Understanding the Risks of EB-5 Projects Promising High Returns: EB-5 Diligence With Investment Banker Siddharth Agarwal

Hear Siddharth Agarwal, a Bay Area Resident and EB-5 Investor,
Explain the Risks of EB-5 Projects Promising High Returns


Now, the most important thing, which I find investors do not understand in the case of EB-5 is, whenever you are being offered a certain rate of return on a project, always think about the cost of capital that the builder of the project or the developer of the project is incurring. There is a wide gap between the return that the EB-5 investor is going to see on a project versus the cost of capital that the developer of that project is going to incur. Why do I say that? I say that because, for example, there’s an EB-5 project somewhere in California, in a university town where there is student housing being built, and the builder is offering a 4% rate of interest annually to EB-5 investors.

Now, the industry standard for high-quality projects in EB-5 is usually a 0.25% or 0.5% rate of interest. Now, if that 4% rate of interest is being offered to the EB-5 investor, investors need to keep in mind that the EB-5 agency or the facilitator, the regional center, is also making a significant return on the capital that is being invested. That return on capital being invested is going straight to the regional center, after which another 4% is going to the EB-5 investor. Which means, let’s say the industry standard, and then investors should read all the documentation that is provided by the regional center. I think it’s extremely important to read the memorandum. They should read the debt agreement, the senior loan agreement that any project has. I have come across projects where investors have not been provided the loan documents associated with the loan that the senior lender has made to a particular project.

I have, by God’s grace, been able to help those investors stay away from such projects, because I want to make sure that I know how my capital is going to be treated based on not only the agreement that I have with the builder or the developer. I also want to know how the person above me in the capital stack is going to get treated in the case of a default or a project failure, because that is going to determine to a significant extent as to how I’m going to get treated eventually in a court of law.

Without getting too much into the legal ramifications of how these things work, because that’s a completely different topic on its own: the key thing that people need to understand is the developer is taking this pool of money raised through EB-5 through the regional center.

The regional center is the GP here because it is facilitating this investment into a project is going to earn a certain rate of return. If you read the memorandum, that rate of return or that rate of interest will be mentioned, around 5%, let’s say. On top of that, a builder or developer is offering an additional 4% to the EB-5 investor. What does that mean? It means that the total cost of capital for the developer in a project taking money from EB-5 investors is 9% just for that capital part of the capital stack—which should tell you how risky that project is. The more risk a project has, the higher the rate of return. And you should also contrast this with the fact that EB-5 investors are probably the most powerless class of investors in the U.S.