less documentation is required than a bank might require.
The EB-5 GLOBAL Structure
- EB-5 GLOBAL is different from other Regional Centers in that they don’t make money unless the EB-5 investor makes money. In their equity model, they typically use a profit-sharing equity structure in which cashflow is distributed to investors. In their current project, EB-5 investors receive 4% annually.
- While Mona always advises investors to be wary of projects that are offering a high annual interest (and in the present market, 4% is high) for any potential risk of capital return, a distinction should be made here between a loan model and an equity model. The market in the U.S. for a first mortgage loan is around 5-6% in terms of interest rate, depending on the project; whereas an equity model would provide returns in the high teens or low twenties. To get EB-5 equity into a project, at 4% a year, is saving a project developer roughly 16% a year in what you would be paying for U.S. equity; thus it is still a great deal.
- EB-5 GLOBAL has built an additional alignment when it comes to the return of capital. When they do a sale or refinance, 100% of the capital goes to the EB-5 investors—before the developer earns any money at all.
The Five-Year Money-Back Promise
- Developers often promise EB-5 investors that they will get their money back in five years, but Mona argues that based on her experience over the past 11 years, this is an artificial timeline. Based on the time it takes for an I-526 petition to go through, most large projects simply cannot deliver on the five-year promise.
- Mona contends that a five-year return of capital from the start of construction is challenging. A Regional Center that makes most of its money over the course of time the loan is outstanding has no financial incentive to make sure the loan is repaid, because at the maturity date, should it be 5 or 7 years later, if the developer ends up not paying the Regional Center, it has made 100% of the profits on the deal over the lifetime of the loan and there is no penalty to the RC financially if the investors do not get their money back. By comparison, EB-5 GLOBAL promises a five–to–seven-year return of capital, and they create financial penalties for themselves if they fail to return the investors’ money by the seven-year deadline.
- For example, EB-5 GLOBAL might begin with a 70/30 split on profits. At the end of the seventh year, if they haven’t returned the EB-5 investors’ capital, the profit split goes to up to 75/25, then 80/20 and so on, and the investors continue to receive more and more of the cashflow distribution. Thus, there is a strong financial incentive for EB-5 GLOBAL to ensure timely repayment.
Risk of High Debt
- Be careful of instances where you are told that there is only 30% EB-5 on the project. That investment may be sitting behind a 50-60% first mortgage loan, putting the EB-5 investment at the bottom of the capital stack.
- It’s important to look at the total debt on a project, not just the EB-5 debt. The first mortgage must be repaid in full before the EB-5 investor sees any money at all.
- In cases where the total leverage is 80% which is very common in this industry, it is much more difficult for the developer to refinance – they have to refinance the whole debt. Additionally, the project not only has to support the current interest burden but also should be able to support a higher level of interest because there is no way they’ll be able to get the EB-5 portion refinanced at EB-5 rates in the future. The typical EB-5 interest rate is 6%, while market interest rates may be anywhere from 10% to 14%.
- In their debt projects, EB-5 GLOBAL creates alignment of financial incentives by requiring that the EB-5 loan is the first mortgage loan, i.e. no bank loan before EB-5, and limiting the total amount of debt on the project to 34%. This protects EB-5 investors and gives developers the incentive to refinance quickly, as they can probably get a loan with an interest rate even cheaper than the 6% they are paying for EB-5.
Aggressive vs. Conservative Financial Projections
- Aggressive financial projections, although good for marketing, are dangerous for EB-5 investors in that job creation numbers are based on the project’s actual performance. While the I-526 is approved based on the anticipated number of jobs created, the I-829 is based on what the project actually did in terms of job numbers.
- The ability to refinance or sell is also rooted in a project’s actual performance. Conservative financial projections do not assume top-of-the-market numbers or fairy-tale endings. There should always be some room for economic downturn. A highly levered project combined with aggressive projections can potentially lead to default on the loan and investors will end up paying for it. Conservative financial projections protect both the investor’s immigration status and the return of capital.
Please see the link below for access to the podcast episode: http://mshahlaw.com/getting-money-back-devin-williams/ .
About the Author:
Hermione Krumm, Esq. is an associate attorney with Mona Shah and Associates Global. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione writes and comments frequently on current business and immigration issues. Her articles have been published by LexisNexis, ILW, EB-5info, EB-5 Supermarket, etc. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.
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