Different Types of EB-5 Financial Structuring

The EB-5 Immigrant Investor Program is a popular pathway for foreign nationals to obtain permanent residence in the U.S. In addition to receiving a Green Card, EB-5 applicants strive to earn profitable returns on their investments.

As a result, thorough financial planning is required, especially regarding capital funding and the financial sustainability of the investment.

Gaining permanent residence is the primary motivation of many EB-5 applicants. This sometimes makes them focus on complying with the EB-5 regulatory requirements and neglecting financial viability considerations. This approach is risky because understanding a project’s capital stack can be crucial for applicants to predict their investment’s performance, make informed decisions, and safeguard their capital.

In this post, we will explain the different types of EB-5 financial structuring and the factors investors need to consider while selecting a low-risk EB-5 project.

What Are the Different Types of EB-5 Financial Structuring?

The EB-5 financial structuring refers to the different layers of funding that make up the total investment in an EB-5 project. The financial structuring for direct investments is pretty basic, as it involves just one EB-5 investor. However, financial structuring for regional center EB-5 investments is more complex.

Typically, regional center investors have four types of financial structures to choose from, as well as combinations between them: senior debt, mezzanine debt, preferred equity, and common equity. Here’s a breakdown of the four layers of the EB-5 capital stack:

Senior Debt

Senior debt is a type of loan injected into an investment in exchange for interest payments. In most cases, the senior debt forms the largest percentage of the EB-5 capital stack, with lenders given the highest priority for repayment. This ensures that senior debt lenders receive their interest/dividends before all other investors in the project, making it the most secure type of financial structuring.

While senior debts are less risky, the profit realized from this type of funding is limited to an agreed fixed interest rate. In other words, the return on investment from senior debts is significantly less than the profits from other forms of funding.

EB-5 senior debt holders usually secure their loans either through a first-lien mortgage on real estate or a repayment guarantee. These measures help minimize the risk of financial loss.

Mezzanine Debt

Similar to senior debt, mezzanine debt starts as a loan. However, if the project fails, mezzanine debt holders may convert their loans to ownership interests. Therefore, it is accurate to say that this type of financial structuring is a middle ground between regular loans and equity-based investments.

After the senior debt is paid, mezzanine debt holders are next in line to receive their returns. If the developers fail to meet their obligations, mezzanine debt holders can claim ownership interests.

When an investment project becomes unstable, most EB-5 regional centers prefer to extend the project developer’s deadline rather than assume ownership interests. This approach helps them avoid the financial burden of taking over the project.

Mezzanine debt is mostly preferred because it offers higher returns than senior debt and has a higher priority over equity shareholders in the event of project failure.

Preferred Equity

Preferred equity is a type of investment in which investors get paid before common equity investors but after all debts are settled. A major advantage of preferred equity is that it yields higher returns compared to senior and mezzanine debt. Additionally, if the investment is unsuccessful, preferred equity investors have a better claim on assets than common equity investors, though still subordinate to debt holders.

Common Equity

Common equity investors bear the most risk because they receive their profits after every other investor. Often, there are no assets left for them if the investment fails, resulting in a total loss.

On the other hand, if an investment is successful, common equity investors usually gain significant profits. EB-5 investors with a high risk tolerance are best suited for this type of financial structuring.

Common equity in a project typically consists of various classes or shares among partners, leading to a wide range of terms regarding profit-sharing and capital repayment. It is important to carefully review the offering documents to understand the dividend and capital repayment priorities.

What Factors Should an EB-5 Investor Consider?

EB-5 applicants select their projects based on several factors. These include their risk appetite, investment objectives, and the regional center management they collaborate with. Let’s discuss them briefly.

Risk Tolerance

Under each type of financial structuring, the element of risk is highlighted because an investor’s appetite for risk is a key consideration when selecting a viable EB-5 financial structure. Investors who can handle the uncertainty that comes with riskier investments are welcome to choose equity-based capital funding. In contrast, risk-averse investors are advised to select debt-based capital funding.

Investment Goals

EB-5 investments are unique because investors and other project stakeholders must consider both their immigration and financial objectives. This is why investors should evaluate whether the financial structure they have chosen will support all their goals.

Management Capability

Aside from a specific project’s capital stack, the EB-5 regional center’s experience and expertise are also critical factors. As a result, EB-5 investors should look for regional centers with a track record of completing EB-5 investment projects. Organization, good project oversight, and the overall operational expertise of an EB-5 regional center heavily influence the likelihood of the project’s success.

Get Reliable Advice From Industry Experts at EB5AN

While it is important for EB-5 applicants to understand the basics of financial structuring, the financial aspects of EB-5 investments still require expert judgment. As such, working with an experienced EB-5 team will facilitate important financial due diligence functions such as risk assessment.

EB5AN has helped over 2,300 foreign nationals from around the world get EB-5 visas. Book a free consultation with our expert team to learn how we can assist you in finding the right project for your EB-5 investment.