The EB5 industry has undergone a sea change in the past year. First there was the changes to the EB-5 program effective November 2019, which increased the investment limits to $900,000 USD minimum for a TEA investment and stricter definition of TEA designated areas. Many projects simply wound down as they could not either qualify for the new TEA rules or didn’t have a strong enough project to attract enough investors to invest $900,000. Secondly, the impact of Covid-19 on the projects was profound. Quite a few EB-5 Investment projects were hit badly due to the shutdowns and the slowdown in hospitality related sectors. The post 2020 EB-5 project selection criteria is much more daunting. So how should investors evaluate EB-5 projects now given all the uncertainty around us.
Stick to Fundamentals
Let’s look at the stock market. When the market enters a volatile period, prudent investors like Warren Buffet go back to the basics. They pick stocks that are fundamentally strong. Stocks that might not return a lot of growth, but have the solid footing to weather a storm of bad economic conditions. They look at the liquidity (cash on hand) in the company. How leveraged (debt) is the company. Too much debt and too little liquidity can result in companies going under after a couple of bad quarters of slow revenue.
This has been true of EB-5 projects also. Consider the case of a major hotel opened in early 2020 by a prominent EB-5 Regional Center. The federal shutdowns in March/April 2020 resulted in the hotel shuttering it’s doors within a few months of opening. Eventually, the developers of the project abandoned the hotel completely as they didn’t have the necessary liquidity to service their debt obligations. You might think, it was unfortunate timing, this could have happened to anyone. I beg to differ. If the developers of the hotel were seasoned veterans with a solid balance sheet of running multiple hotels in the past and have a solid portfolio of assets, they could have worked it out with their creditors. They could have pledged some of their existing assets to extend their repayment to the banks. But, since they didn’t have any assets to pledge, the developers in this case, simply gave up the only collateral they had, which is in this case the hotel that EB-5 investors had invested in. The investors are currently in discussions with the regional center and the banks to figure out a solution to recoup atleast a part of their EB-5 investment.
We are still not out of the woods yet, the vaccine delivery has been plagued by problems in the US and all over the world. Some reports state that it will be Spring 2022 before all Americans are vaccinated. While the Federal government is willing to bail out individual Americans and small businesses, there are no bailouts for EB-5 projects.
- I focus on projects and industries that are not affected by Covid, whether it is the overall sector doing well or the geographic location least affected by Covid.
- I also look for a strong balance sheet from the project developer. After all, it is not the Regional center who is responsible for returning your investment. It is the project developer’s responsibility. Regional centers are only conduits between the investors and the project.
- Does the project have cash flow already? that’s a great sign, we can actually measure real performance compared to future projections.
- Is it a greenfield project or a brownfield expansion? A brownfield project is a project which is an expansion of a previously successful business. Whereas a greenfield project is a brand new project. Apart from the fact that brownfield projects have demonstrated returns, they also have the necessary infrastructure in place to allow for the expansion.
- Look at the developer equity into the project. most EB-5 and real world projects are built with an 80:20 Debt to equity ratio. So the developer puts in 20%, while the lenders (banks and EB-5 investors) put in 80% of the cash required for the project to be completed. The banks will have a first charge on the assets of the projects. Investors come in next before the developer (if investors are not before the developer, then it is not a good financial model for the EB-5 investor). But with just 20% from the developer, and if the project is not completed on time or on budget, there are not enough assets left to liquidate and pay back the EB-5 investors. The banks would take control of whatever assets available and EB-5 investors are the ones taking a big haircut. Avoid this by selecting projects that have high equity from the developer, I recommend projects that have around 40% developer equity. The developer has more skin in the game, so he will also work extra hard to make the project a success.
- Collaterals: What are the collaterals the developer offering to the EB-5 Investors? The more the merrier. if he is just putting up the Project as collateral, there is not much value unlocked till it is completed. The construction stage is the most dangerous stage of any business venture.
- I make sure that the project is as close to completion as possible or better yet, it is completed. Yes, you heard it right. EB-5 investments can be made into projects that are already completed and fully operational. There are not many projects like those, but it’s my job to find these diamonds in the rough and present it to my clients.
I do my homework for my clients
Every week, I get emails from regional centers and developers touting their EB-5 projects. I evaluate all of them using the same criteria I mentioned above. I interview the project principals to get a good understanding of their financial background and project related experience. I conduct a through due diligence of their financials to analyze any weaknesses in the balance sheet or portfolio. If I am satisfied with all the materials on hand, I then schedule a onsite visit to the project location to meet some of the stakeholders in person and view the project construction progress. Only when I am fully convinced of a project’s potential to succeed, only then I recommend a project to my clients.
If you are interested in learning more about current EB-5 Investment projects or have questions about my selection criteria, I am more than happy to have a chat with you about. Contact me with your question or inquiry.