Prospective EB-5 investors seeking a project with a strong likelihood of returning their original capital investment may want to pay close attention to the project’s LTV. A low LTV, which stands for loan-to-value ratio, can be a good indicator of future repayment.
For EB-5 projects that are providing a loan from the NCE (New Commercial Enterprise) to the JCE (Job Creating Enterprise), the NCE is basically acting like a bank, pooling the funds of the EB-5 investors and making a loan to the developer.
A low Loan-to-Value (LTV) ratio is good for the JCE and its investors because it represents a lower risk for them. Here’s why:
- Greater Equity Cushion: A low LTV means the borrower is putting in a significant amount of equity into the project or the loan amount is smaller relative to the property’s value at the time of stabilization for a new construction project. This provides more equity in the property, reducing the chances of the loan being “underwater” (where the borrower owes more than the property is worth). In fact, with a low LTV the project can often decrease substantially in value and the loan is still able to be paid off through refinance or sale.
- Lower Default Risk: Borrowers with a significant amount of equity (and lower LTV) tend to have more financial stability and are less likely to default on the loan. The borrower has more invested in the project and is thus motivated to keep up with payments and repay the loan in full.
- Easier Recovery in Foreclosure: If the borrower does default and the lender must foreclose, a low LTV ensures that there is more than enough value in the property to cover the outstanding loan balance. This reduces the risk of the lender losing money in the process.
- Better Borrower Quality: Borrowers who can afford to put down a larger amount of equity (and thus have a lower LTV) are typically seen as more financially responsible, which makes them less risky to lenders.
In the case of EB-5, investors will want to examine whether the NCE they are investing in is providing a senior loan (first position) to the JCE or a subordinate loan, often referred to as second position or mezzanine loan. For investors whose EB-5 funds are part of a senor loan, they simply need to check that the LTV for the project they are investing in is more than adequate and has a significant cushion to cover the EB-5 loan.
However, for investors whose funds are being used for a subordinate loan, they must make sure the LTV is more than adequate to ensure coverage for both the loan it is subordinate to, as well as the EB-5 loan.
