A common question received by our team of EB-5 professionals is “What is the typical structure of an EB-5 project?” The answer can be complicated, so we want to share our collective experience resulting from our work across various EB-5 project structures. Additionally, we have provided an adjustable mezzanine debt template to serve as a simplified starting point for EB-5 project developers, which can be modified for the specific capital structure of your project.
This article should not be construed as legal advice, and you should always work with appropriate counsel on structuring decisions.
Key Parties Involved in an EB-5 Project
The first step in any project structuring discussion is to understand the parties involved in the transaction and to determine which role(s) each party will play. Participants may have several roles in a transaction, so it is critical to think through the impact of certain parties fulfilling certain roles.
As a general summary, the key participants in an EB-5 deal involve the following:
- Project sponsor (a real estate developer or, for an operating business, the project owner)
- Equity sponsor (often the same as the project sponsor)
- Regional center sponsor
- EB-5 fund manager
- The EB-5 fund is typically structured as a limited partnership or LLC, with investors serving as limited partners or members and the EB-5 fund manager serving as general partner or managing member of the EB-5 fund.
- Project advisors
- Immigration attorney
- Securities attorney
- Business plan writer
- Bank/escrow service advisors
Below is a chart to help illustrate the different parties involved in an EB-5 deal, the roles they play, their relationship to the project and the project sponsor, and the timing of their involvement in the process.
EB-5 Project Structuring – The Key Structuring Decisions
The next key question is “How will EB-5 fit into the capital stack, and will the investment function as a loan or an equity investment?” EB-5 investors will always be equity investors in some capacity, whether they directly own equity interests in the project or equity interests in the EB-5 fund (often called the new commercial enterprise or NCE). The NCE can either make a loan to the development company (the job creating entity or JCE), or the NCE can make an equity investment directly into the project. The more common structure is a debt investment because it offers more standardization and protection to investors, with a clear path to exit.
If structured as debt, the loan from the NCE into the JCE can take the form of any debt instrument imaginable, with the differing priorities, covenants, and obligations that come with each such type, such as a senior loan, second position loan, or a mezzanine loan. Equity can also be structured in a variety of ways. Capital structuring decisions are deal-specific and must be tailored to the needs of the project, the target investors, and the position of the EB-5 capital in the overall capital stack. An experienced securities attorney can provide guidance on some of these key decisions and ensure the project is legally structured and marketable to investors.
EB5 Affiliate Network typically provides the below guidance on the use of equity vs. debt structuring for the EB-5 investment.
- Investors play a more active role.
- The structure is traditionally used in smaller deals where EB-5 owners are directly involved in management and/or want meaningful returns.
- Some markets demand more of an equity-style investment. Generally, investors in China prefer capital preservation over equity-style returns. However, other markets may be more receptive to traditional equity structures.
- Older deals may have been completed using the equity model before the loan model became more common.
- Investors play a more passive role.
- Investors prefer this structure due to the perception that it is a more secure form of investment. The typical EB-5 investor’s top priority is to secure a green card and ensure capital preservation.
- Debt instruments are often secured by collateral and have priority over any equity in the project.
- There is a clear path to exit since debt instruments have a maturity date.
- The loan structure allows for more standard terms, covenants, and obligations.
- The EB-5 fund has various rights with respect to the development of projects.
EB-5 Project Structuring – Key Roles and Responsibilities
After the structure of the deal is determined, the team can begin to decide the roles and responsibilities of the parties involved.
The organizational chart below is meant to serve as a starting point when considering the structure of a project. For illustrative purposes, we’re using a mezzanine debt deal framework, but this can be tailored to meet any project’s individual needs.
The Key Roles of Each Entity
The key roles of each entity are described below, with each entity numbered according to its position on the example organizational chart.
- (#1) Sponsor parent: For a larger developer, this would be the company’s recognizable name. This entity may or may not be the owner of the project’s (2) holding company. Typically, the sponsor parent will be the manager of the holding company, which is the actual owner of the project. These entities are usually kept separate to limit the liability of the sponsor parent across many projects. For example, if a holding company were to go bankrupt, the sponsor parent would not similarly go bankrupt. If the sponsor parent and the holding company were the same entity, a bankruptcy could jeopardize all projects for the sponsor parent. Having separate entities adds protection for projects and investors and allows for a more organized approach across, in some cases, many projects for a single sponsor parent.
- (#2) Holding company: This company is also referred to as the “project sponsor.” This is the owner of the development/project. This is the company that owns the (3) EB-5 borrower. Typically, developer equity would be contributed to the project through this company.
- (#3) EB-5 borrower: In a mezzanine debt structure, this is a “mid-co” or “upstream borrower.” This entity is specifically formed for the project, and its purpose is to borrow the EB-5 funds from the (6) EB-5 fund. This makes the mezzanine loan structurally subordinated to any senior debt. A new EB-5 borrower will typically be formed for each new project and will be specific to that deal.
- (#4) EB-5 investors: The individual EB-5 investors invest into the (6) EB-5 fund by purchasing equity interests in the fund. The combined interests of these investors are pooled to form the EB-5 fund.
- (#5) EB-5 fund manager: This is the manager of the (6) EB-5 fund, and it is responsible for financial administration of the fund. If the EB-5 fund is a limited partnership, the EB-5 fund manager would serve as the (5) general partner of the EB-5 fund. Similarly, if the EB-5 fund is a limited liability company, the EB-5 fund manager would serve as the managing member or manager of the LLC. The EB-5 fund manager may or may not be affiliated with the (10) regional center or the (7) development company or may be completely independent. The EB-5 fund manager typically has a fiduciary duty to the investors in the EB-5 fund, so if it is affiliated with the development company, such affiliation would need to be disclosed and any conflicts of interest would typically need to be waived by such (4) EB-5 investors.
- (#6) EB-5 fund: (4) EB-5 investors’ contributions are pooled together in this EB-5 fund, which is then invested into the project’s (7) development company. If the EB-5 fund is a limited partnership, each EB-5 investor purchases partnership interests to become a limited partner in the fund. If the EB-5 fund is an LLC, each EB-5 investor purchases equity interests to become a member of the LLC. The rights and roles of limited partners can range from minimal involvement to active voting rights. The EB-5 fund either makes a loan or equity contribution to the (3) EB-5 borrower.
- (#7) Development company: This is the company that directly owns the project assets (land, building, etc.) and is typically the borrower of the senior construction loan. Should there be a mortgage or a secured loan, the development company typically secures the loan because it is the entity that owns the assets of the project.
- (#8) Senior bank/lender: Mezzanine debt deals typically involve a senior bank or lender. This lender will have first priority on the (7) development company (assets of the project) and will often record a mortgage on the property. Often, the senior bank or lender and the (6) EB-5 fund will have an intercreditor agreement that outlines the respective rights of each creditor with respect to the project.
- (#9) Development manager/developer: This entity is responsible for managing the project development. Typically this is the manager of the (7) development company, and it will oversee tasks including construction, landscaping, etc.
- (#10) Regional center: The regional center has an administrative agreement with the (6) EB-5 fund. The regional center may be affiliated with the (5) EB-5 fund manager but does not have to be. The relationship to the EB-5 fund is not an ownership relationship but a service relationship. In some instances, the regional center may be owned by the (7) development company. In such instances, proper disclosures should be given to investors, and any potential conflicts of interest should be identified.
Optimizing the structure of an EB-5 project from an immigration risk and financial risk perspective is a complex endeavor and requires the input of a team of knowledgeable advisors with current market data. This article is meant to serve as a starting point for understanding the key players and structuring decisions involved in the EB-5 process. Please contact EB5 Affiliate Network with any questions about structuring your EB-5 project.