EB5 Exit Plans That Actually Work – Episode 9

An EB5 investment is only as good as the method for investors to get their money back

What exit plans actually work, how, and what to watch out for?
That is the topic of this episode.

The U.S. EB-5 Program is very unique because investors have the opportunity to get their green card and permanent residency in the United States. An important caveat of the Program though is that the invested funds cannot be guaranteed in anyway – they must be considered “at risk” by the USCIS. There can no set rules when it comes to determining the best type of exit strategy an investor should take. While the projects Private Placement Memorandum should explain some of the options or choices an investor has, it will vary on a case by case basis.
Host Mona Shah, co-host Mark Deal and attorney Omar Hakim talk about varies exit strategies available to EB-5 investors. Although the investor can’t generally choice how they will ultimately exit a project, they can be better prepared by understanding the nuances and pitfalls associated with the most common types – cash, refinancing, and bonds.

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There are many project available that present themselves as being “at risk” but are not actually risky investments.
Omar explains that an investor cannot have a guarantee that a project isn’t risky. It is likely that a statement to that effect would violate the laws stating EB-5 funds must be placed at risk and this could lead to a denial from the USCIS.
Mona explains that without the associated risk an investor would not necessarily be considered an entrepreneur.
Generally, the more money invested, the less risk there is for the project to lose money. Higher equity demonstrates confidence in the developer and the confidence they have in the project. Eighty percent of projects can be considered risky because the developer has little financial interest in the project.
What would be considered a good ratio of EB-5 money to other investor money to have in a project?

• A none real estate project would depend on the reputation of the developer; the project should already be started so that is can be assessed more accurately.
• The risk associated with real estate can be difficult to determine because every project is different and many time it’s still just a concept.

 
Equity vs Loans
There is a cultural component to keep in mind; some cultures do not want to be involved with loans, they would rather have an equity share in the project. Funding for Regional Centers, regardless of its funding structure, are designed to return funds as if they were loans.
Omar goes into a more detailed explanation of the differences between preferred equity and loans.
There are developers who do not want give equity shares of a project. They have a feeling of ownership of the project and would rather repay a loan than share potential profits.
It is discussed in how developers are looking for investments that will get their projects off the ground, investors are looking at projects as a way of getting their citizenship.
While there is potential an investor lose money (an at-risk investment) a loan is a straightforward investment. As an equity partner, the potential return is higher but there are additional liabilities attached to it.
There is always an expectation of a return on the loan and needs to be paid back on the agreed upon terms / interest rate.
No standard rule for an exit strategy is in place and it will depend on the individual project but there are four (4) generally excepted strategies,

1. Cash;

2. Refinancing;

3. Municipal Bonds; or

4. A combination of any of those three

During a weak economy, strong project with adequate financial backing may have to wait until the market improves to complete its exit strategy.
Partial ownership may be used as another exit strategy but will most likely be denied by the USCIS because it can be view as a guaranteed returned and not being placed at risk as is required.
The different exit options
Although only used in a handful of projects, bonds are generally used for large infrastructure projects
Omar discusses how refinancing is used. In order to refinance, projects must be moving forward and must be able to sustain the new loan.
Delays in a project will lead to delays in the refinancing process. Investors will get their money back but not as quickly as they expect. Large scale real estate projects are not designed to get investors their money back quickly.
Cash exits offer more control than the other strategies but not ever but depends on the type of project. A large project may be the easiest access to funds, while a medium or small scale project may have to wait before they are producing enough to offer a cash exit.
Some of the projects that are apply to provide a cash return are:

• Franchise restaurants;
• Theme parks; and
• Transportation related business

Omar explains how the EB-5 Private Placement Memorandums clarify if it will make sense to combine multiple payback scenarios.
Payback options can be determined if there is more transparency to the development before but it is ultimately affected by project viability and if the project is “recession proof” there can be nothing saying that an investor is guaranteed a successful project or other positive return for their investment.