Seven Key Takeaways to Best Protect Your EB-5 Investment.
Houston EB5 would like to encourage you to be aware of misleading promises that increase the risk of your EB-5 visa. Repayment guarantees on EB-5 loans is a hot topic that can come under the USCIS cross-hairs at any moment.
We have seen the USCIS repeatedly change its stance on a number of issues. As an EB-5 investor, you do not want to find yourself on the wrong side if this were to happen.
Most EB-5 Regional Centers could promise repayment guarantees with no real collateral. The majority of regional centers have decided it’s not worth the immigration risk.
However, some Regional Centers are aggressively marketing “Corporate Guarantees” from private companies. Some advertise a “Land Guaranty” to investors who want to get priority processing and avoid retrogression with rural projects.
Exercise caution and do not assume these promises to repay the loan make your EB-5 investment safer. Most of these bold assurances are not watertight.
If a loan repayment guaranty is essential for you, consider the following guidelines. These are critical issues most EB-5 Regional Centers conveniently do not tell you.
1. THE EB-5 STRUCTURE IS A MAJOR RISK
A repayment guarantee is a REACTIVE measure and not a PROACTIVE safeguard. The repayment guaranty is an attempt to mitigate the risk of an EB-5 loan agreement. However, the TRADITIONAL EB-5 LOAN MODEL is a major reason for borrower defaults.
Most investors do not realize that EB-5 loans are NOT cheap. Developers like EB-5 loans because they are less stringent than conventional finance, not because they are inexpensive.
A traditional Regional Center may pay their EB-5 investors less than 1% yearly. However, they typically charge the EB-5 Project 8% per year for 5 years. This 35% added cost of EB-5 capital can increase the likelihood of project defaults.
On the other hand, a vertically integrated Regional Center and Developer does not impose such burdensome costs on the project. Their profit is not from fundraising but results from the success of the real estate development. Their model typically offers preferred equity to EB-5 investors and gives them higher returns without the increased risk through the added sunk-financing costs.
2. A GUARANTEE IS ALREADY A RED FLAG
A loan guarantee in the context of commercial real estate, particularly for EB-5 investments, can be a warning sign. Normally, the property and its potential income should suffice as collateral for a sound project.
The need for additional guarantees might suggest that the project is not as financially solid as it should be. Senior Loans, which hold the first claim on a project’s assets, usually do not require extra guarantees.
An EB-5 loan guarantee from a parent company or third-party guarantor often might indicate that the collateral within the project, whether property or projected revenue, was strong enough only to cover the Senior Loan but not the EB-5 loan. This may be a red flag for high-risk.
External guarantees can lead EB-5 investors to overlook rigorous due diligence, potentially drawing them into high-risk projects. This allows borrowers to market projects that carry greater risks.
3. DOES IT BIND THE GUARANTOR?
If the project does not pay the EB-5 Loan, you want a guarantee the EB-5 investors can call upon quickly. You do not want to be in lawsuits that can take many years.
You need a guarantor that cannot walk away easily. You also want assets that can cover the entire EB5 loan, interest, and legal expenses.
Unfortunately, this is NOT what you get with a private company guarantee. Unless the company is a publicly traded company, then a corporate guarantee does not mean much.
By definition, a limited liability company (LLC) is a US business structure that protects business owners from personal responsibility .A private company could also, at any moment, liquidate its assets to its principals. They could even declare bankruptcy and leave the EB-5 investors with nothing to go after.
4. IS THERE A PERSONAL GUARANTY?
Banks in the United States understand that private company guarantees are slippery. US banks always ask for PERSONAL guarantees when giving loans to private companies.
They require that the principal shareholders of the company sign a personal guarantee. Furthermore, those guarantees must include survivorship clauses on those personal assets to make them fully enforceable. This ensures that there is nowhere to run.
5. IS THERE A UCC FILING?
The EB-5 partnership needs undisputed repossession rights on the guarantor’s assets. Otherwise, you may be in for years of litigation.
A private company guarantee only means something if it includes UCC filings on specific assets.
The Uniform Commercial Code (UCC) regulates commercial transactions across the U.S. Filing a UCC-1 statement with the Secretary of State is the only way to confirm the EB-5 Partnership’s first-lien position.
Ask if there is a UCC filing and what assets it pledges. An impartial (non-regional center) appraiser must determine the NET VALUE (sponsor equity minus debt) on those assets.
Do not invest in smoke and mirrors. A REAL guarantee typically includes collateral with UCC filings. Without collateral and UCC filings, a personal guarantee is only worth the value of the paper it’s written on.It could take years in court to MAYBE get money from a sponsor on a repayment guarantee.
6. BEWARE OF LAND GUARANTEES
Land guarantees are shaky ground. Unless in a prime location in a major city like New York City, land does not have significant value. Across the entire US, we simply have a lot of land.
Most rural projects want EB-5 capital to develop infrastructure. If the project fails, without utilities the land value will not increase.
Therefore, an appraisal of the finished project is misleading. Always insist on an independent appraisal on historical cost or current market value.
Ask a reputable real estate attorney if the guarantee is adequate. You should clarify that you are seeking robust, fail-safe protection, and see what they respond.
Real guaranties are rare and USCIS could later find them unlawful. You want to avoid uncertainties in USCIS’ interpretations.
7. THE BEST WAY TO PROTECT YOUR EB-5 INVESTMENT
Over a long period, Real Estate is usually a good investment. The issue is timing. If you hit the cycle at the wrong time, then your asset is simply not worth as much at the time of the sale as it could be.
Nobody has a crystal ball to predict when is a good or bad time to enter the market (although we can do our best to estimate). Structuring debt in the most conservative way is the best protection against any downturn in market value.
You want a project with low sunk financing costs. The interest that a Regional Center charges is a fixed, sunk cost for the Project. The Project has spent money that it cannot recover.
Investing in a project of a Regional Center whose profit strategy is aligned with your capital return goal is a safer strategy. A vertically integrated Regional Center that employs EB-5 preferred equity over EB-5 debt minimizes sunk financing costs.
Preferred equity gets dividends when the project is successful. This alleviates the project’s cash flows and increases its likelihood of success as it isn’t burdened with crushing financing costs.
Low-cost financing lowers the overall project cost. With a lower cost, the project has a higher margin at any given sales price. This gives EB-5 investors the best chances to recover the full amount of their investment. This is the best way to protect EB-5 investors against any economic downturn.
At Houston EB5, we are a vertically integrated regional center and developer. We have a 100% success rate in project I-526 and I-829 approvals for over a decade. We also have a 100% success in repaying EB-5 capital in full.
We choose to not profit as a regional center but rather aim to profit as a developer. However, in order for us to do that, we must fully repay EB-5 funds in each project before we can exit the project.
We always place EB-5 equity above our own. This is why we’ve had a 100% success rate in repayment of EB-5 funds. This is an accomplishment that only the gold standard of regional centers have.
LOOKING FOR A RURAL PROJECT?
Do not assume that all the EB-5 reserved visa categories in the Visa Bulletin are Current. The I-526E Petitions already in the pipeline will soon make the High Unemployment category retrogress for China and India. This will show on the Visa Bulletin at some point in the near future.
However, the Rural category still has thousands of visas available and will remain Current for the foreseeable future. A rural project is the quickest way to US residency for China and India-born investors.
Rural projects are different from urban high-unemployment ones, and there is a lack of information about rural areas. EB-5 investors need to know ways in which they can mitigate risks and identify areas that are safe for EB-5 investing.
A shining example of a solid Rural Targeted Employment Area project is “The Frederick” in Fredericksburg, Texas. With priority processing, you may get your I-526E approval in 4 to 12 months. With concurrent filing, you may get your Employment Authorization Document (EAD) in 3 to 6 months.
The Frederick is already more than halfway subscribed and there are limited EB-5 spaces available. To become a part of this exciting opportunity, feel free to reach out to a member of our team.