Two years is the number every EB-5 investor fixates on when thinking about the return of capital. But is this timeline fact or fantasy? In this episode, Mona brings back guest Manuel Ortiz, Vice President of Global Business Development at First Pathway Partners to dissect the regulatory timeline from the real world timeline.
Manuel is put in the hot seat and does not sugarcoat reality. For most projects, two-year exits are rare; take it from someone with 13 years of experience in the industry. Most projects require 24 months to break ground, let alone stabilize. So, what is an honest timeline for return of capital? Manuel reveals the realistic timeframe and explains how rushing an exit could turn an EB-5 investment into a high-risk short-term loan in disguise.
The current debate around rural versus urban projects gets its time in the spotlight too, with Mona and Manuel looking at where the market is heading and what investors should keep in mind before committing capital. Their conclusion is clear. Whilst the two-year rule may be the law, a realistic return of capital usually depends on the project, the asset, the stage of construction and the strength of the exit plan.
“You don’t want investors getting mixed signals and overcorrecting, saying, ‘Well, now I should get it back in two years,’ because that creates a whole host of other issues.” – Manuel Ortiz
Manuel Ortiz
Manuel Ortiz serves as Vice President of Global Business Development. Ortiz has over 20 years of public and private sector finance experience in global and domestic markets.
Mr. Ortiz has led award-winning investor relations teams, directing capital raise efforts in excess of $500M with investors from over 40 countries. In recognition of his work in emerging markets, he earned a national industry award for bringing EB-5 services and educational resources to underserved countries around the globe. His rich expertise, communication with stakeholders, and cultural competency have earned the trust of global institutional investors, family offices, hedge funds, qualified individuals, and their intermediaries. He has also been featured in the media on Fox News, ABC and UniVision.
Prior to leading top awarded investor relations teams for private equity firms and EB-5 fund managers, Mr. Ortiz started his career as an analyst and underwriter conducting detailed valuations and due diligence for M&A acquisitions and financial analysis for commercial construction risks. He went on to become a public information officer and spokesperson, at the Port of Brownsville, working on economic development matters for the Port’s CEO and Senior Management.
Mr. Ortiz earned an MBA from the Cox School of Business at Southern Methodist University and a BBA at the University of Texas at Austin, with a minor in international business. He also holds a FINRA Series 7 license and is bilingual – fluent in Spanish and English.
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Transcript
This transcript was produced using AI and subsequently edited for style and clarity. The edits do not alter the substance of the speaker’s remarks
Mona Shah (0:59 – 1:48)
Hi, everyone. Since October 2023, the rule has been that EB-5 capital must stay invested two years. Yes, you heard it right, two years.
That wasn’t what happened before. And we will discuss that very briefly. However, do you get your capital back in two years?
That’s the question that this episode answers. If not two, then how long? And what has to happen first?
So to discuss this with me today, we have a recurring guest. In fact, he’s been recurring quite a few times. Manuel Ortiz.
He’s now Vice President of the Global Business Development at First Pathway Partners, which is a Milwaukee-based EB-5 fund manager and regional centre. And it’s been around since 2007. Manuel, welcome to our podcast.
Manuel Ortiz (1:49 – 2:00)
Hey, Mona and Rebecca, it’s so great to be here with you both. Really appreciate the opportunity. And you’re correct. My family actually came over from Spain in the 1920s.
Mona Shah (2:01 – 2:01)
Oh, wow.
Manuel Ortiz (2:02 – 2:52)
Yeah, it’s pretty interesting. When my grandfather wanted to migrate to the U.S., him and his brother both wanted to come. And so they owned a business in Spain.
And the only way you could figure things out back then was to flip a coin and figure it out or fight. And so fortunately, I come from a loving family and they decided to flip a coin and my grandfather won. And so if you think about it, he had a 50 percent chance to come to the U.S. He came here, owned a hotel in the Los Angeles area, created jobs. If it weren’t for that 50 percent, I might not be here. My father would not be here. And so you just think about that immigrant story about how those decisions can impact not just the first step, but generations to come.
Mona Shah (2:53 – 3:27)
Right, right. Well, we hear this all the time, don’t we, when investors say, well, I’m doing this for my children. Yeah, your children and your grandchildren and your great-grandchildren.
But anyway, let’s get into the topic, because this is a hard topic right now. This two year number, the very first thing I will say to you, Manuel, is that whenever an investor hears two years, they translate it to I’m getting my money back in two years. But these are two different issues.
Yes, you can get your money back within two years, but there’s something that has to happen before that.
Manuel Ortiz (3:28 – 4:20)
Yeah, I think you’re exactly right. And oftentimes what investors tend to confuse is that there are two processes moving in parallel, but independent of each other. Right.
On one side, you have the immigration timeline. On the other side, you have the investment timeline. They move in parallel, but not necessarily together.
I think what USCIS did with regard to this guidance is actually great because it prevents some of the problems of the past where you have the immigration process dictating when investors get their money back. So in a way, they just took that off of the table, which is great. But you also want to make sure that you’re invested for a period of time where one, you’re able to maximise the job creation, but number two, not to a point to where you’re exiting too early and you’re trying to exit an unstabilized asset, for example, or putting the investment at risk a little more than what you need.
Mona Shah (4:21 – 5:04)
Yeah, you’re right, Manuel. It’s a conditional clause that really carries the weight. I mean, two years provided the job creation is done.
And as we know, when there’s any major kind of project with major construction, there’s always delays. So until the construction is done, the jobs are not created. If the jobs are not created, then you’re not able to exit out, even if by law you can do.
So really, the issue is, what is the rule? What is reality? Yeah, it’s two years.
But what is the reality? Is it five? Is it four?
What are you actually seeing right now in the market, now that this rule and timeline has gone on a little bit since the 2022 REIA was actually brought in?
Manuel Ortiz (5:05 – 6:18)
I would say the shorter the time frame, right, could typically mean that you may not be taking full advantage of the job creation from an immigration perspective. And then I would say also on the shorter the time frame, right, you may be turning the project into a short-term loan situation inadvertently, which those types of loans will typically carry a higher interest rate because they’re typically going to be a little bit riskier. So you don’t want to put investors at a higher risk category either.
And so what we found to be the most conservative option is to basically get to a point to where the asset is stabilised and you’re exiting a stabilised asset. That’s going to depend on the project, right? The bigger the project, sometimes that stabilisation timeline can be five to seven years.
The smaller the project, sometimes you’re talking about somewhere in that four to five-year range. And remember, just because it stabilises and is projected to stabilise in four years, like you said, construction may take a little bit longer. So you may need an extra year of cushion.
And so it’s really important just to look at it from the stabilisation standpoint and give yourself a little bit of room to hedge for any type of unforeseen delays.
Mona Shah (6:18 – 6:54)
Yeah, it’s a very good advice, Manuel. So really, but what you’re actually saying indirectly is go for the project where the work has already begun, where construction has already begun. And then, you know, you do have a limited time unless the language allows you for investments to come in.
So it is tough on the project. When do you actually go out and get EB-5? Because a lot of projects need that money from the beginning.
They don’t need that money halfway through. And then if we’re getting it halfway through, is that really helping the community? Is that really job creating?
Manuel Ortiz (6:55 – 7:28)
Right. I think you hit the nail on the head. The timing aspect of it is really important.
And the further along you move in the timeline, the lower risk the investor is going to have. And so I would say that if you’re looking at a project that already has all of the construction approvals and it’s moving forward, you know, very quickly, maybe the developers already put in some equity. I think that’s great.
But the further you get away from that initial starting point, I think the riskier it can also get on the other side of it.
Mona Shah (7:29 – 8:10)
That’s true. I’m going to sort of lead you in a one of those difficult decisions because we had this argument about a year ago when the industry was split, when IIUSA did start a lawsuit against this proposal because they wanted five years. And to be fair to IIUSA, you know, that the rationale was if a project saying it’s going to give you money back in two years, it’s likely to be more risky.
But really, it was because they wanted to make sure that at least each developer had money for five years. And I understand that from a developer point of view, it doesn’t help an investor’s point of view, especially if investors taking a loan out and paying high interest.
Manuel Ortiz (8:11 – 9:17)
Right. And so I think they’re the main thing for as investors are conducting the due diligence process on different types of projects is just to look at the type of project that it is. How long is it going to take to build?
Some projects take 26 months, some take 36 months. And just really focussing on that stabilisation period and the exit strategy. Sometimes it’s a refinance.
Sometimes it can be the sale of an asset. It’s very hard to predict as we can see today where interest rates are going to be tomorrow. Right.
It is very hard, although the Fed’s going to be announcing something today if they haven’t already. But it’s very hard. So that refinance strategy in the future, it’s kind of a guess.
It’s an educated guess, but it’s still a guess. And so I would say that the safest way to consider things is just or the most conservative way to look at it is just to say, OK, when is this project going to stabilise? And is it realistic that we’re going to exit at whatever that loan to value actually is?
Mona Shah (9:17 – 9:33)
So if I asked you, if I came to you and I said, Mama, with all your experience, because prior to First Pathway, you worked for quite some years with Civitas and you have a tonne of experience in this area. What is an honest two-year offering? What does that look like?
Manuel Ortiz (9:34 – 9:38)
You know, I would say that I’ve never in my career…
Mona Shah (9:38 – 9:38)
I put you on the spot.
Manuel Ortiz (9:41 – 10:30)
But that’s OK. I think it’s a good spot to be in because I can honestly say that, you know, the two-year exits are very rare. I haven’t been a part of those, again, because at that point, most of these projects will take 24 to 36 months to build as it is.
And you’re basically exiting a unstabilized asset. And so even like what they call merchant builders, you build and you sell, you build and you sell. Even those, you know, can be considered to be a little riskier.
And I just haven’t worked in those. But I would say if you’re looking at a quicker exit, I would say that if you’re able to exit sometime within the four and the five-year range, and if you have a little bit of a room of hedging, just a little bit of a cushion, if there’s a construction delay, I think that would be a real realistic target.
Mona Shah (10:31 – 11:09)
Yeah, I happen to agree with you. And those are the projects which, again, take the money in when they need it. But just as an FYI, because Rebecca and I have argued for many years, and I’ve written a number of articles about it, I was always against the old redeployment.
I felt that that rule was indefensible. And we’re seeing now so many cases of redeployment money going awry when people are getting their actual capital back, but they couldn’t take it because they’re pre-REIA, what we call legacy cases, and their money has been redeployed. And that money has been lost.
Manuel Ortiz (11:10 – 11:16)
There are countless examples of investors making great investment decisions.
Mona Shah (11:16 – 11:17)
Yeah, initially.
Manuel Ortiz (11:18 – 12:19)
Right, initially, and then unable to get a return of capital because of the requirement of having their funds invested throughout the immigration process. And so they get redeployed into a new type of project. And I’ll tell you, too, another important thing is often missing that is that the options that are typically available there are new construction projects.
And again, those new construction projects are typically going to be the higher risk category. And so they made an initial great decision. They go into something else, the macro economy changes, and they end up losing their capital.
And so that’s kind of something that I truly do believe USCIS was trying to disconnect from and saying, hey, we’re just going to take this off the table, which is great. But what you don’t want to do is get to a point to where investors are getting mixed signals and overcorrecting and saying, well, now I should get it back in two years when that creates a whole host of other issues as well.
Mona Shah (12:19 – 12:31)
Yeah, yeah. I mean, look, the project did everything it promised. The jobs were created.
The loan was repaid, but the investor still could not have his money back. Do you know how often redeployed capital just simply does not come back?
Manuel Ortiz (12:32 – 12:36)
It’s hard to say because there’s no no data on that.
Mona Shah (12:36 – 12:36)
That’s true. The only data is litigation.
Manuel Ortiz (12:37 – 13:11)
Yeah. I mean, that could be a really good project, I would say, for IUSA as well as for some of these other organisations to look into.
But I would say really going into the future, I would say it’s going to be more important to just focus on quality due diligence, exiting stabilised assets. And, you know, with this new guidance that USCIS has put out, hopefully that is off the table now, which is, I think, better for investors.
Mona Shah (13:12 – 13:16)
All right. All right. So here we have the other big question for you.
Manuel Ortiz (13:17 – 13:19)
And I know you’re going to put me on the spot again, Mona.
Mona Shah (13:19 – 13:57)
I’m going to put you on the spot a couple of more times in this episode. But here we go. This is a difficult question.
I get it. But we would love to hear your your views on it. In a project when a developer is talking about the return of capital and that they give various options like refinance, sale or cash flow, what, take the most common case, the EB-5 loan will mature.
Everyone expects a refinance to repay it. Put us in the same room as the bank. What should we be familiar with?
What should we see or what should we know about?
Manuel Ortiz (13:58 – 15:43)
You know, I would be very careful to focus on percentages because and I’ll give you a perfect example. Sometimes people focus on loan to cost. Sometimes people focus on loan to value.
And you focus on, hey, loan to cost should be no more than 55% and loan to value should be 50% or something like that. But the reality of it is, is that let’s say you’re at a 25% loan to cost. It sounds great.
But if you’re 25% of an asset that’s worth nothing, you’re 25% of nothing. Right. So I would say, you know, it’s really important to focus on what is the actual business thesis behind this asset?
Why are they doing it? Is this value realistic? Has this been independently verified by let’s say an appraisal company like HVS or something like that?
And how did they arrive at that future loan to value number? So if you’re like at a 50% loan to value, for example, on a hotel, was that 50% loan to value based on 80% occupancy, 90% occupancy or 50% occupancy? Right.
Because those valuations into the future are based on the assumptions that they’re making. And sometimes if your assumptions are really aggressive, that value is going to look great. So it’s just really important to have most of the numbers that are out there independently verified because the developer is going to look at a project like it’s their baby, right?
The baby’s perfect. It has no blemishes. It’s the most beautiful thing.
But you need to have an independent party verify that. And I think that’s kind of sometimes where some of these projects don’t have that.
Mona Shah (15:44 – 16:05)
Yeah, maybe they don’t want that either, Manuel. But it’s going back to common sense location and, you know, how popular that project is if we’re talking about a hotel, for example. And let me ask you, though, if refinance is not in the mix, what other options are there for investors to get their money back?
Manuel Ortiz (16:05 – 17:17)
This is why the loan to value is so important because you can also sell an asset, for example. If the EB-5, for example, is in a senior loan position and the loan to value is 50%, right? And let’s say that the loan is $50 to $100 value.
Well, if there’s a default, for example, or something like that, you could sell the asset at $80 and still feel comfortable that you’re going to recuperate the 50 or you could sell it at $75 and still feel comfortable you’re going to get the 50. But if that loan to value, over-exaggerating here, but let’s say it’s at 80%, then you’ve only got 80 versus $100 valuation, about a $20 margin of error, right? And so the stronger the loan to value that’s independently verified.
And again, these are just assumptions, but that gives you more margin for error or more cushion in the event that something goes wrong and you could sell the asset. That’s another value where the buyer is looking at it to say, hey, I’m getting $100 value asset at $70. That’s great for them, right?
So they get that at a discount.
Mona Shah (17:18 – 17:28)
Well, we see sales often when the project is sort of apartment buildings and, you know, or small houses or something. You don’t see the sale option as much in hotels.
Manuel Ortiz (17:29 – 19:06)
So I would say that typically a buyer for a hotel would be an institutional buyer, or you would have REIT that do that. Sometimes these major brands will take over a boutique hotel, for example. I would say that part of the reason that you’re not seeing just US real estate in general, a lot of exits as you would typically see right now is because interest rates are a little bit higher than what you would like.
So they call that trade. So interest rates are a little higher. So you’re not seeing trade volume like you did in a pre-pandemic environment.
So you may be having strongly performing assets, so assets that are performing really well, but a buyer is not going to buy right now because their debt cost is going to be high because interest rates are high. And I’ll tell you too, that one of the disconnects that people don’t usually make with this is that a high interest rate environment is really good for EB5 because now investors and regional centres can compete with traditional lenders for senior loans. So it’s great.
High interest rate is great for new projects, but a high interest rate market is not good for old projects, your exits, because you’re unable to exit some of those older assets. What happens when interest rates drop, a low interest rate market for new projects, you may see more mezzanine deals. You may see more equity deals, but you’re also for the old projects, you’re going to see more exits because people are buying and selling assets because you have lower debt costs.
So it’s a little bit of a different cycle for different things.
Mona Shah (19:07 – 19:28)
Fascinating. I really enjoy your insight on this, Manuel. And what I’m really going to ask you now, which I’m sure people are waiting for this, would your answer make any difference if the project was in rural or in urban?
That is the big deal right now with all the run after rural.
Manuel Ortiz (19:29 – 21:27)
So I would say being in the business, going back to 2013, you know, we’ve all seen different cycles and, you know, if starting my career in finance, for example, in 2003, dot com bus, finishing my MBA in 2008, 2009, grave recession, starting an EB5 in 2013, volume was really high. All of these different cycles, seen many different types of projects. If you look at projects that have not worked well historically, I mean, just by virtue of the definition of how the EB5 programme was structured pre-RIA, they were all urban, right?
So you’ve had failures in projects that are urban historically. So I do think that sometimes when you look at some of these chat groups, whether it’s WhatsApp or any other social media platform, you start hearing just chatter from, you know, what I would call the social media trolls that’ll say, hey, you want to invest in urban because it’s safer? That’s not necessarily so.
And it really goes back to evaluating the underlying asset, the value of that, the business thesis, why are we doing this? And what value is actually going to be there in the next three to five years, right? That’s really what makes the difference.
Location in real estate is the most important thing, but there are good locations in rural areas as well. There are quality assets in rural areas as well. You know, for us at FPP, we’ve had, I would say, two projects in rural areas.
We may have one more coming up, but you’re talking about three since 2022. And there are some companies that have had more than 10 rural projects. I’ll tell you just from our side of it and our underwriters, it’s very hard to find one, right?
So, you know, I think that’s a really important thing to keep in mind. It’s going to be harder to find the good ones, but that doesn’t mean that there aren’t any good ones.
Mona Shah (21:28 – 22:18)
No, I do agree with you. I mean, even though Rebecca and I have argued in the past, and we’ve argued on this podcast that the urban TEA tends to be more better capitalised. But what I have seen is that, you know, what really does travel with the geography is the asset mix.
So you have rural offerings, which are really skewed towards resort, ski developments, lake developments, food processing, all that type of stuff. And then the urban high unemployment areas, which are really skewed towards hotels, multifamily mixed use. So they’re different assets and they obviously have structurally different repayment mechanics.
But as we come towards the end of our podcast, I’m going to go back to the beginning. Realistically, then two years, three years, four years or five years, what’s the realistic number for repayment?
Manuel Ortiz (22:19 – 22:46)
So I would just say it does depend on the asset. But if you were to pin me somewhere, you know, if you’re talking about a midsize project, I would say that, you know, you would want to maybe look somewhere in the four to five year range, maybe six year maximum somewhere in that window, I think would be important. But it really just depends on the size of the project.
But I would say a midsize project like that, that would be a realistic time frame.
Mona Shah (22:46 – 22:52)
The size and where the how far the project has moved along in construction, is that an important factor?
Manuel Ortiz (22:52 – 23:41)
I would say that the timing of even when when you get into something like so if you get midway into the construction process, you’re going to have a quicker time to stabilisation because obviously you you save some time. But then, you know, we would leave it to the experts like you on the immigration side to say, hey, there is a job nexus here. No, there’s not.
No, there is risk that this project is going to get approved or not. So I think there you get into more immigration topics and immigration risk, I would say on the investment side. Sure, if you’re able to get into a project that is a little further advanced, maybe that time frame could get a little bit shorter.
But you would have to assess that that doesn’t put you at higher risk on the immigration side. Remember, you’ve got the immigration process and the investment process moving in parallel, but they’re independent of each other.
Mona Shah (23:42 – 23:49)
Manuel, thank you for your insights. We look forward to having you back and discussing the next interesting topic. Manuel, thank you.
Manuel Ortiz (23:49 – 24:10)
How did this go by so fast? You put me on the hot spot so much. It just went by so fast.
So I really appreciate your time. It was great to be here and have this discussion with you at a crucial time. It’s the best time for EB-5.
Processing times are moving really fast. We have the September deadline coming up as well. And so I’ll tell you, it’s just a really good time for EB-5.