EB-5 Investment Structure: Where Does Your Investment Amount of $500,000 Go?

EB-5 Investment Structure:
Where Does Your Investment Amount of $500,000 Go?

EB-5-investment-structure

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The EB-5 regulations require a foreign investor to invest in a qualifying EB-5 Visa program. However, as per the USCIS rules, you cannot invest in a project with a loan, even if there is a guarantee of repayment.

This was not the case when the program came into existence. The foreign investors would invest with a cash down and a portion in the form of “promissory notes”. Eventually, the USCIS changed the law and made it clear that a loan cannot be treated as an investment.

However, these days, many Regional Center investment projects are structured as loans. These projects offer loans to investors that have to be repaid within 5 years with interest. This seemed like a contradiction to the existing rule that loans cannot be considered as investments in an EB-5 program. This confused the EB-5 investors. However, the fact is that the investors are not actually taking a loan; they are making an equity investment into a project by partnering with the Regional Center. Here, the investor takes an equity position in a debt fund.

Key Participants in an EB-5 Deal

Each participant has a different role in the transaction. The first step to understanding the EB-5 investment structure is knowing who the key participants are.

  • Project sponsor
  • Equity sponsor
  • Regional Center sponsor
  • Project advisors
  • EB-5 fund manager
  • Immigration attorney
  • Business plan writer
  • Securities attorney
  • Bank/escrow service advisors
  • Economist

Regional Center Investment Models

There are two different models Regional Centers use to structure their projects: the equity model and the loan model.

  1. Equity Model

    In this model, the individual investor makes an EB-5 investment in their own project. This is called “Direct EB-5 investment”.

    The EB-5 equity model is any project that takes ownership of a business or property. In this type, the EB-5 investor forms a limited partnership with the Regional Center, when a new project is created. The funds are usually invested in land and commercial projects to obtain and develop the property or to invest in a startup business.

    Since the EB-5 investors are limited partners, they own shares in the project. When the majority of the partners decide to dissolve the partnership, the exit strategy is initiated. That being said, if the investor doesn’t want to dissolve, the shares can be sold to a 3rd party buyer in the open market.

  2. Loan Model

    In this model, the individual investor takes an equity position in a debt fund. This fund is then loaned for development or spending in an EB-5 Project. Here, the investors and the Regional Center form a limited partnership through which the fund is loaned to the borrower, who can be a public organisation, private party or even a city. Under this model, the exit plan is initiated when the loan matures. The loan maturity is set for 5 years once the partnership is initiated. The repayment can be made earlier if all the investors receive their green cards.

How the EB-5 Fund Moves? Who Are the Entities Involved and What Roles They Play?

Once the EB-5 structure is determined, the roles and responsibilities of each party involved are decided. Let’s understand the key roles each entity plays in this deal.

The Key Roles of Each Entity

  • Sponsor parent: It is usually the company’s name for a large real estate developer. A sponsor parent may or may not be the owner of the project’s holding company. Usually, the sponsor parent is the manager of the holding company (the actual owner of the project). The other entities are usually kept separate from the sponsor parent to reduce its liability across various projects.

  • Holding company: Also known as the “project sponsor”, this is the actual owner of the project. It is through this company, the developer equity is contributed to the project.

  • EB-5 borrower: The main purpose of forming this entity is to borrow the EB-5 funds from the EB-5 fund for the project. A new EB-5 borrower will be formed for each new project, and it will be specific to that deal.

  • EB-5 investors: The individual EB-5 investor purchases equity interests in the fund to invest into the EB-5 fund. The interests of these investors are combined and pooled to form the EB-5 fund.

  • EB-5 fund manager: The EB-5 fund manager is responsible for the administration of the fund. In case the EB-5 fund is a limited partnership, the EB-5 fund manager serves in the capacity of a general partner of the EB-5 fund. If the EB-5 fund is a limited liability company (LLC), the EB-5 fund manager serves as the manager or the managing member of the LLC.

  • EB-5 fund: The EB-5 fund is formed by pooling the contribution of all investors. This fund is then invested in the development of the project. In case the EB-5 fund is an LLC, each investor becomes a member in the fund by purchasing equity interests. Similarly, if the EB-5 fund is a limited partnership, each EB-5 becomes a partner in the fund by purchasing partnership interests. The EB-5 fund makes an equity or loan contribution to the EB-5 borrower.

  • Development company: This company is the direct owner of the project assets (building, land, etc.). Usually, this company borrows the senior construction loan. Since this entity owns the assets of the project, if there is a mortgage or a secured loan involved, it usually secures the loan.

  • Senior bank/lender: This entity will have first priority on the development company and usually will record a mortgage on the property. In most cases, an inter-creditor agreement is signed between the senior bank/lender and the EB-5 fund, outlining the rights of each creditor with respect to the project.

  • Development manager/developer: This entity manages the project development. Typically, it oversees all development tasks, including landscaping, construction, etc.

  • Regional center: There exists an administrative agreement between the Regional Center and the EB-5 fund. The Regional Center has a service relationship and not an ownership relationship with the EB-5 fund. The Regional Center may but doesn’t have to be affiliated with the EB-5 fund manager.

  • Not all EB-5 Regional Centers are the same, and not all agreements are equal.

    Regional Centers vary widely. This means both the agreements and the projects between Regional Centers can differ substantially. Therefore, it’s important to carefully review partnership agreements and exit strategies to figure out if investing through a particular EB-5 Regional Center is the right option for you. Nysa Global’s immigration services can help you explore your options to figure out the best one and fast track the route to obtaining the US Green Card.

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