Most potential EB-5 investors understand that their regional center investment will end up being deployed into a project. However, investors are not always aware of how their funds fit into the project’s capital stack, which is all the sources of funds that comprise the funding for the project.
Typically, EB-5 funding plays one of three roles in project financing. Each role can lead to a successful outcome and has its advantages and disadvantages.
EB-5 in Senior Position
When used as a senior loan, EB-5 capital is used similar to a bank loan and is secured by a first-position lien on the project’s assets. EB-5 investors whose investment will be used as part of a senior loan should check to ensure that the lien is fully collateralized, meaning that all of the projects assets are assigned as collateral. A senior loan often accounts for more than half of the capital stack.
This structure offers a high level of security for investors, as they are repaid before all other stakeholders in the event of a default. This lower risk profile makes the senior loan position attractive to more conservative EB-5 investors and can help facilitate the capital raise process. However, the yield for senior loans is typically lower than other forms of investment, which may be less appealing for investors seeking higher returns.
Additionally, developers may find this structure restrictive, as it often limits the amount of leverage available and may require more expensive subordinate financing to complete the capital stack. To get the project underway, which is an attractive selling point for investors, the developer may also need to be able to provide a significant amount of bridge financing. Potential EB-5 investors will want to confirm that bridge funding is in place, or the project may fall behind schedule if bridge funding is not in place.
EB-5 as Mezzanine Financing
As mezzanine financing, EB-5 capital is positioned between the senior debt and equity. It is typically secured by a personal guarantee or a pledge of the developer’s ownership interest in the project rather than the project’s physical assets. This structure may offer a higher yield than senior debt, making it more attractive for investors and more flexible for developers needing to fill a funding gap without diluting ownership.
However, the mezzanine position can be riskier due to its subordinate status. In the event of a default, mezzanine investors are only repaid after the senior debt has been satisfied, and the security interest may be limited by intercreditor agreements that restrict remedies or control rights in a distressed scenario.
The risk of an EB-5 investment can be significantly mitigated by a personal guarantee from a developer with a strong balance sheet. Investors may want to verify the balance sheet to ensure that there is ample amount to cover the EB-5 loan.
EB-5 as Preferred Equity
When structured as preferred equity, EB-5 capital is treated as an ownership interest in the project, typically with fixed preferred returns and priority over common equity in distributions. This option offers the highest potential return but also the highest risk, as it lacks collateral and is repaid only after all debt obligations have been satisfied. Preferred equity can be highly attractive to developers because it does not require fixed payments like debt and offers greater flexibility in managing project cash flow.
Ultimately, the choice between senior loan, mezzanine financing, or preferred equity for EB-5 funds depends on the project’s capital needs, the developer’s financing strategy, and the risk-return expectations of the EB-5 investors. Each structure involves trade-offs between security, yield, flexibility, and complexity, and must be carefully tailored to meet both financial and immigration objectives.
