EB5 Investors Magazine Volume 7, Issue 1 | Page 79

EB5INVESTORS.COM 77 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