JUDGING RISKS IN REAL ESTATE PROJECTS WITH MONA SHAH & ADAM GREENE
EB-5 Investment Voice,
(Mona Shah & Associates Podcast Series)
Reported by Hermione Krumm, Esq.
EB-5 Investment Voice is the only Podcast series that focuses on and the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah, welcomes guests from the industry including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.
In this podcast, Mona Shah interviews Adam Greene, President of Live in America, an EB-5 platform owned by the LCP Group, about the risks and EB-5 real estate projects and what to look for. Live in America has successfully sponsored EB-5 projects with foreign investment capital exceeding half a billion dollars.
How will the proposed increase in minimum investment amount affect the EB-5 program?
Mona and Adam discussed the likelihood of an extension of the program, with reforms expected in September. The Department of Homeland Security published their proposal to amend the EB-5 program on January 13, 2017 and was open for public comments till April 11, 2017. The proposal raised the minimum investment amount required for the EB-5 program to $1.35 million in a Targeted Employment Area (TEA), up from $500,000 currently, and $1.8 million for developments in low- to average-unemployment areas, up from the current $1 million. If adopted, it would likely take into effect sometime over the summer of 2017.
Mona and Adam pointed out that in the EB-5 industry, an increase in the minimum investment amount to $1.3 million will likely harm the market; whereas a slight increase to $800,000 / $850,000 is more welcomed and anticipated.
Mona added that once the investment amount is raised, investors will potentially have a lot more to lose as their monies remain at risk. This will therefore call for more well-structured EB-5 deals.
What does Live in America offer?
As a subsidiary of the LCP Group, Live in America operates 23 Regional Centers, covering all or part of 38 states and territories. The company entered into the EB-5 industry 6 years ago, based on over 40 years of experience in real estate, investing in hotels and dealing with hotel management. It is also listed on the New York Stock Exchange. Adam Greene is the Managing Director of LCP’s EB-5 Group. He started as a lender for construction and project financing, doing infrastructure financing with JP Morgan Chase. A large majority of EB5 projects have basis in real estate.
Mona to Adam: Is it true that “EB-5 risk is not investment risk because there is little promise of return”?
As lenders for the construction of real estate; Live in America views investment risk as a credit risk, i.e. the risk of getting repayment. Whereas most investors consider the foremost risk to be whether they will get the green cards, Live in America looks at credit risks and is concerned about
- if the sponsor(s) can get the project built,
- if the operations can support the debt service that the project has to bear upon completion,
- if the EB-5 investment fits in the capital stack, and
- if the EB-5 criteria can be satisfied for the investors to get their green cards.
Is it important to have a large/well-known developer?
Size does not necessarily matter but experience definitely does. An experienced developer is way more important. When looking for risks, investors will want to see that a developer can execute in the market where they are located – this could mean financial capabilities, but a lot of it is experience.
It is also important to know that development projects take a very long time. EB-5 investment is cheap money, but also slow money. While pending EB-5 financing, developers might have to plug the gap or look for alternative sources of funding.
What do you look for in developers?
It is difficult to bank a new developer. Look for developers who have had success in projects that are similar to the one they are trying to finance, knows the local contractors and have successfully been able to coordinate with many different trades in the market that have completed a project of this size and scope, and still feel good about the costs.
Do investors feel more confident and secure investing in NYC?
A project is not necessarily appealing just because it is in New York City, the real estate capital of the world. Projects have gone wrong in NYC but it is still a fact that real estate prices in New York are resilient and when it comes to real estate, it is all about location. Mona adds that it is important to know that not every project is suitable for EB-5.
The flashy NYC projects are not the only projects investors look into. Anticipating credit risks, many investors prefer smaller projects and smaller markets to ensure the projects will be done.
Is there going to be a higher interest return for EB-5 investors?
Mona believes that with the upcoming changes underway, investors will not be so satisfied with their return of zero interest. Deals will have to be structured at a higher interest rate. Sadly, with the present commission structure with agents in places like China and Vietnam, someone will have to be paid less or developers will end up paying more.
If developers are looking for mezzanine investment to come in, where EB-5 financing usually takes place, there is a hefty 10-12% for construction loans. It leaves limited room and generates a lot of pressure all around for developers to provide the investors with extra return, a cost so high that it might make the EB-5 investment seem unattractive.
Can a developer service a debt after completion?
Check if the economics of the project supports the debt load that the developer is taking on. This involves basic credit analysis and independent due diligence. Get an independent study to make sure you understand the dynamics of the market, in that way you can project the cash flow.
For developers with their own Regional Centers, some might not get a third party independent analysis. Although some are doing great jobs, some end up taking the money. Live in America, acting as a third party and lender that only has fiduciary duty to the EB-5 investors, provides a good check on the progress of the projects and makes sure the money goes where it is supposed to go.
Where in the capital stack is the EB-5 investment?
Some developers may want to use the EB-5 money as a slice of equity. They may call it mezzanine debt, but if EB-5 money fills in the capital stack that the developer needs from 90% to 98%, it has risks of equity. Developers have a natural tendency or incentive to push where the EB-5 investment is in the capital stack. An 8% in the capital stack is a lot different from a EB-5 mezzanine loan that goes from 65% to 80%.
If developers use EB-5 financing more as equity rather than mezzanine loan, the risk of loss is greater: if they lose money, the EB-5 money will be the first one out.
Many EB-5 investors prefer EB-5 money to be a smaller chunk of the capital stack. It is not finance but it is EB-5. These investors are more concerned about the projects getting done and creating jobs so as to get their green cards. Therefore, if you are only raising 8%, you have more visibility on the project being full financed and getting completed. That’s why many investors are more concerned about how much the EB-5 investment is. But it is equally if not more importantly to know where their monies are in the capital stack. If the EB-5 debt plus the senior debt goes up to 80% of the capital stack, developers can lose 20% of their money and all the EB-5 investment will get repaid.
About the Author:
Hermione Krumm, Esq. is an associate attorney with Mona Shah & Associates. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.