EB 5 Investment Projects
Full Service EB-5 Advisory
EB-5 Project Evaluation & Selection
As an EB-5 Investor & Advisor, I have evaluated many EB-5 projects over the last five years. I have met & spoken with many developers, Regional Centers, and other project stakeholders to understand their business models. I have built a methodology to evaluate Projects for their success rate.
Based on my experience, I focus on the following aspects of a project when conducting due diligence:
Project Planning - Documentation and Viability
Whether its a hotel, condo, or logistics warehouse, an EB-5 project is a new business venture and it is essential that the appropriate planning is in place to protect its viability. This starts with ensuring that project construction is on time and on budget. There are a number of reasons for delays and cost overruns, including delays in acquiring permits from local municipalities, insufficient capital provisions, too little developer equity, or overly aggressive construction schedules. For any construction project, cost overruns and delays can impact the project’s profitability, but for EB-5 projects, they can also have a negative impact on an investor’s eligibility for the EB-5 program.
I analyze all project documentation, including construction timelines, the status of permitting and entitlements, budgets, and other issues that can impact the successful progression of the project before providing my seal of approval.
On Site Assessments
Many of the projects that investors can choose from will already be under construction. Unlike other advisors, I will personally visit the construction sites of my vetted projects to evaluate the current progress of development.
Pro Forma Analysis
For Regional Center projects, job creation is directly related to the project’s development costs and operating income. If either are overstated in the original I-526 application, it could create an issue at the I-829 phase if not enough jobs were created for all participating investors. In my project evaluation, I assess cost estimates and revenue projects to ensure that they align with industry benchmarks and market conditions.
I also provide an analysis of the pro forma from an investor return standpoint. Typically, EB-5 projects repay their EB-5 investors either by refinancing the project after the completion of construction and/or from the project’s operating cash flow. It is critical that the income projections are reasonable and have enough cushion to still repay investors if there is a reduction in cash flow. I run a sensitivity analysis to check for stresses in the cash flow and the effect on the repayment timeline.
The operational success of any project is directly tied to market supply and demand. Often, developers or sponsors will commission an independent market study or project appraisal to validate market demand and the project’s associated projections. In conjunction, I conduct a market assessment of projects to understand the demand/supply gap, industry trends, and competitive positioning of the project. I also evaluate the business model to understand the market sector, competition, and any regulatory challenges. This allows me to identify any potential issues or risks related to the project performing as projected.
Financial Position of the Sponsor and Related Financial Instruments
Every EB-5 project will include funding from a variety of sources in addition to the EB-5 capital. In fact, it’s ideal that an EB-5 project’s capital stack is well-supported by other sources of funds and does not rely solely on EB-5 capital. Other sources of funds include developer equity, a senior loan, a bridge loan, and sometimes bonds, tax incentives, or other financial instruments.
I analyze the balance and positioning of the capital stack to ensure:
The project sponsor has sufficient equity in the the capital stach and whether any alternative funding sources are available if needed
The project sponsor has accounted for loan interest during the construction stage
The valuation of the completed project is - at a minimum - enough to repay the senior loan as well as EB-5 investors’ capital.
It is also important to understand the senior loan terms and its effect on EB-5 investors’ rights and repayment. In the event of default, it is essential to understand the position of the EB-5 investors in the capital stack, relative to other creditors and equity holders. Ideally, EB-5 investors will be provided with adequate collateral in the loan documentation.
Job creation should be verified by an outside economist. As a general rule of thumb, it is best that job creation is projected to be at least 10-15% higher than what is actually required to ensure job creation is still sufficient in the event the Project spends less or operates with lower revenue than originally projected.
Regional Center Track Record
The Regional Center not only chooses projects to sponsor, but is also tasked with tracking the progress of projects, including timelines, expenditures, and job creation and reporting that information to USCIS as well as to project stakeholders, including EB-5 investors. Working with a Regional Center that has a track record of sponsoring successful projects can significantly reduce the risks for EB-5 investors.
Other Key Features
Some other considerations that I take into account when assessing projects include:
The developer should have “skin in the game” so if there is a high proportion of developer equity, relative to the total capital stack, that is a good sign.
Prefer projects that are at least 50% complete, as this means that collateral value has been created.
Completion guarantee from the developer
If the project is fully financed (with bridge lending), that's another good sign. In these cases, EB-5 funds repay bridge lending and in the event the EB-5 offering is not fully subscribed, the project can still be completed.
Does the project have Exemplar approval? If it does, this indicates that USCIS has verified and approved the project documents to be compliant with USCIS EB-5 regulations.
Third party oversight: the Regional Center should be unrelated to the developer, so that it can provide third party oversight for EB-5 investors. Sometimes, the Job Creating Enterprise (JCE)/Developer is affiliated with the Regional Center via common ownership, while the Regional Center also serves as the General Partner or Manager of the New Commercial Enterprise (NCE) into which EB-5 investors invest. This can create a conflict of interest in the event the project fails, because the Regional Center and GP of the NCE should be fiduciary to EB-5 investors and act on behalf of the investors to enforce their rights, not on behalf of the JCE to recoup losses.
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