Getting Your Money Back with Devin Williams – Episode 54
In addition to a green card, EB-5 investors want their capital back as quickly as possible. Today, Mark and Mona are joined by Devin Williams, President of EB-5 GLOBAL, to explain how to identify projects with an alignment of financial incentives that benefit both the developer and the EB-5 investor. They cover the differences between debt and equity projects, the risk of high debt, and the value of conservative financial projections.
EB-5 investors hear a lot of promises: This project is only 30% EB-5! You will get your money back in five years! This project will easily hit its job creation numbers! But unless you do your due diligence to ensure an alignment of financial interests and conservative financial projections, there is a danger that you may not get your money back—and your immigration status may be at risk as well.
Devin Williams is the President of EB-5 GLOBAL, a firm with a different approach to EB-5. Since its inception in 2011, EB-5 GLOBAL has completed six projects, and they have a 100% approval track record with USCIS. A graduate of Harvard Business School, Devin has 23 years of experience in investment banking and finance.
Today Devin joins Mona and Mark to discuss what it means to have an alignment of financial interests between the developer and the EB-5 investor. Devin explains how EB-5 GLOBAL structures financial incentives to protect EB-5 investors and make certain that their capital is returned within seven years if at all possible. Mona and Devin speak to the issue of high debt, covering the importance of understanding the total debt on a project rather than just the percentage of EB-5 involved. Listen in for insight around the value of conservative financial projections in terms of your immigration status and the return of capital.
What Constitutes a Good Deal
- In the early days of EB-5, there was a lack of sophistication in terms of available projects. In the last three years, the quality of deals has improved; however, Devin argues that this doesn’t necessarily make the playing field safer for EB-5 investors.
- Devin contends that a good deal stems from an alignment of financial interests: When what’s good for the developer is also good for the EB-5 investor, everyone wins.
- Investors must examine how the Region Center makes its money. In the case of debt project, a Regional Center generates revenue as long as the loan is outstanding. While the EB-5 investor wants their capital back as quickly as possible, the Regional Center has a financial incentive to keep the loan outstanding for as long as possible.
Interest Paid to Investors
- Investors often question why the interest paid to them is so low, in some cases as low as .025%. Devin explains that the US government, developers, EB-5 investors and third-party agents all have a stake in the program. Developers go the EB-5 route because it is a cheaper source of capital and paying such a small interest rate.
The EB-5 GLOBAL Structure
- EB-5 GLOBAL is different from other Regional Centers in that they don’t make money unless the EB-5 investor makes money. They typically use a profit-sharing equity structure in which cashflow is distributed to investors. In their current project, EB-5 investors receive 4% annually.
- EB-5 GLOBAL has built in additional alignment when it comes to return of capital. When they do a sale or refinance, 100% of the capital goes to the EB-5 investors—before the developer earns any money at all.
The Five-Year Promise
- Developers often promise EB-5 investors that they will get their money back in five years, but Mona argues that this is an artificial timeline. Based on the time it takes for an I-526 petition to go through, most large projects simply cannot deliver on the five-year promise.
- Devin agrees that a five-year return of capital from the start of construction is challenging. However, EB-5 GLOBAL promises a five- to seven-year return of capital, and they create financial penalties for themselves if they fail to return the investors’ money by the seven-year deadline.
- For example, EB-5 GLOBAL might begin with a 70/30 split on profits. At the end of the seventh year, if they haven’t returned the EB-5 investors’ capital, the profit split goes to up to 75/25, then 80/20 and so on, and the investors continue to receive more and more of the cashflow distribution.
Risk of High Debt
- Be careful in instances where you are told that a project is only 30% EB-5. That investment may be sitting behind a 50-60% first mortgage loan, putting the EB-5 investment at the bottom of the capital stack.
- It’s important to look at the total debt on a project, not just the EB-5 debt. The first mortgage must be repaid in full before the EB-5 investor sees any money at all.
- In cases where the total leverage is 80%, it is much more difficult for the developer to refinance. Additionally, there is no way they’ll be able to get the EB-5 portion refinanced at EB-5 rates. The typical EB-5 interest rate is 6%, while market interest rates may be anywhere from 10-14%.
- In their debt projects, EB-5 GLOBAL creates alignment of financial incentives by requiring that the EB-5 loan is the first mortgage loan and limiting the total amount of debt on the project to 34%. This protects EB-5 investors and gives developers the incentive to refinance quickly, as they can probably get a loan with an interest rate even cheaper than the 6% they are paying for EB-5.
Aggressive vs. Conservative Financial Projections
- Aggressive financial projections are dangerous for EB-5 investors in that job creation numbers are based on the project’s actual performance. While the I-526 is approved based on the anticipated number of jobs created, the I-829 is based on what the project actually did in terms of job numbers.
- The ability to refinance or sell is also rooted in a project’s actual performance. Conservative financial projections protect both your immigration status and the return of capital.