The EB-5 Project selection process is a tedious and cumbersome process. This process cannot be sped up, Investors should do as much due diligence as possible and where necessary, consult with a Financial Advisor to evaluate the projects.
The first step is to understand the life cycle of an EB-5 Investment. There are two stages in an EB-5 project. Stage 1 is the construction stage and stage 2 is the operations stage.
Construction Stage of the EB-5 Project:
As an EB-5 project is a new business venture, whether it is a hotel, condo or logistics warehouse, it is essential that the project construction needs to be completed on time and on budget to start off on the right foot. There can be a number of reasons why delays and cost overruns can happen in any project. For eg., delays in acquiring permits from the city/county, insufficient capital provisions, too little developer equity, aggressive construction schedules, etc.
Ideally, a seasoned developer, with a track record of successfully executing projects of similar size would have the experience and foresight to ensure that the EB-5 project doesn’t suffer. I check to see if the sponsor has sufficient equity in the capital stack and if any backup funding sources are lined up. Has the sponsor provided for loan interest servicing during the construction stage, as there is no revenue generated during construction.
Has the sponsor done an Independent market study and/or project appraisal to validate the projections provided by them.
The valuation of a completed EB-5 project should be at a minimum enough to repay the Senior loan and EB-5 investors loan. That’s why it is important to ensure that project construction costs are contained as per original projections.
Operational Stage of the EB-5 Project:
Typically, EB-5 projects repay their EB-5 investors, either by refinancing the project after construction completion and/or from operational revenue. So it is critical that the income projections are reasonable and have enough cushion to still repay investors if there is a reduction in cash flow. Run a sensitivity analysis to check for stresses in the cash flow and the effect on the repayment timeline.
In the event of default, it is essential to understand the position of the EB-5 investor amongst the other creditors and equity holders of the project. If EB-5 investors are provided with adequate collateral in the loan documentation, this provides a huge comfort for investors.
Steps to undertake when doing an EB-5 project Due diligence:
- Analyze the project documents to review the construction projections, cash flow analysis and any other independent appraisals.
- Visit the project site to evaluate the current project stage.
- Assess the revenue projections and cost estimates of the various stages of the project.
- Market assessment to understand the particular industry scenario, demand-supply gap, competitive position of the project.
- Evaluating the Sponsors financial position.
- Understand the Senior loan terms and effect on EB-5 investors rights and repayment .
- Undertake a SWOT analysis to identify any risks in the project.
Once you have narrowed down your project, it is imperative that you understand the various steps of the EB-5 process before investing in the project.
