As with any financial investment, investing in the EB-5 program is not without risk. At LCR, we understand this can be a daunting prospect for our clients. If you’ve done some research on the EB-5 program, you’ll know that, by law, your investment must be ‘at risk’. This means there is a risk of capital loss – and if anyone claims their investment is ‘risk free’, they either don’t understand the regulations around EB-5 investments, or perhaps they are simply unscrupulous.
With that said, there are a number of steps investors can take to minimize the risk to a level they’re comfortable with. There are thousands of EB-5 emigrants now living in America who have successfully navigated this journey, and with the right approach, and partners, you can too.
These are the five key questions every investor should ask when reviewing an EB-5 investment project:
- Whose on the team?
Who will be managing your investment and what’s the experience of the team? By researching their credentials and past experience you should be able to gauge whether they have the skills and experience required to successfully complete the project. If they’re talking about providing strong financial returns, rather than their responsibility to ensure sufficient jobs are created, tread very carefully.
- How strong are the job-creation prospects?
Do your own analysis to understand whether the firm’s methodology for creating jobs is likely to be successful. How many direct jobs are they claiming the project will create, and how many indirect jobs? Do the numbers make sense? LCR is pleased to be able to offer our investors the opportunity to invest in a project where meeting the job-creation requirement is a certainty. Our Surf Club Four Seasons project has already created around 8000 jobs, which means the job-creation credit for EB-5 investors will be met immediately upon their I-526 submission. This means the risk of a green card not being approved at the I-829 stage is virtually zero.
- How likely am I to get my money back?
Just because an EB-5 project must be ‘at risk’, doesn’t mean it has to be risky. Make sure you understand the capital structure of the project and where the EB-5 capital sits in that structure. You will want your money to be as senior as possible, with sufficient collateral beneath it in case of a default. The total amount of collateral for LCR’s Surf Club project at time of EB-5 funding will be ~ $800 MM, and thus, our EB-5 investors will have 8 to 1 collateral coverage. Even though the EB-5 loan is structured as a mezzanine loan, there will be no senior loan on top of it at the time of funding. In addition, there are strict, contractual covenants already in place which restrict the developer’s ability to raise additional debt capital in the future which include collateral coverage and debt/equity ratio that they must adhere to.
- When is the money returned?
Most EB-5 investments are structured as fixed term loans, however some may be in the form of equity with no definitive time line on when the money is returned. The term of the EB-5 loan for LCR’s Surf Club project is 5 years and therefore we expect the repayment of the investment to occur in year 5.
- How much investment return should I expect to make?
The average market return for successful EB-5 projects is 25 bps per annum. This is due to the market dynamics in China, where demand far outstrips supply. We’re aware of projects in the market that promise a higher rate of interest (or equity upside), but there’s no ‘free lunch’ in finance. These projects typically come with significantly more risk. Any project that needs to offer a return above the going market rate is either much riskier, or the sponsors are likely struggling to raise capital.
Answers to the above five questions will help you determine the best quality EB-5 investment available to you. Other hallmarks of a high-quality project include:
- The project documentation is transparent and you receive clear answers to any questions you may have.
- There is a contingency plan if things go wrong.
- The job-creation aspect of the project is compelling. Remember, confirmed job creation is essential for a successful EB-5 application.
- There is an independent due diligence report available. A number of companies offer independent due diligence reports on regional centre projects. Find out if one has been done for the project you’re interested in. LCR’s Surf Club Four Seasons project has been reviewed by EB-5 Diligence, which is widely considered one of the leading due diligence firms in the EB-5 industry. Their comprehensive report is the product of weeks of detailed research and investigation, and it is available to our investors.