Table of Contents
- 1 Maximizing Impact with EB-5 Funding: The Capital Stack Solution.
- 2 Maximizing Impact with EB-5 Funding: The Capital Stack Solution is best represented by the following:
- 3 EB-5 fits best as a replacement for mezzanine financing.
Maximizing Impact with EB-5 Funding: The Capital Stack Solution.
Where does EB-5 funding work best in the capital stack of a target investment/Job Creating Entity?
First, it is important to identify the traditional sources of capital in a large development project and how much of the overall construction costs these sources will meet.
1. Senior Debt:
Senior debt, from a traditional lender, is likely to be the least expensive capital available to a large, well heeled, construction project. In most projects the senior debt accounts for +- 60% of the overall costs.
2. Mezzanine Financing:
Mezzanine financing normally comes from a non-traditional investor such as outside equity investors or venture capital. This is likely to be the most expensive component of a developer’s capital stack. This component of the capital stack is normally 25% to 30% of the overall capital needs of a project.
3. Developer Equity:
Every developer needs to have what is called “skin in the game” which is another way of saying the developer’s own money that is at risk. This portion is usually 10% to 15% of the overall costs of the project and it should be the last in priority when it comes to capital being returned by the project when a liquidity event (a sale or refinance) occurs.
It is important to identify the traditional sources of capital in a large development project and how much of the overall construction costs these sources will meet.
The primary key to success in EB-5 is the creation of new qualified jobs that support the removal of conditions for the EB-5 investors. A properly structured capital stack plays well towards the job creation needs of EB-5 investors as all capital sources are blended together in order to determine the overall job creation resulting from the construction activities of a EB-5 target investment. Now, when thinking about those sources of capital above, where does EB-5 investment seem to fit best as a replacement for other capital?
Maximizing Impact with EB-5 Funding: The Capital Stack Solution is best represented by the following:
EB-5 fits best as a replacement for mezzanine financing.
From a job creating perspective, the EB-5 investor is seeing a 3x or 4x return on the jobs their money alone would create. This is an enormous return on investment and in the category that means the most to nearly every EB-5 investor. The developer and the JCE are seeing benefit because the EB-5 capital is replacing the most expensive capital at a lower cost.
Senior debt is important as it is normally the lowest cost for capital and a third party is subjecting the project to its underwriting criteria and lending requirements. This is information that should prove helpful in determining if EB-5 is right for you especially when it comes to EB-5 project structure and focus that we speak about elsewhere in our blog. EB-5 should not be replacing senior debt unless a component of that senior debt was contemplated to serve as a bridge until EB-5 funds could be raised.
EB-5 funds should not be replacing developer equity unless a portion of those developer funds were serving as a bridge until EB-5 funds could be raised. There needs to be developer equity in a project however finding the right project that involves a developer that is bridging this mezzanine level financing can be like finding the needle in the haystack.
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.
Kraig Schwigen is a recognized industry expert in the EB-5 business with over a decade of experience. As the former Chief Operating Officer of one of the largest regional center groups in the industry, Kraig grew the company from 40 investors to over 5,400, representing over $2.7 billion in EB-5 investment capital raised.
Today, as a key member of the American Investment Migration (AIM) team, Kraig is dedicated to sharing his extensive experience and expertise to assist developers seeking EB-5 investment capital.