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through the NCE, the reality is that it is a belief or hope
but not a plan. Reputation is not collateral. Don’t make
that mistake.
Some projects in the EB-5 space are, in all reality,
credit card debt in which the investor is hoping that
the developer is too big to fail. Simply put, when you
place your money with an entity that loans or invests
it down the chain, and that entity has no assets, you
have no collateral to pay back the NCE in the event
of a default. It is critical that the investor ask the
question of which entity is responsible to pay back the
loan (or equity contribution) and what is the collateral
guaranteeing repayment.
For example, a first lien would be the strongest position
for collateral, assuming the loan-to-value is sufficient
to ensure repayment (for example, a loan-to-value
of 75 percent, depending on asset class). This way, if
the asset loses value and is foreclosed on by the NCE,
there is still equity left to pay back the money. The next
position for debt would be a second lien, though these
are not common. Once again, look to the total debt-to-
equity, making sure there is a cushion in case of having
to force a sale. The position that follows is mezzanine
debt. The same analysis for second lien applies,
ensuring that the total debt-to-equity is sufficient in
case of having to force a sale.
In terms of equity, the NCE could purchase an equity
interest in the project (normally, preferred equity).
It is important once again to ensure that there is
common equity that will be lost in the case of a forced
sale. Preferred equity could be weaker than a first but
also could be stronger than mezzanine financing,
depending on the deal terms. It is used many times in
historical buildings to take advantage of historical tax
credits in lieu of mezzanine financing. Below are some
worst-case scenarios.
Imagine that the developer suffers from an economic
recession and is forced to sell a project for less than
its value. A couple of things could happen. In the first
lien scenario, the NCE could actually be foreclosing
on collateral or forcing the sale. It is in control. In
the other scenarios, the NCE would be part of the
process, but with sufficient collateral and debt-to-
equity ratios, there exists the chance to be made
whole. However, if the entity the NCE made a loan to
(or invested in) has no collateral to speak of, the NCE
could lose all the money.
One final note: Be aware that some collateral positions
can change based on the amount of EB-5 money raised.
Be sure to ask this question to know what collateral
will be given in all possible scenarios. Do not believe
the illusion that all collateral is equal. It isn’t, and it
could cost you hundreds of thousands of dollars.
MISCONCEPTION 3:
A REGIONAL CENTER
IS PRIMARILY RESPONSIBLE
FOR PAYING BACK THE INVESTOR
Another misconception is when a regional center shows
an investor its track record for paying back investors.
Let’s be clear on two points: One, the regional center
does not pay an investor back, the NCE does; and two,
the NCE can only pay back once it is paid back. Being a
project in a regional center that has paid back investors
has no impact on your investment unless you were
considering investing with a regional center you think
could be dishonest. Who would consider that?
The NCE agreements should all state that the investor
will be paid back once the financing facility is paid
back to the NCE (and all USCIS requirements are met).
Based on that, the only reason an investor would not
be paid back from the NCE when the NCE is paid back
would be because the NCE is refusing to honor the NCE
agreement. The NCE is normally controlled by a person
who also controls the regional center. But it is the NCE
that has to pay back the investor.
Therefore, project viability is what will determine
whether the investor w ill be paid back . A nd the
manner to be protected is to analyze the project itself
and the collateral. Do not believe the illusion that a
regional center is primarily responsible to pay back
the investor. While it is easy to be overwhelmed by