Exit Strategy in EB-5 Investments: An Important Consideration

Exit Strategy in EB-5 Investments: An Important Consideration.

Exit Strategy: A Critical Component for Developers and EB-5 Investors

Prospective EB-5 investors are seeking green cards and a return of capital above all else so all elements relating to exit strategy, in the New Commercial Enterprise (NCE) as well as the investment in the Job Creating Entity (JCE), should be at the forefront for developers as well as those seeking US permanent residence through the EB-5 Program.

EB-5 investments normally take the form of either equity or debt.

Every EB-5 investor will be making an equity investment into an NCE. Prospective EB-5 investors need to understand exactly how the pooled funds of the NCE will be invested in the JCE. (The EB-5 Reform and Integrity Act of 2022 requires that all pooled investment occur through a regional center, so the topic here speaks to pooled investment occurring through a regional center and not the direct investment of a single individual.) EB-5 investments normally take the form of either equity or debt.

In a debt arrangement there will be a loan agreement between the lender and the borrower. The NCE would serve as the lender and an affiliate of the JCE would normally serve as the borrower. The due diligence of prospective EB-5 investors needs to delve much deeper though than just a labeling of debt versus equity as many “loan” agreements, in past EB-5 offerings, were nothing more than equity investments by the NCE into the JCE as these loan agreements lacked the enforcement provisions a commercial lender would require especially in an event of default.

EB-5 investors are seeking green cards and then a return of capital.

Remember, EB-5 investors are seeking green cards and then a return of capital. A loan agreement should clearly illustrate what obligations exist on the borrower that relate to job creation by the JCE such as a minimum spend requirement. (Direct, indirect, and induced jobs can be calculated based upon the construction spending associated with a project so having a minimum spend requirement can ensure that a specific number of jobs will be created by the required amount of project spending.)

An EB-5 loan agreement should detail when repayment is to occur

A loan agreement should also detail when repayment is to occur, how repayment will occur, how much repayment is to occur, what the interest cost is on the loan and what enforcement rights the lender has if the borrower defaults on any of its obligations. Elsewhere in what we have discussed we touch upon some of the “what if’s” that can arise in EB-5 as well as in any true investment.

• What if the borrower does not repay when the loan matures?
• What recourse does the lender have?

Prospective EB-5 investors are seeking green cards and a return of capital above all else so all elements relating to exit strategy, in the New Commercial Enterprise (NCE) as well as the investment in the Job Creating Entity (JCE), should be at the forefront for developers as well as those seeking US permanent residence through the EB-5 Program

The Other “What If” to Look For in any EB-5 project

The other “what if” we like to look at is, what if the borrower repays early? What language exists within the operating agreements of the New Commercial Enterprise that deals with an early repayment by a borrower and how a return of capital could occur to eligible investors?

Remember, EB-5 investors come from nearly all parts of the world and not all investors progress through the immigration process at the same pace so some investors in an NCE could become eligible for a return of capital before all investors are eligible so are there provisions in those organizational documents that speak to a return of capital to eligible investors and not all investors when repayment occurs on the investment loan of the NCE?

Not all “what if’s” have to be bad. All “what if’s” should have an answer though and any NCE an investor is considering should be able to answer those questions.

Feel free to contact us directly with any questions you may have. Our staff will be able to help you or to put you into direct contact with the parties that can.