Webinar: EB-5 Diligence and Real Estate Investment Fundamentals with Crown Capital

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Sam:
Hi everyone. Thank you for taking the time to join us on today’s webinar. Today we’re going to be chatting about real estate investment fundamentals with two guest panelists, longtime experts in the real estate field. This presentation is not legal advice; you should engage your own legal counsel for advice. During today’s webinar, we’re going to cover a number of important topics. I’ve outlined a list here. If you want access to the slides, please send us an email and we’ll be happy to provide these slides as well. First, we’ll start with a little bit about EB5AN. We’re a national EB-5 investment fund manager, we’ve worked with over 2,000 investors from more than 60 different countries. We’ve been in this space for more than 10 years, and we’ve done more than 15 EB-5 projects.

One of the things we’re really proud of as a company is having investors from more than 60 countries, and what’s really important here is that people of many nationalities and backgrounds around the world have consistently found value in our investment approach, under the EB-5 visa program. This is a map showing some of our regional centers. We cover a large portion of the country, with more than 10 USCIS-approved regional center licenses. As I mentioned earlier, I’m Sam Silverman, one of the two managing partners. My bio—a little bit more about my background—is here on the left-hand side, and my partner, Mike Schoenfeld, here, on the right side. Now we’ll introduce Crown Capital and the two panelists, principals of Crown Capital, who are joining us today. I’ll let Dave Yancey, one of the principals, share a little bit about the company, and then we’ll talk a little bit about Dave and Mike’s personal backgrounds.

Dave:
Hi, I’m David Yancey, and with my brother Mike, we run Crown Capital. We’re a value-add and direct investors in real estate at various product types—primarily, at this point, apartment and multifamily properties in the Western US. My background: originally I was an attorney, I practiced law in the banking and bank lending area for several years, and then over time I realized there was some terrific opportunities on the business side. And so, I moved out of practicing law full-time into real estate, and now, I’m a principal of debt and equity, primarily, again, apartments in the Western US.

Sam:
Mike, do you want to share a little bit about your experience as well?

Mike:
Sure. My experience started with an economics degree in undergrad, then worked as a real estate appraiser, then went on to law school, practiced law, had a large real estate focused firm in San Jose. I then moved into commercial mortgage banking at Crocker Bank, which was the fourth-largest bank in California at the time. They went on to merge with Wells Fargo. I started my own mortgage banking firm, which I ran for about 15 years, and then went into direct investment in multifamily in the West, so in conjunction with my mortgage banking work, I acquired a sizable multifamily portfolio.

Risks Across Various Real Estate Categories

Sam:
Thank you, guys. During today’s webinar, the goal is to help EB-5 investors understand real estate development investment and the risks associated with that type of investment—and how to make decisions and diligence projects to get a better sense of the more important aspects when considering an EB-5 investment. That is going to be part of a larger real estate development investment. And so, I think it’ll be helpful to start with a little bit of an overview. Dave, can you tell us a little bit about the major real estate categories and how the risk varies a little bit across these different categories?

Dave:
Sure, Sam, be glad to. The two basic categories are residential and commercial. Residential is commonly thought of as single family homes, condos; individual units that are designed for a dwelling unit for a person or family. Then, the commercial side of the big categories are multifamily, which are commonly called apartments. And then retail, like shopping centers, office buildings, hotels, industrial and other product types. Each has its risk and reward fundamentals. Over the years I’ve done most of these product types, but have settled primarily on multifamily currently.

With any of these projects there is the development side, where you start and build and eventually complete and sell and/or rent for income. Or you buy existing property: you may do a value-add project, where you buy something that’s been built, but you think at this point it can be improved, either through renovations or better management. And they’re risk and reward factors: typically higher risk, higher reward. And higher risk means there’s the potential for possibly losing your money at a higher risk level, but then again, you might in fact, if things go well, have a much higher reward.

So, each individual investor has to analyze their own risk level and how much risk they’re prepared to consider. Again, risk is all relative, the more well-informed you are and the more deeply you understand your project, the lower the risk.

Sam:
Keeping in mind that there are these four major real estate categories (obviously opportunistic being the one with the highest risk), but also knowing that, in order to qualify for the EB-5 visa program, new jobs must be created—because of that requirement, the vast majority of the EB-5 investment projects available today fall into that opportunistic bucket, and typically involve ground-up new development. So, Mike, could you tell us (I know over the years you’ve been involved in different projects in probably all of these four categories) a little bit about what makes opportunistic type projects higher risk, and why is that the case?

Mike:
Well, I think it’s the case for a lot of reasons: one being that you don’t have an established track record of an income stream that produces net cash flow to support debt and financing. So, you have to base your assumptions on projections and budgets that haven’t yet been put in place. So, at the end of the day, financing is contingent upon a credible pro forma that shows what you expect to get, as far as income and expenses go. That’s why ground-up development and taking on distressed properties that don’t yet have a substantial cashflow makes them the highest risk.

Sam:
For opportunistic, most of the projects that fit in that bucket are going to be ones where there is not yet an established track record of revenue, NOI; they’re earlier on and they don’t have that proven financial track record. And so, if you can find a project that does have those characteristics but still qualifies as opportunistic, how would you characterize the risk level of a project like that versus one that hasn’t yet recognized any revenues?

Mike:
Well, one that’s recognized revenues is certainly going to mitigate the risk to the downside. That’s where you go to the value-add, of course, where there’s been some recurring cash flow, but you need to go in and do some deep renovation. That’s a step up from just ground up. There’s some people that think ground up is less risky than value-add because you start with just a flat piece of ground and you can better quantify your costs maybe from a ground up standpoint than you can from a deep renovation, because you don’t know what’s behind the walls sometimes. There’s variables in both scenarios.

Sam:
Got it. So generally, as we look at the risk profile of these different categories, obviously, Dave, with higher risk, higher reward— but also higher risk typically is going to demand more due diligence. If you were evaluating a core property investment opportunity versus an opportunistic opportunity, walk us through how you would approach the diligence process. How much more time and research and digging into the details would something that’s opportunistic require, versus something that’s one of the other lower risk categories?

Dave:
Well, the term risk sounds a little scary at first, but I think it’s very, very relative to the expertise of the team that brings their expertise to the project. So, opportunistic, if done by very experienced people that do deep research and really understand the product type and the market they’re in, the risk level can be reduced, even though it’s in the generally classified higher risk category of projects. Again, ground up, let’s talk about it: you’ve got a piece of ground or dirt, you’ve got to start from scratch and get through all the land entitlement, zoning, financing, and look at your competition.

If someone else is building the same product right next door, that could be risky or it could be that you can see what they’ve done and the success of that project bodes well for you doing the same or a similar project alongside. So, it’s ultimately, it’s a combination of the product type, the competition, supply and demand… Ultimately, supply and demand is the factor. If you’re creating a product where there’s high demand and a small supply and you can get that to market before other people do, then that’s generally going to be a big win situation. So, again, you have to assemble a good team, if you don’t know how to do it yourself, then you’ll need to look to professionals that really have a seasoned track record.

The Role of Supply and Demand in Real Estate

Sam:
That brings us into the supply and demand discussion in terms of product types and how that works. So, Mike, could you start us out and talk about supply and demand and why that’s so critical to understand when you’re investing, particularly in real estate development—where the new supply of some kind is going to be available in the market from the project that you are investing in?

Mike:
Well, I think a lesson learned in real estate development is that there’s a lot of lead time. From the day you identify a possible site to do a development, until the day you put shovel in the ground, until the day it stabilizes, is a pretty long runway. So, the art of the deal is that the amount of supply and demand today could be quite different from two years from now, or three years from now, when you stabilize that property. And that’s where in-depth data, experience, and really looking at the big picture as to where you think you’re going to be two and three years down the road, where the supply and demand lies—then is really where it’s hard to predict. Because what’s true today certainly might not be the same by the time you’re ready to stabilize the asset.

Sam:
Got it. Dave, what are some of your thoughts when you think about supply and demand fundamentals when you’re considering making an investment in a project?

Dave:
Well, I think that the fundamental issue in economics is supply and demand, and that affects price. You want to produce a product at a low price and sell it at a high price, preferably. But you have to remember that that price is really determined by supply and demand. If you have a high demand for something but also a high supply, then you don’t necessarily have a high price. If you have a low demand and a low supply, same thing. What you’re looking for is an imbalance between supply and demand. There’s a high demand and a low supply, that’s your sweet spot. So, it’s like umbrellas, if on a sunny day the price of umbrellas is fairly low, but as soon as it starts pouring down rain, the price of umbrellas goes up if you’re the only guy that has umbrellas to sell. So then you’ve got to apply that to any other product, including real estate.

Again, a lot of it is projection, and this boils down to the experience and due diligence of those actually processing the project. If you see that there’s a lot of job growth in an area and there isn’t a lot of new construction, that’s a sign you might want to seriously consider that spot for your next project. Again, also regulators and the time to actually get this thing done: a lot of it is local regulation. Some places are a lot easier than others to get something done and to market in a reasonable time. So, a lot of it’s like experience. And time is money. The longer it takes to do something, the more expensive the end product is. So, it’s complicated, and again, you have to rely on your professionals.

Sam:
So, Mike, in your experience, when considering a real estate development investment, if you see a market where there’s a lot of other construction going on, a lot of new supply planning to come online—is that a market that you’d be excited about considering an investment in, or one where you’d be more cautious than normal because you’re concerned with too much inventory coming open, and then as a result, pricing coming down?

Mike:
It’s a great question. You look across the Sun Belt markets, where a lot of smart big money has rushed in over the last several years, to the Phoenixes, Austins, Nashvilles…. You see a lot of this money rushing into these markets, and it’s too much of a good thing. At some point I think supply does catch up to demand. And so you walk into some city and you see a lot of cranes—we used to always look at how many cranes there are in a town, and if there’s a lot of cranes, then it’s a boom town. But then where are you in the cycle? Has every Tom, Dick, and Harry run in and put up a crane and a high rise? So, are you looking at an oversupply coming in the near future?

It’s really challenging to predict two to three years out; what’s good now won’t necessarily be good then. So, my theory is you have to play the middle ground and not get overly exuberant at good times and not overly conservative at bad times, but you just stay in the middle of the road.

Sam:
Got it. And in terms of trying to mitigate risk, in your opinion, how does a project that’s selling single family homes one by one vary with a project that’s building a large single tower? In terms of the ability to adapt the project’s development plan to meet the supply/demand that’s currently facing the market?

Mike:
I think that if you can phase single families, it’s ideal. I remember early in my career seeing that done, and our father also did vacation/second home developments. You have the ability to phase your construction costs by building 20 homes or 100 homes at once. Whereas a high rise has to all be built at once, and I think you got a lot more capital at risk when building a high rise than you do on low-density single-family homes. Yes, you have to take down the land, maybe all at once, but you don’t have a lot of vertical costs, which is your biggest expense, usually. With the single families, I would consider it far less risk than building a high rise, for example.

Cap Rates and Interest Rates in Real Estate Projects

Sam:
Obviously, cap rates/interest rates are a key part of the real estate valuation equation. So, we’ll spend a few minutes chatting about that and how some recent trends are going to be impacting real estate values over the next few years. So Dave, walk us through, keeping in mind that many of our EB-5 investors are not real estate professionals, and maybe their only exposure to real estate has been renting an apartment. So, what is a cap rate, and how does that fit in with interest rates generally?

Dave:
Sure. Well, without getting too deeply into the technicalities, a capitalization rate or a cap rate is merely a shorthand way of calculating your return on your investment as a percent of your investment. So, if you were to invest $100 and you receive a return of 5% on that, and this is without accounting for any loans involved. But you bought something for $100 and it’s an annual calculation, each year—if you’ve got a return of 5%, that would be $5, and that would be a 5 cap. Now, you might not get an annual return; maybe you hold a thing for five years before you actually get your return. And so $5 per year for five years: if you got that paid at the end of five years rather than annually, that would be $25, but it would still be an average of a 5 cap rate.

So that’s the quick calculation of a cap rate. So, if you’re investing in a project, you’d like to know how much return you’re going to get because you compared this to other investments that you might make. You could put it in the stock market, you could put it in a bank savings account, you could invest in real estate, or you could go to Las Vegas and gamble it in the slot machines. So, where do you think you can get the best return based on the timeframe that you’re willing to leave the money there, and the amount that you ultimately will receive? It’s risky to go to Las Vegas and put it in the slot machine, but once in a while it could really be a great return. But maybe that’s too risky. In my view, one of the lowest risks compared to the amount of return is real estate.

It’s a medium-term investment; it’s very, very reliably profitable over time, and a lot of people in year in and year out make a lot of money doing that. And so, that’s your cap rate. Interest rates are just the cost of money if you borrow money. Now, some people and entities just do deals with all cash. If you already have the cash, maybe you don’t want to borrow any money. On the other hand, most people in entities don’t have enough cash or would prefer not to use all their cash, so they do borrow money. The cost of borrowing is just another cost that you have to calculate in constructing your project.

There’s the cost of labor, the cost of land, the cost of materials, like concrete and sheetrock, and there’s the cost of your debt: that’s the interest rate. Generally, the lower the rate, the better; this just means a lower cost, just as you would prefer to buy lumber and other materials cheaply. And so, those two things, then the cap rate and your other costs, including interest rates—you take your gross receipts, you subtract all those expenses, which are your cost to construct and your interest, and what’s left, free pass: that’s what you get to consider your profit.

Sam:
Mike, tell us a little bit about how the concept of value fits in across different real estate assets and then what the relationship is between cap rates and interest rates—how they interact.

Mike:
Well, what we know is that investors demand a higher return if it’s a higher risk asset. I think the lowest risk assets would be triple net leases to Fortune 500 companies, maybe on a long-term lease. Then, after that, you’d go to a good-quality apartment buildings as being considered a very low risk type of asset. On the lower risk assets, you’re going to get a lower interest rate and lower cost of money. You’re also, though, however, going to have to pay a lower cap rate, which is a lower unleveraged return on the investment, because those with capital will have to take a lower yield if there is a lower perception of risk. So, the lowest risk would be… I think single family homes is considered the lowest risk, then you go to multifamily apartments. Of course, the triple net leases to the Fortune 500 companies, and then you go into office retail and hospitality.

Sam:
How do changes in interest rate impact cap rates generally, like when interest rates go up? What does that have in terms of impact on cap rates, broadly speaking?

Mike:
Well, it certainly is a direct relation, which is that as interest rates go up, the cost of capital goes up. So, you have to have the asset you’re buying priced lower to reduce the amount of capital you have to invest to get a yield that’s attractive to people to invest the capital. So yeah, they’re directly proportional. As interest rates rise, valuations will fall.

Sam:
Now that we’re in an environment where interest rates have risen substantially over the last 12 months or so, correspondingly property values have also generally declined.

Now, many EB-5 real estate development projects are in some stage of development as EB-5 funds are coming in; some are mid stage, later stage, earlier stage. But generally all real estate EB-5 projects are in some stage of the development of the project to be able to take in EB-5 capital. One of the areas that we’ve identified as higher risk for investors are projects that started several years ago and are now coming to market and about to be completed in the next 12 to 18 months. So Dave, could you walk us through how a project that got underwritten a few years ago—now with COVID, higher interest rates, higher construction costs—what are some of the real potential risks to be aware of for an investor who’s coming into an investment like that in 2023, close to when that project may be finishing?

Dave:
Well, no one has a crystal ball, and it’s extremely difficult to predict the future. And if you could, of course you could be right all the time and there would be virtually no risk, but that doesn’t exist. So, we have to live with the reality of the world. And development is, again, an uncertain process. There’s really two categories. There’s the things that you have some control over and there’s some things that you have no control over. Examples of things of no control: if COVID comes along and no one can predict that. And that alone has caused significant financial damage, let alone health damage. Financial damage to many projects, real estate and other. Everything in business has virtually turned upside down during COVID. So, everyone’s going to have to face those uncertainties. The things you can control are the things you have to focus on: first of all, just be more well-informed, do better due diligence, and understand your market better than the next guy.

The way that you win the race is by outrunning the guys next to you. So, as the old joke goes, how fast do you have to run to outrun? How fast do you have to run to outrun the bear that’s chasing you? And the answer is, well, you have to outrun the guy next to you because if you outrun him, the barrel will catch him first and you’ll get away. So you’re really not competing against external forces as much as guys that are doing similar things to what you’re doing, and you’ve got to beat those guys. And it is a competition. The market is very efficient and there’s plenty of smart guys. So you need to try and be the smartest guy predicting things. What are your labor costs? Maybe you can tie in a longer-term contract on material costs. What’s the regulatory environment?

How pro-development is the place that you are; this city or state, whoever the regulators are that regulate what you’re doing? Do you have some influence with those regulators? Have you done a deal before in that market? Understand the place, because each place is different. Do you understand that place? If not, you need professionals to advise you. The cost of money, again, that’s the debt or the interest rates. Interest rates are hard to predict. Sure, the smartest guys in the world can predict and they’re often wrong, but you do the best you can.

And you keep your cost down and your speed up and you try to get to the finish line at the right time. And if not, you need to have reserves because you never get it quite right. And so don’t be a hog, just be a pig. Meaning: don’t over-leverage, don’t overestimate your profits. Take a modest and a more humble view and know that well, maybe things could take longer and cost more, and I’ll have some reserves just in case I’m wrong. Those are the guys that actually win the race, usually.

High-Risk Pre-Pandemic Real Estate Projects

Sam:
Mike, can you walk us through this chart and talk about how this type of a project might not be an ideal one for investors considering a real estate investment—because of COVID and some other factors that may have more negative impacts on certain types of projects versus others?

Mike:
Well, these numbers look very familiar, because I looked at projects that were put into the system in 2019, and these assumptions would’ve been reasonable assumptions where you had your estimated cost of $60 million: your revenue and your expenses, cash flow, all based on 2019 assumptions. Then you go fast forward four years. And yes, the reality is that those development costs have gone up by a marginal amount, one on six, whatever that is—15% or whatever that number is. Seems realistic. Your revenue definitely has been muted. Top-line revenue has been muted by COVID, by a contraction in economic activity. So, it’s very realistic to have seen a 10% drop in top-line revenue. You would’ve been lucky if you’re operating expenses had stayed flat. But let’s say if they did, even though your revenue went down, maybe your operating expense stayed flat, but they probably didn’t.

So, your free cash flow before that service has gone down by 20%, while your interest rate expense has gone up by 40%: very realistic. I mean, in early 2022, you could borrow at 3%, and that loan today is maybe 6%. So in many instances, debt services doubled in four years with net income of course being suppressed by these relative amounts. But yeah, you could see, as you say here, going from a $70 million valuation to a $25 million valuation due to these lower top-line revenues, higher interest expenses, and an overall capitalization rate being higher now due to the higher cost of money. It’s very realistic what you have here.

Sam:
So, if you’re a potential real estate EB-5 investor, and you’ve got the option of going into a project like this where it’s likely a large single structure project: a hotel or apartment building that was started in 2019 and is now about to finish—compared to a large single family home project where there’s a lot more flexibility to build and sell homes and adjust cost expenditures, increase prices, etc.…. How would you evaluate that kind of project type versus the other? And why would you go with one or the other?

Mike:
Well, as I said, with single families, you don’t have to build it all at once. Generally, you could phase it. You may take down the land or have an option on an extra land, but traditionally you’ve got a phase one, you sell out a few hundred homes, and then you have to put in the infrastructure sewers and roads and all of phase two. But you’ve recouped a lot of your investment maybe through the sale of phase one. You’ve also tested the market and penetrated the market with 25% of your project in the end of phase one. All of your capital is not deployed early in the process, so that reduces your risk.

Sam:
So, all things equal, if the goal is to reduce investment risk and reduce the risk of loss of capital, you’d definitely prefer to be in a more flexible, ongoing single family project versus a larger sole-structure project.

Mike:
The only variable is the takeout financing to each individual home buyer. If interest rates are elevated, clearly that 30-year mortgage that that homeowner’s buying with is going to be higher, which could depress the sales price of those homes. But the saving grace is you haven’t built all the homes at once. You haven’t had to deploy all your capital at once, so you might delay delivery of the second phase a little bit till interest rates cool off.

Sam:
This is a basic chart showing that monumental rise in interest rates over the last year, year and a half, to date. Now, let’s chat about capital stack basics for projects. So Dave, in your experience focusing more for these questions on real estate development, since that’s what’s most applicable for most EB-5 investors: how’s a typical real estate development deal financed, and how do you think about different types of capital that are coming in?

Dave:
A development is the most complicated form of a real estate project, and it requires more complicated financing structure. And lenders are not stupid. They’re very risk-averse. They know that the loaning money is easy and that getting it back is the hard part. So, they’re very careful to have other people have money at risk that’s more at risk than their money. Typically, you would have equity. Equity is non-borrowed money that is raised from either the developer himself or other investors, and that money is put in first and guaranteed to be put in the project. And then you might have even tiered levels of equity where the primary or preferred equity gets the first profits out of a project. And then if there’s more profits, then the next level of equity gets theirs and then the next level gets theirs. But above that, and senior to all that, is the debt.

Lenders want a certain return on their money. So instead of, “Well, I’ll take 10% of the return as an equity person would,” the lender’s saying, “No, I’ll loan you this amount of money, and I want a 5% return period whether your deal does well or not.” And so, that’s a hard number that you’re going to need to pay, or you could lose the property and have a foreclosure. How do lenders decide how much to loan you? Of course, you want to borrow as much as you can at the lowest rate you can. Well, lenders want to get the highest rate they can and loan you the less they can subject to risk. So again, they’re going to look at the product type; they’re going to look at a lot. They’re going to look at the sponsor. How well does the person that’s doing this project know his stuff?

Has he done a lot of projects before? Has he borrowed money and paid it back as agreed? Have we personally dealt with him before? Lot of lenders really like to do repeat business with guys that have done and performed as agreed. So, good debt (meaning a good quantity of debt at a low price), is something that you really have to build a track record on to get. Then, beyond that, a development project will typically loan you some money, they’ll see how it’s going, and then they’ll release further funds if things go as planned: on time, on budget. They’ll inspect the project as it’s going along.

And then when it’s done, that first level of debt is probably more expensive because that’s the high-risk portion of the project. When it’s finally built and fully rented, then some other lenders that specialize in what you call takeout financing will come along and do a takeout loan and pay off all this senior original construction debt. And they’ll charge you a much lower rate of interest and probably give you equal or a larger loan amount.

Sam:
Mike, walk us through the distressed or failure situation where a project gets completed, it doesn’t rent as well as was projected years earlier, and now interest rates have gone up. Now, the debt cost on a quarterly or monthly basis; there’s not enough rental income to cover the debt. Mechanically, what happens in that situation? And how are each of these different capital stack positions going to be impacted?

Mike:
Well, again, they’ll be impacted depending on how bad it gets. But the senior loan… We’ve been around long enough to have seen where it gets so bad that even the senior loan becomes non-performing. But in lesser distress situations, the equity, the common equity is the first to be wiped out if there’s a depression in valuations due to revenue reduction or increase in risk interest rates. But the common equity is the most risky, and it will be wiped out through a lower valuation. Then, the preferred equity is next. I mean, the senior debt is the most secure and it will be first to be paid, and then the debt above that becomes less likely to get paid back as the valuations go down.

Sam:
Dave, you practiced law for many years. What happens mechanically when there’s just not enough rental revenue to pay the senior loan? What does the senior lender do, and what does that legal process look like? And how are the other capital providers (in this case, mezzanine preferred) potentially getting some money back, if any? What does that legal process look like, and how does that happen?

Dave:
Well, this is when the lawyers get deeply involved. Of course, for each of these investors and lenders, there are thick documents; in some cases, dozens if not hundreds of pages of loan agreements and promissory notes and explanations of what happens if there is a default. And the default can be defined as many things. But the primary one is you don’t perform as agreed and you’re not making your payments on your loan, let’s say. Okay. So the lender goes, “Hey, you missed your payment. Pay up, or we’re going to take a legal action.” This is a secured loan, meaning that the loan is secured in first position against the real estate asset. So, it’s clear in those documents that they can take that asset away from you, and they can turn around and sell it for whatever they can get. That’s how they get their return on investment.

Normally, they’ve calculated this so that there’s value well in excess of what they’re owed. If there isn’t, then they’re out of luck too, and they lose money. The procedures on how the actual foreclosure is conducted vary from state to state, but there’s a clearly defined process that takes months and sometimes even years: a liquidation of the asset. And then the liquidity, meaning the cash, is paid off on a priority basis. The senior lender gets paid first, and if there’s any left, the mezzanine guys get it. And if there’s still some left the preferred get it, and if there’s still some left, the common equity guys get it, but typically there’s not going to be enough to pay everybody. And then last guy on the totem pole may be left partially or completely empty handed. That’s it in a nutshell.

And big projects, big institutional projects: these are non-recourse. And typically everybody is a big boy and understands the process, and the owner won’t even fight it. They’ll just hand the keys over to the lender and go, “Guys, sorry, it didn’t work out.”

Underwriting a Project’s Risk Level

Sam:
Given that kind of increased risk level for investors at the common and at the preferred equity levels, that’s where it’s critical to really understand how the project’s financed and the likelihood of its success in a failure situation. Those are the kind of tranches of capital that are going to be impacted first in a foreclosure scenario. Let’s shift over and talk about developer reputation and track record.

Mike, you’ve been in the lending market, you were a mortgage banker for many years. I’m sure you’ve dealt with many borrowers, some developers, some existing property owners. What are some of the key things if you’re a lender or an investor considering a deal? What are some of the things you’re looking for, and why are those things really important for an investor or a lender?

Mike:
That’s a great question because I worked at a very blue-blood, white-shoe commercial bank, Crocker Bank. They were one of the big boys, the fourth largest in California. They made big construction loans on big institutional deals. And having had conversations with the chairman of the board, I said, “What are you really looking at? I mean, just the real estate, right? I mean, it’s a nice building you guys will make a loan on.” He goes, “You know what, it’s people first.” Absolutely underlined it and said, “Look, you’re in a commercial bank here. We’re not some hard money lender, but we’re loaning to people, good people.” And honestly, the real estate was very much a second consideration in underwriting the integrity of a loan request. People first: that’s what I could tell you. If you got a guy that’s got a track record of always paying back his banks and having executed effectively his business plans, historically, that is by far the most important aspect of a consideration of a credit request. And the real estate is a second consideration.

Sam:
And how does that play out in a particular project? If you’re going out to get financing for a project and you don’t have a long track record, how is that going to impact your financing cost and the number of lenders willing to loan you—the overall likely success of your project and getting the money it needs to be built?

Mike:
The cost of the money is going to go up pretty quick, if you don’t have strong sponsorship.

You can always get money at a price. We know hard money lenders, loan sharks: there’s always money available. It’s just how much you got to pay for it. And so, as you weaken the sponsorship and the strong guarantor of the request, the cost of the money will go up dramatically, which puts additional stress on the project to be successful because the margin of error will narrow as the cost of capital goes up if you have a weak sponsor.

Sam:
In your experience underwriting a lot of these larger construction loans, talk to us about how most loans are typically done on a particular asset. Funds are being loaned and the security of that loan is the asset where the money is being used. How common was it to see money being loaned to one asset, one address, but then having the security of that loan be secured by a guarantee from a much larger, separate entity that’s also controlled by the project owner? How common is that?

Mike:
Well, it’s a perfect world from a credit underwriter’s position if he’s got a very deep pocket sponsor. There’s two sources of repayment when the bank looks at a deal. There’s the principal and the real estate, two sources of repayment. Every credit at a commercial bank is underwritten and requires two sources of repayment, one from the sponsor and one from the real estate. And the sponsor really is the key to getting it through the institutional investors. If you don’t have the sponsor and that guarantee, then it goes down to the B- and – quality lenders and the price goes up quite a bit.

Sam:
From a credit perspective, walk us through mechanically why, if I’m a bank, I want to make a loan that’s not only going to the project but it’s also separately guaranteed by a larger, well-capitalized entity. Why am I willing to give lower interest rate, better terms? Why am I willing to give that person a better loan versus the guy who’s not giving me the parent guarantee and it’s not separately secured?

Mike:
Well, the reputable developers with the long track records usually have a diversified portfolio. And so. by having them on the hook, it actually reduces the risk to the bank substantially. If they’re just looking at their subject property real estate and that specific project were to fail, they’re stuck holding the bag, because there’s no secondary form of repayment from a strong sponsor. So by diversifying their exposure through the substantial experience and portfolio of the guarantor, the risk is substantially reduced.

Sam:
We talked a little bit earlier about some of the impacts that have occurred over the last three or four years on the real estate market. Dave, do you want to walk us through some of these major changes that have happened in markets around the US and how they’ve impacted projects that have been under development, let’s say, for the last four or five years and are now coming to the market this year and next year?

Dave:
Yes. Well, this somewhat gets back to my point earlier, which is there are some things that really are beyond your control, and then there’s some that are at least partially under your control. COVID, for example, was something that no one foresaw and really couldn’t be controlled, and if you could get lucky and in some markets, COVID didn’t affect you as much as in other markets. And no one really could predict that. So, you just don’t really worry about those things. Some people call them black swan events, some things that are just so beyond any kind of reasonable forecasting that you just would never know, and so we won’t worry about it. What are the things that you can control? Those are basically location and cost.

Now, where do you think the path of progress is? You want to get there just before the progress gets there because once it gets there, it’s like reading about something on the front page of the Wall Street Journal. If you didn’t know about it before you saw it there, then you didn’t know about it soon enough, because then once everyone knows about it, the competitive advantage of doing something ahead of the crowd is lost. So what are these things in looking at your chart here? Yeah. The high cost of living, rising interest rates, outflow migration. Nobody in 2019 expected any of that. We were booming. And then suddenly some black swan events like COVID happened. There’s also political things like the national government policies on balancing the budget and how much they spend on various parts of the government that can increase cash. And if you increase the economy by pouring a bunch of cash in there, then it causes inflation. It’s the money supply. Milton Friedman and any other economist will tell you that if there’s more money and less productivity, inflation happens. So =, we’ve had inflation.

Political situations in various cities and other factors have caused an increase in crime. Well, of course you don’t like crime, but could you have predicted where the crime is going to go up? Maybe not. If you can, then you want to go to those lower crime areas. Again, these are all risk factors and you have to… It doesn’t mean that you don’t do a deal in a specific area, but you have to do a risk-reward analysis. How much risk compared to how much reward? If the reward is extremely high, maybe you’ll take more risk. How much money do you need to return to your investors or to you in order to provide the incentive for someone to place the capital in this deal? And again, time is money. You’ve got to get these things done with a reasonable period of time or a very, very deep pocket. Deep pockets can sit around 10 or 20 years if they have to for that liquidity event.

The whole thing is to make sure that you have a liquidity event when you need it. If you’re building and planning to sell something in two years and you have loans coming due in two years, you better be sure you can do it in two years. Otherwise, do a project that you can do in one year hopefully, and then have a safety zone of another year. Otherwise, it’s too bad. And yeah, the bank takes the property and you lose. So, as your project shows there, that car is crashing into a wall in ’23, ’24—could you have avoided that with enough precaution and keeping some dry powder? The good guys, the smart guys, probably will avoid that crash. Others are going to have the crash and the rest of them, it’s like the Three Little Pigs. The pig with the brick house, he’s going to go out and take advantage of the situation of the other two that built the straw and the stick house.

Sam:
So Mike, taking a look at this chart, there are many projects that started in 2018, 2019 that drove through this tunnel and were impacted by all or most of these red bubbles that we’ve got on here. If you’re an EB-5 investor considering a project and maybe you’re not right at that point of the car crashing, but you’re just on the other side of the tunnel, how are you thinking about what project you should pick? You should probably be looking at these six or seven factors and saying, “Okay. What kind of impact did those six factors have on this project?” Because that impact has already happened over the last four years. You’re getting into the car now right after it’s gone through the tunnel. So, everything that happened before you get in has already happened. So, if you’re in that situation now, how are you looking at one project versus another?

Mike:
Well, I think you have the luxury of hindsight, as you point out. You have all these major events that occurred over the last four years. And so you have that information in your rearview mirror so you can now make a very educated decision based on all that somewhat being in the system. You know there’s a high cost of living. You know there’s a high interest rate environment. You know there’s been outflow migration. You know crime’s high and you know COVID’s over. Rising unemployment, we’re actually still at full employment. Whether that’s going to go to a higher unemployment… it doesn’t seem to be apparent that there’s going to be large layoffs. I don’t think there’s going to be large layoffs. But all these things really are already in the system. So, if I’m an investor today, I can say, “Yeah. I know about all that.”

Now we kind of have a clean slate I think, going forward as to setting new parameters. What are the reds today? Well, that’s what they are. It’s not ones that were projected before COVID or whatever. They are what they are. And so I think you have a pretty clear playing field going forward to understand that we are in a high interest rate environment. You have to take that into consideration as to your debt stack on a new project now. And so you have a pretty good amount of information as far as evaluating a project. And we don’t see any black swan events here, I don’t think, in the near term and you just have the parameters that are in place now.

Sam:
High level, what you’re really looking for are projects that… Essentially almost every development project is going to have been impacted by some of these six red balls. But what you really should be looking for are what are the projects that have been less affected than others, because everyone got affected, but now you’re getting on the boat after it’s gone through the storm. And so you really want to find the one that was least negatively affected, ideally, and has the best prospects for avoiding that brick wall. And you want to stay away from the projects where a lot of these six balls have been more dramatic, more inflated. And tell us a little bit how some of these things are going to vary across geographic areas.

Mike:
Well, I think first of all, for-sale housing appears to still be doing well. There’s low inventory. I’m talking on a national level. There’s low inventory of for-sale housing. People don’t want to give up their low interest rate that they have on their existing house. So there’s low inventory. So I think the demand going forward for single families and condos appears to be pretty darn strong. They’ve learned the habits during COVID that they want the privacy of a home, so that’s a big plus for single family. So, the single family market going forward as we speak looks to be very attractive. What’s not attractive? Central business district, high-rise office buildings look to be a very tough sell. Regional malls, tough sell. I think the residential niche of the market’s still the best. I think the apartments in good growth markets that are overbuilt are certainly a preferred product type. And that’s how I see it.

The Developer’s Access to Capital

Sam:
Let’s chat for a couple of minutes about developer’s access to capital. So Mike, if you’re a lender or an investor, how are you looking to see if a developer is going to be able to get a project done and has the money on hand—or is going to be able to get the money to finance something?

Mike:
Well, you’ve got to look at his track record. I mean, if he’s one of the successful guys that’s made it through the last four years of COVID and has a track record of executing business plans, good times and bad, then you’re going to think the guy’s going to be able to do it again. I mean, history tends to repeat itself. So has he had a track record? If he’s a newbie right now trying to source project financing, I’d be very skeptical, I would, because just getting the A-piece, the bank loan, is going to be really tough. And then of course getting the equity as you go up the debt stack gets even harder. So it just depends a lot on his track record.

Sam:
And how important is it for that track record to include periods in the past where there were corrections, the financial crisis? How important is it to have had a lot of projects going on during one of those times and been able to perform on everything and make it through the tunnel?

Mike:
I think it’s the most important thing. If a guy’s been around long enough to have been through the last tough cycle, say, in 2008, 2009 when the bank took back a huge amount of REO foreclosure product… If the guy made it through that cycle, then I think he could make it through this cycle. I think that cycle was tougher than this cycle is. It had a lot more foreclosures than this cycle will have because there’s lower leverage here on most of the properties.

Growing U.S. Real Estate Markets

Sam:
Now, we’ll chat just for a minute about growing markets. Dave, how does supply, demand, and outflow migration factor into different markets? And what are things that investors can look for in terms of markets in the US where there’s more economic activity and people are moving to? And assume a lot of EB-5 investors in general are not in the US. Many of them have never visited the United States. They’re coming from overseas, from Asia, from Europe, and so they’re not really that familiar with preferences and recent trends for what’s happening domestically.

Dave:
Sure. Well, again, I just come back to supply and demand. That’s the fundamental thing that you always need to think about. Outflow migration, that means declining demand. Inflow migration would be increasing demand. But you can’t look at just demand. You have to look at supply. Increasing supply and increasing demand at the same time doesn’t really cause prices to go up. They’re equal. It’s the imbalance between those two that causes up or down pricing. So as a developer, you’re looking for uprising. Where is the market most likely to go up? And what’s the timing?

Again, if everyone rushes in and it’s a low-regulated environment—there are certain states and cities where they’re very pro-development and just about anybody that shows up that can fog a mirror can put a shovel in the ground and start building something; whereas in supply-constrained and heavily regulated markets, the bigger urban markets—the New Yorks, the San Franciscos, the LAs, and then certain states in general—those are very constrained by supply, meaning there’s less available land and also the regulators are a lot tougher. So, those are very tough places to add supply. If you have a tough place to add supply and a high demand, meaning inflow, that’s your ideal formula.

Now, sure, if there were a lot of those around, everyone would be just going there automatically. There aren’t a lot of those around. And so where do you go? You can look at these things. And again, movements of population are just one half of the formula. Then you have to compare it to how much supply. So in five years, a lot of these places that everyone’s going to be moved to are probably going to be overbuilt. And then the guy we’ve got was the last guy in—probably not going to have a successful project. The guys that were there early, they’re going to have the successful projects because they’re going to have already gotten through the regulators, acquired their land, their financing, built the project and sold it and had their liquidity event before all the Johnny-come-latelys that are now building and finally getting their product up and going finally get it up and going—in which case, those guys may be sitting there trying to rent their stuff at pro-forma prices that they’re not obtaining in the market. Therefore, they’ve got a problem.

I don’t know if you’re asking me what specific markets, like what states and cities I would recommend, but I’m reluctant to say that because it depends very, very much on the experience of the developer. A guy who really knows his market, he can make money in any market. He’s got a lot of experience. The guy that’s really been fantastically successful in one place might go, “Oh, well, now I want to go to X, Y, Z across the country and a city I’ve never done anything in,” and he might be surprised at his lack of success.

Sam:
Mike, you’ve been on the banking side, on the lending side in the past. If you were in a bank today and they gave you $50 million and they said, “Mike, we need to go out, deploy this money. It has to be new real estate development loans,” what are some characteristics of things you’re looking at in terms of geography and the general profile of a deal? Where would you want to be focused on lending that money out in new development deals now?

Mike:
Well, one thing they always said, especially in multifamily, is that jobs equals rent growth. Jobs tend to drive demand more than any other thing. We learned that in apartment buildings. It’s wherever they create a job, new factories being built—that directly relates to upward pressure on rents, because the first thing a person does, when we come out of college, get the job, “Oh, boy. I get to go rent an apartment.” So that’s really directly related to job growth. So I would go to the job growth markets wherever those are, Northern Virginia, I don’t know where else, Florida and Texas and the places that are creating jobs. It looks like Nevada’s had a tremendous amount of inflow due to California’s outflow. And so I think Nevada’s really benefited from a more conservative political environment and lower taxes, as Florida has. So, the places that have low taxes, job growth and migration, that’s where I’d be looking.

Sam:
Dave, playing on that same supply, demand impact, where you’ve got a lot of outflow migration from parts of California, how does that translate into pricing?

Dave:
Well, again, I know that it’s easier to answer that well, job growth equals everyone’s making money and therefore it’s a good place to invest. And I would stress, again, the balance between supply and demand. And this is regarding housing specifically, which is one narrow product type within real estate. And you can see where the blue spots are, the ones that have, I guess, the best price. “Select markets are experiencing housing price corrections.”

As far as building houses, again, it takes time to get your approvals and all and by the time you get around to it, it may be too late and everyone else has done it. But the quick answer is that the southern states, the states with less regulation, states with better climates, lower tax and more pro-business environments and especially now with people able to work remotely more than they have in the past: those are the target areas I would suggest. And that probably overcomes the likelihood that it’s easier to add supply in those areas. And so it’s probably a good idea to try those if you feel you have the expertise nationally. Again, going to a new market that you’re not familiar with can be a costly education.

Sam:
And when we look at year-over-year housing growth, that kind of same thing really shows up in the data here where we see the South Atlantic division. Florida, Georgia, and South Carolina, have the highest year-over-year housing growth compared at the bottom there, the Pacific division. So, a lot more demand and currently insufficient supply to meet that demand is pushing housing prices up in those areas.

Dave:
Yeah. And again, if you’re in for-sale housing, which is a specific narrow real estate product type, that’s cash and carry, build a house, sell it, get a liquidity event, go to the next house or go to the next 10 houses, the next 100 houses, you can phase it.

You can have regular liquidity events, and maybe the short-term return is modestly less than building some giant building that requires a huge amount of capital upfront, and then one giant liquidity event at the end. That’s certainly going to be viewed as overall on average lower risk, and housing has always been a great way to make money in this country.

There’s no end of the demand for it. These southern, South Atlantic, and other mostly southern states are prime locations for that.

Guidelines for a Safe Real Estate Investment

Sam:
To wrap up, we’ll talk a little bit about potential target areas and key questions that you would want to be considering if you’re an EB-5 investor, or if you’re a lender and you’re looking in the market. We talked about this a little bit over the last few slides, but Mike, summarize for investors: What are some of those regions that you’d be focusing on, and then key questions that you want to be asking before you make a decision?

Mike:
Well, I think it’s easy to say, “Well, these certain states are booming.” Specifically, Florida and Texas seem to be the poster child’s big net in migration. The concern is, is there oversupply? It’s hard to time real estate. You really got to look at each individual piece of real estate. Real estate is defined as being unique by definition, each piece.

If you have a good piece of real estate and a good demographic type of environment, and it’s priced right, and you bought the land at the right price, it could be almost anywhere. America’s a great place. It’s not like LA is a terrible place because they’ve had some out migration. It’s still a great place. Florida’s benefiting from a lot of migration, as is Nevada.

I think every deal is specific, but in general, you want to be careful about oversupply. Texas and Phoenix had that situation, where everybody came in and started building. I think Nashville’s getting a little bit oversupplied. I think every deal has to look specifically at the specifics of the deal itself. I think the sponsor is honestly the overriding mitigating factor.

I think markets come and go; great sponsors don’t come and go. I think that’s really significant. That’s why the big banks look to the sponsors almost more than they look at the real estate.

Sam:
Dave, what are some of your thoughts on this?

Dave:
Yes, I completely agree with those points Mike made about sponsorship. That’s the number one issue. A guy that has that track record isn’t about to ruin a career with one bad deal, and that can happen. If you have a bad deal, boy, it’ll be hard to come back with your hat in hand to your lenders and your investors in the future if they’ve had a bad experience.

The other thing I think is a big issue: as soon as everyone’s talking about it, like, “Oh, these are all the markets where everyone’s moving,” this is all old news. In other words, everybody knows about that. What are you going to do different than everybody else? That’s how you actually make money. If you’re just another one of the herd, following around what you read in the Wall Street Journal, or what you see in some broadly generalized statement, I think it’s a little risky.

I do think that those markets, they have some legs, but that’s what happened yesterday. What’s going to happen tomorrow? Well, I think that with regard, I would really rely on expertise, as Mike has said, and your developer, more than just, “Oh, yeah, Nashville’s hot, let’s go there,” kind of thinking. It’s also product type.

If you want to get into investment where you’re going to build, hold, and hold for income, as opposed to what we call cash-and-carry type real estate: which is, you build a house, and you sell it, and you have a liquidity event, you pay your taxes, and you go to the next deal. It’s really an entirely different business. How soon do you need a liquidity event is part of the factor, and what type of product and location?

The Importance of the Developer’s Track Record

Sam:
Let’s walk through these six or seven key items and get both of your comments. A sponsor’s an experienced developer with a long track record. For someone who’s developing real estate on a regular basis, Mike, what does that look like?

Mike:
You mean as far as how long?

Sam:
How long, how much total development, dollar projects…

Mike:
Relative to the size of the deal, but 10 years of doing it I think is kind of a minimum. Let’s say a guy’s been doing it for 10 years. Okay, yeah, that’s a good developer. A guy that’s been under five years, that’s a newbie. These are just broad statements, but how many deals have you done like this before?

“Well, no, I’ve never done one like this before, but I’ve done some that are similar.” It’s an art, it’s not a science. It’s not an exact thing. The more a guy’s done deals just like this one, the better off you’re going to feel.

Sam:
The more of those types of deals that have gone well, completed, and now this is a carbon copy.

Mike:
Certainly makes it easier to underwrite the risk, yes.

Sam:
Dave, talk to us a bit about cost of capital. Obviously, that’s going to be intertwined with performance, and the track record of prior deals as well.

Dave:
Okay. I wanted to say one thing about what Mike just said: the length of the time of the experience of the developer is very important, but also, has he gone through hard times and still been successful? In other words, everyone looks like a genius steering a market that’s on fire and going up. You buy, you flip, you don’t do anything, and you sell it for a profit. The guy looks like a genius. How do the guys do when there’s a downturn?

That’s the real test of the experience and quality of the person. You’d want to see, for a developer or anybody else you’re investing money with, have they experienced and handled the good and the bad times successfully? As far as the number of years, I suppose it depends a bit on the length of the market cycles, but, 10 years or more, certainly. Again, remember that it’s risk-reward adjusted.

In other words, everyone can go out and buy, let’s say, US government securities. They’re the lowest risk thing on the planet. There is no risk. It also pays the lowest return. It’s really a matter of trying to get a higher return without taking on too much more risk. Do you consider a developer that has a pretty good track record in exchange for a potentially higher return, or do you go with a guy that’s solid gold, but he’s not going to give you a very good return, but you know he’d probably get it?

Again, risk-adjusted return is really the whole art of the deal, if you will. As far as reputation, of course, that’s a component of experience. It should be good. Again, how good? Well, it depends on what he’ll pay in return. A guy that’s got an A+ reputation that’ll give you a 5% return, versus a guy with a B+ reputation that’ll give you a 6% return. Well, then, that’s where the thinking comes in.

Supply and demand, I keep coming back to it. It relates to all of these things. EB-5, that’s a technical issue, which, Sam, you can address. Location, again, historically, things go up, and things go down, things go up, and things go down. That is the nature of an economy. It’s like gravity, it’s always going to be here. It’s a fundamental law, which is things don’t go up all the time, and they don’t go down all the time.

Sometimes the best time to do something is right after a bad event. As Baron Rothschild once said, “The best time to buy is when the blood is running in the streets.” I imagine the price of real estate in Ukraine right now is pretty low, but that’s a risky area. That’s more risk than I’m prepared to take on. Again, it’s risk adjusted.

Sam:
You mentioned reputation. For investors who aren’t very familiar with real estate developers, Mike, what does a good reputation look like, and what does a bad one look like? How do investors quickly figure out, does this developer have a good reputation or a bad one?

Mike:
Well, first of all, you look at the amount of money, let’s say he’s borrowed over the last 10 years, and how much of it he’s paid back. If he’s borrowed a billion dollars and paid every penny of it back on time, sign me up. If he’s given two or three deals back to the bank, probably a big red flag. It’s like a credit report. What is his credit report? Has he paid back his banks on time and in full?

Well, no. He had one deal where he had to extend a year or two, but eventually, he paid it back. In the meantime, he’s also executed eight other good deals. That’s probably okay. If he’s handed the keys back to some banks over the last five or six years, I’d be hesitant to do business with him.

EB5AN’s Twin Lakes Georgia Project

Sam:
We’ll shift gears now and chat a little bit about one of our current EB-5 projects. One of the projects that we’re currently working on is our Twin Lakes rural EB-5 loan project by Kolter. Twin Lakes Georgia is a single family home community with amenities. It’s located just outside of Atlanta, Georgia. It’s a rural TEA project that qualifies for the reduced $800,000 investment threshold. Because it’s a rural project, it also qualifies for priority processing, so getting the Green Card faster, and a larger 20% visa set aside, which we’ll chat a little bit more about.

This project is being developed by the Kolter Group. Kolter is one of the largest developers in the Southeast. They’ve worked on over 20,000 single family homes. This particular project’s been under construction for several years. It’s 1,300 single family homes total. More than 500 homes have already been sold, and almost 400 homes have already been constructed and handed over to buyers. All the primary amenities: the clubhouse, pickleball courts, and the tennis courts are already completed and open.

The project has an in-place senior loan with Third Coast Bank. Previously, it had a senior loan with Wells Fargo Bank, one of the largest, most conservative real estate lenders in the space. Since the project’s been under construction for a number of years, it’s already created more than 1,800 EB-5 eligible jobs, which means that we already have more than the 10 required jobs needed for every EB-5 investor who joins the project now to receive their permanent Green Card. When completed, the project is expected to create almost 7,000 EB-5 eligible jobs in total.

This is an overview of a number of prior Kolter-EB5AN projects. As you can see here, the Twin Lakes Georgia loan project is one of 15 Kolter-EB5AN projects. Over the last 10 years, we’ve done many projects with Kolter, and all of our prior projects have all the required EB-5 jobs already created. 100% of all EB-5 investment funds have either been repaid to investors or remain invested and in good standing and compliant in all of these projects. Twin Lakes Georgia is one of 13 Cresswind-branded retirement home communities.

Cresswind’s a national award-winning lifestyle active adult community brand that’s owned by Kolter. As you can see, Cresswind Georgia Twin Lakes there in the green in the center: it’s one of 13 essentially identical retirement home communities. Many of these have already been completed, sold out, successful. Most importantly here, it’s a proven business model that’s worked and is currently working across several different geographic areas, primarily in the Southeast United States.

One thing we’ve touched about earlier is that the project does qualify as a rural project, which means that it has several unique advantages compared with some other EB-5 projects today. It qualifies for the larger visa set aside of 20%, which is most important for EB-5 investors born in China or India, where there’s very likely going to be another backlog of investors in the future. Rural project investors will likely face no backlog, or will have the lowest potential additional waiting period to receive the Green Card because of this set aside.

The I-526E processing speed is also prioritized for rural investors, meaning that their approval to receive the green card will be done on a priority basis. Investors, like all the other categories, can do the concurrent filing. If you are in the US already on an H-1B, F1, or another non-immigrant visa, you can adjust status and get a work permit in just a few months.

A little bit about Kolter. Kolter is a large real estate development firm in the Southeast. They have five primary divisions. As of today, they have more than 70 active projects, more than 500 employees across five primary business units. Kolter Homes is their oldest and largest of the five divisions. Some other quick highlights: most importantly, they’ve borrowed billions of dollars over the last 25 years, and they’ve never not repaid a single loan or failed to complete a project over that 25 year period.

They’ve also been recipients of a number of developer awards and single family home design awards over the years. They have a very experienced management team, over $24 billion of expected and in-process real estate development over that time period. A lot of their team has worked together for many years. On the banking side, they’ve borrowed funds from some of the largest publicly traded banks in the US. As of year-end ’22, five of the top 10 largest banks had over a billion and a half of loan commitments to Kolter projects across their portfolio.

Mike, how does that borrower track record compare to some of the deals you’ve looked at over the years?

Mike:
I think it’s a very, very impressive track record. I think the fact that they’ve borrowed from what you call money center banks, I’ve dealt with these banks. PNC, they’re one of the biggest construction lenders, very conservative. I ran some deals by them. They’re very particular. Of course, we know Wells Fargo’s about as particular as it gets. These are big-boy banks that only loan to top tier developers, so very impressive.

Sam:
This is a quick map showing their footprint across the Southeast. Kolter’s primarily Southeast-focused. You can see the majority of their projects are in the Florida, Georgia, North/South Carolina markets, and with over 180 projects to date across that area of the country. One of the other things that’s really impressive and relevant for the Twin Lakes Georgia project is the active adult single family home market in Atlanta.

One of the things that Kolter has really done well is develop a competitive advantage in that active adult 55 and up retirement market, which is what the Twin Lakes project is focused on. If we look at just the market share of that market in Atlanta where the Twin Lakes project is based, you can see here that, of all the home builders building homes in that market, Kolter had the largest market share in 2022, the most recent full calendar year.

What’s also really important here is that some of the other competitors in that market, Lennar Homes, PulteGroup: these are some of the largest and oldest publicly listed home builders in the US with substantial market caps, $36 billion and $15 billion, huge, huge companies, even bigger than Kolter. Yet in this niche market, the active adult 55 and up in Atlanta, where this project is located, Kolter is outperforming even those much larger builders.

Then lastly, one of the things that we really focus on at EB5AN is transparency and making sure that investors have access to information, whether it’s on the project side or also from investors. One of the things that we’ve tried to do over the last couple of months is have investors who joined the Twin Lakes Georgia project record interviews, share their experiences, explain why they hired a particular attorney, what their experience was, and how they researched potential EB-5 projects, and then ultimately, why they choose to invest in the Twin Lakes Georgia project.

All of these testimonials and videos and transcriptions are available on our website, EB5VisaInvestments.com/testimonial, so you can feel free to review any of those at your own leisure.

With that, I want to say thank you, Mike and Dave, for taking time out of your day to join us. Really appreciate it. For any investors considering making an investment, please feel free to reach out to us.

You can reach out at the number there, visit our website, book a call, and we’ll be happy to share more details on the Twin Lakes project, and also help connect you with a qualified attorney, or answer any EB-5 related questions that you have as you explore making an EB-5 investment. Thank you again, and I hope this is helpful for you.