EB-5 Risk Assessment
Two types of risks are inherent in EB-5: immigration risk and investment risk. While investment risk—the risk in the project’s ability to pay back its investors their invested capital—is directly tied to the health of the project, part of the immigration risk comes from the uncertainty in the project’s ability to meet USCIS requirements. Ultimately, the project’s strength goes towards minimizing the part of the immigration risk that is project dependent. It is therefore important to identify and invest in a strong project in order to reduce risks in both investment and immigration.
A strong EB-5 project must be situated in favorable market conditions, be of manageable size, and have an experienced and responsible developer. Though most EB-5 projects nowadays are located in TEAs where unemployment rate is greater than 150% of national average, a project situated within or in the vicinity of a stable and prosperous local economy stands a better chance at attracting patronage of its goods and services, and is thus more likely to stay afloat, turn a profit and, in the long run, repay its investors. Size of project is also crucial. An EB-5 rule of thumb favors the choice of a small project with minimal construction over a large one with extensive construction, for extensive construction tends to be more long-drawn and involve more risks and uncertainties, which affect the project’s ability to execute its business plan and meet USCIS requirements as well as its overall profitability. In addition, a smaller project allows for easier management by the EB-5 loan manager in case of a project failure, and provides greater chance of repaying the investors.
For EB-5 purposes, a reasonable structure in a project’s capital stack—the composition of its financing—is also essential to investor’s assessment of its risks. A project with equity from the developer itself as well as from the government in the form of grants, tax credits and/or real estate tax incentives favors EB-5 investors and is preferable to one without.
There are other safety measures that can be present in a project, which bring to its investors greater investment security. Such measures are usually stipulated in the project’s guaranty agreement, and can include guaranty of repayment by ownership of project property and/or business, as well as collateralization by external properties. The presence of such safety measures renders a project more reliable and less risky.