As the EB-5 program has become more prominent, the sophistication level of investors has increased significantly. As a result, EB-5 investors have done a better job when it comes to project due diligence. However, there are still several questions that are often going unasked.

Every EB-5 investor should ask the following questions of every regional center they speak with:

1. Is the senior EB-5 loan fully collateralized?

    As interest rates rose coming out of the COVID pandemic in an effort to curb inflation, traditional capital became more expensive and harder to find for major real estate projects. As a result, EB-5 capital has become a more common and viable option as a senior, or first position loan.

    Investing in a project where the EB-5 loan is in senior position can have significant advantages for investors. If the Job Creating Entity (JCE) defaults on the repayment of the EB-5 loan and other loans associated with the project, the EB-5 loan is first in line to recover its loan proceeds. This recovery occurs through foreclosure – whether judicial or nonjudicial.

    However, a senior loan is only as valuable as the collateral that is pledged against the loan. EB-5 projects are often complex, featuring multiple phases and multiple assets. It is important for the investor’s security that all of the project’s assets are reflected as collateral in the senior deed of trust. Not all EB-5 projects, however, are fully collateralized.

    A senior loan that is not fully collateralized by the entire project and all of its assets puts investors at risk of being repaid significantly less than their original capital investment. 

    2. Does the NCE have a pledge of equity from the JCE?

      Having a secured senior loan is certainly advantageous for investors, but the remedy for a default on the part of the JCE is foreclosure. While the procedures for foreclosure vary from state to state, the foreclosure process typically takes at least three months and, in some cases, more than a year.

      During that time, who is looking after the project? Typically, it is the party that has defaulted, or a receiver can be appointed, but that also takes time. 

      A pledge of equity, on the other hand, quickly transfers ownership from the defaulting party to the party that provided the loan. In the case of EB-5, this allows the New Commercial Enterprise (NCE) to step in quickly and take action to protect the value of the project assets, maximizing the ability to provide a return of capital to its investors.

      Pledges of equity became popular with traditional commercial real estate lenders after the financial crisis in the late 2000s and are now standard in most major deals. A potential EB-5 investor should always ask if the NCE has a pledge of equity from the NCE. 

      Related Posts