Priority of payments, otherwise known as the waterfall, is perhaps one of the most important features an investor should consider when picking an EB5 project. Simply put, the waterfall clearly defines the order of claims to the funds by various stakeholders as the funds become available for distribution.
In the most common case of an EB-5 financing, there is usually a senior loan that sits at the top of the priority of payments. The senior loan, which is sometimes referred to as the bank loan, is followed by a mezzanine bridge loan, if any. Finally, the project owner injects equity to the transaction which typically has the lowest level of priority in terms of distribution. When the EB-5 funds are raised, they could either be senior to the mezzanine debt, refinance the mezzanine debt, or in some cases are junior to the mezzanine debt.
It is essential to understand the priority of payments, because in a case of bankruptcy, the job creating entity (JCE) which typically borrows a loan extended by the newly created entity (NCE), will most likely not be able to pay back the loan. In that case, available collateral in the form of land and certain improvements might have to be liquidated. The liquidation proceeds are distributed to various stakeholders in accordance to the waterfall.
Therefore, when assessing the credit risk of the transaction, one needs to carefully study the waterfall in addition to the combined value created by the completed project as well as the level of equity and mezzanine debt. This amount constitutes the cushion that the investor would have before its funds would be in jeopardy in the case of a financial crunch. On the other hand, the level of senior debt and sometimes mezzanine debt that is above the EB5 in the waterfall gives the investor an idea of how much needs to be cashed in before the EB5 investors could see any distribution of capital.
For further information on waterfall or factors such as retrogression and reinvestment risk that affect the waterfall, please do not hesitate to email us at info@americaeb5visa.com or call us directly at + 1 917 355 9251.
Posted by americaeb5visa on June 8, 2018