U.S. investment migration · EB-5
The EB-5 capital stack: where does your capital sit in the repayment queue?
In many EB-5 project marketing materials, the word “loan” is presented as safer than an equity investment. That is partly true — but the full picture is far more complex, and it comes down to where the EB-5 capital sits in the project's capital stack.
How does the capital stack work in EB-5?
Most EB-5 projects today use a loan model. Some projects use an equity model, but that structure is generally riskier. In the regional center loan model, investors transfer funds into a New Commercial Enterprise (NCE) — the entity that holds the capital — and the NCE then lends the money to the project company.
The advantage of this structure is that the NCE can require the project company to provide collateral or a guarantee for the loan.
“Loan or equity?” is not the only question to ask
Many investors researching a project ask just one question — “Is this a loan or an equity investment?” — and relax as soon as they hear “loan.” But caution is warranted: some projects marketed as loans are in fact unsecured loans, with no collateral at all behind them. If the project fails, the lender holding that promissory note may have little or nothing to recover.
“Better to choose an equity structure with clear commitments and a property title or other real assets we can enforce against if needed, than a loan in name only, with nothing in hand to secure it.” — Thomas Lee, Southeast Regional Center (SRC)
Cash flow as a priority queue
In a project, cash flow works like a queue ordered by priority. Those holding collateral stand at the front and are repaid first; loans with no collateral behind them stand at the very back. So don't let the word “loan” cloud your judgment — find out what actually protects your money: actual real estate, a developer's commitment, or just words? The reality is far more complex than the label suggests, and this is where investors need genuine due diligence specialists.
The role of banks and developer equity
In long-established EB-5 markets such as China, investors have consistently favored projects with bank participation in the capital stack. The reason is that banks run extremely rigorous due diligence, from asset appraisal to legal and insurance review; a project that a bank has vetted gives investors more confidence.
There is no single formula for every project — the capital stack depends on the industry. However, in some projects the developer equity ratio (the developer's own capital) is only around 10%, a level that is not recommended. The higher the developer equity ratio, the stronger the evidence of the developer's commitment to, and accountability for, the project's success.
So when assessing a project, don't look only at the total capitalization. Break it down: how much is developer equity? How much is bank debt? And where does your EB-5 capital sit within that?
Don't forget: where will the money to repay you come from?
Beyond assessing immigration risk and investment risk, investors must also ask: where will the project get the money to repay investors? Each project has its own repayment strategy, depending on its business model. Many projects state that they “have a developer guarantee,” but the question to ask is: in a worst-case scenario, how would that guarantee actually be triggered, and how much liquidity would stand behind it to protect investors?
Practical advice: many projects look dazzling from the outside, with beautiful, upscale renderings. Set those images aside and look at the legal documents. If you can't work through that thick stack of documents yourself, engage a qualified firm to do it for you.
Conclusion
Analyzing a capital stack is not a job reserved for lawyers or financial experts. With three key questions, investors can make an initial assessment on their own:
- What position does my capital hold in the repayment queue?
- What assets secure it?
- And where will the money come from when the project ends?
