Exercising due diligence while selecting an EB-5 investment project is extremely important. While the world of EB-5 is full of opportunities, it has also been ripe with failure and lost dreams. Lured by the massive size of a project, and unrealistic yields, many immigrant investors have been blanketed by a false sense of a security. Because projects can vary substantially, these investors have also fallen victim to poorly conceived development plans marketed with distorted guarantees. To add, the industry has become saturated with unqualified brokers over authentic investment experts. With more EB-5 horror stories coming to surface you’re probably wondering “how do I select the best project and managers to keep my investment safe?” Let’s take a look at a few distinguishing factors that you should consider before making an investment.
Larger projects may look more attractive, but do they come with less risk? Think again. At face value, a $250 million-dollar project may seem appealing, but comes with much more syndicated risk from banks. An indication of this comes from a capital stack, which is used to show the sources of capital required to complete a real estate transaction, their expected returns, and associated priority of repayment. Typically, larger investment projects are higher in the stack, meaning they are riskier. On the other hand, smaller projects, of shorter duration, are lower in the stack and are given the first priority of payment making them far less risky.
Firms that conscientiously invest in smaller projects can also be more advantageous because they can generate cash flows much earlier than market average. Typically, these firms select projects in sectors that are not impacted by changes in the economy. Thus, despite adverse market conditions, they are still able to maintain a defined institutional exit and repayment. Conversely, financing for a new hotel or office space comes with unpredictable market risk which can threaten the execution and completion of a project at any time.
Cautious investors should be reminded that in recent times, many EB-5 investments made into larger development projects have failed to obtain necessary financing to complete the project. Other horror stories have included large projects being unable to return distributions to the investors, notice of a default from the senior lender, receipt of information that the project is failing to pay contractors, and failure to meet projected timelines. Any of these issues not only compromises your investment, but also threatens the chances of you earning permanent residency. With this in mind, it is crucial to monitor the historical success rate of a manager’s past projects.
The EB-5 market is also over saturated with brokers, which are investment companies that raise funds for third party projects. In some cases, this may indicate a red flag as brokers have limited oversight compared to those investment partners directly involved in the construction and investment of the project. Choosing qualified professionals who administer control over the entire construction process adds an extra layer of armor to one’s investment.
And, with any investment, be it big or small, team experience ranks high in qualifying factors. A team of investment management professionals that have knowledge of all EB-5 related factors- real estate, immigration, and law- should be the status quo, although it is often not.
Another unique, and important, factor to consider is personal equity. Personal equity invested by an EB-5 manager along-side an immigrant investor in a project means they “skin in the game.” In other words, they have an added incentive to ensure that the project is successful from start to finish because of their own personal investment. This, too, can help to reduce risk and put you on an equal playing field with your investment manager.
The coveted EB-5 program is a special financing tool that leads to great opportunities. It can provide investors and their families with the perfect solution to settle in the US and maintain investment security. In considering the EB-5 path, investors need to perform due diligence and select trust worthy partners. While size may be appealing, one must be careful to assess all of the risk factors associated with it. Even more, it is important to evaluate the experience and track record of your EB-5 manager as well as their commitment to protecting your investment.