As you search for a low-risk EB-5 project that will protect your financial and immigration interests, it’s essential to evaluate the project’s construction status and financial situation.
In fact, an EB-5 real estate project’s risk level is primarily determined by (1) the developer’s financial strength and (2) the likelihood of construction being completed on time and on budget.
Many times, an EB-5 real estate project’s guaranteed maximum price (GMP) contract—or the absence of a GMP contract—is an important indicator of the likelihood of construction being completed on time and on budget.
Ask yourself the following before investing in an EB-5 project: “Does this EB-5 project already have the funding required to reach completion, and will it eventually be able to repay its investors?” To a large extent, your chances of getting U.S. Green Cards and a return on your invested funds will depend on the answer to this question.
This is where GMP contracts come in, as they are a vital part of answering the first half of the above question.
GMP contracts are signed between the project developer and a general contractor in charge of construction. Essentially, a GMP contract stipulates that the general contractor will complete the project at or below a fixed amount, and the general contractor will cover any costs that exceed this amount.
Due to this safeguard, a GMP contract with a reputable general contractor can significantly reduce investors’ risk. In this post, we explain why GMP contracts can be crucial for EB-5 investors and how they may increase your chances of recovering your funds and obtaining U.S. Green Cards.
The Role of GMP Contracts in Large Real Estate Projects
Why Does a GMP Contract Lower EB-5 Investors’ Risk?
What Types of EB-5 Projects Benefit the Most From GMP Contracts?
GMP Contracts in EB5AN Projects
Safeguarding Your Immigration and Financial Goals
The Role of GMP Contracts in Large Real Estate Projects
To understand the importance of GMP contracts in large real estate projects, we must first understand the different roles carried out by a project’s developer and its general contractor.
The developer coordinates most aspects of a real estate project, making sure that everything is in place for construction to begin and to reach completion. The developer is in charge of acquiring the land, obtaining permits, raising funds, planning and designing the building, and making sure the project stays on track and gets completed within the targeted budget and timeframe. The developer also oversees marketing and property sales, if applicable.
The general contractor, meanwhile, is a construction firm hired by the developer to physically build the project. The general contractor is in charge of executing the developer’s design for the building, sources labor and construction materials, and manages the details of day-to-day construction activities.
While the general contractor is only involved during the construction phase, the developer takes on most of the risk for a project—the developer is in charge of raising the project’s funds and repaying the lenders when any development loans, including EB-5 loans, mature, meaning they are ultimately responsible for most financial aspects of the project.
Still, the general contractor can influence the financials of a project. In particular, when a developer hires a general contractor to build one of its projects, it may create an agreement known as a GMP contract.
Under a GMP contract, the general contractor agrees to complete the construction of a project at or below a set maximum price. If construction costs exceed this maximum price, the developer will not have to cover these extra costs—the general contractor will do so.
And if the project is completed for less than the set maximum price, the terms of the GMP contract will determine which of the two parties will receive these savings or whether the savings will be shared between the developer and the general contractor.
Why Does a GMP Contract Lower EB-5 Investors’ Risk?
A GMP contract essentially “locks in” the developer’s construction costs, ensuring that the costs will not exceed the maximum price set forth in the contract. Therefore, this kind of arrangement can significantly lower the developer’s risk of exceeding its budget and thus reduces the risk of a project being unable to be fully constructed on time and on budget.
If there are unexpected costs, the risk instead shifts to the general contractor.
An additional benefit is that a GMP contract incentivizes the general contractor to complete construction on time and within budget.
Generally, an EB-5 real estate project with a GMP contract from a reputable general contractor will have a significantly lower risk profile compared to a project without one. If construction costs increase due to inflation, for example, and a project is mid-construction without a GMP contract, the developer would need to raise additional debt or equity to fund these increased construction costs—and if the developer could not do so, then construction would stop and the project would almost certainly fail, resulting in financial loss and immigration issues for EB-5 investors if enough jobs have not already been created based on construction progress to date.
Remember, to qualify for U.S. Green Cards, your invested funds must be used to create at least 10 jobs, and this job creation is mainly calculated based on an EB-5 project’s construction spending.
A GMP contract greatly mitigates this immigration and financial risk. These factors make a GMP contract a critical due-diligence item for EB-5 investors.
When finding a project to invest in, you should always look for an EB-5 project that will be able to progress to completion and meet its construction spending targets—and a GMP contract is a great indicator that a project should meet these goals.
With the added safeguards a GMP contract provides, EB-5 projects will be much more likely to perform well financially and stay within budget—and, in turn, the project’s EB-5 investors will be much more likely to recover their invested funds and obtain their Green Cards
What Types of EB-5 Projects Benefit the Most from GMP Contracts?
A GMP contract is most important for large, single-building EB-5 projects such as condominiums, large multifamily apartment buildings, and hospitality developments. In these property types, construction focuses on a single, large building and will likely take several years to complete.
If an EB-5 project spans several years, the price of construction materials and labor may change significantly over the project’s development. Inflation, supply chain issues, and other changes in the market can make the actual cost of construction higher than projected.
But if an EB-5 project has a GMP contract in place, the general contractor has a contractual obligation to cover any additional costs—even if these exceed the project’s original benefit. With this contract in place, a developer may be able to avoid a significant capital shortfall.
In contrast, GMP contracts are less important for single-family home projects and similar property types. Within these projects, each home can be built relatively quickly, with smaller construction costs per unit. If demand and building costs fluctuate, single-family home developments can save on capital by adjusting the pace of construction accordingly.
Evaluating a GMP Contract’s Feasibility
If you are considering an investment in a single-building EB-5 project with a long construction timeline, look for an enforceable GMP contract. The regional center sponsoring the project should be willing to provide you with information about the GMP contract, if any.
The project’s general contractor should be reputable and have a proven track record, particularly in building similar projects in the same asset class. And to further ensure your funds will be safe, make sure the general contractor is well-capitalized enough to fulfill the GMP contract even if prices are higher than projected.
Additionally, the developer should also have a track record of completing similar projects on time and within budget.
GMP Contracts in EB5AN Projects
EB5AN is highly selective in partnering with real estate developers. We only work with well-capitalized developers with a solid track record of success, and we only sponsor financially secure EB-5 projects that we would feel comfortable investing in ourselves.
Both our ONE Tampa and Boynton Beach Multifamily projects have executed GMP contracts with large and reputable general contractors. ONE Tampa is a luxury condominium tower in the heart of downtown Tampa, Florida. Boynton Beach is a 210-unit upscale apartment community for active adults in Boynton Beach, Florida.
Both projects are being developed by The Kolter Group, one of the leading developers in the Southeast United States. Since 1997, Kolter has invested in projects with an expected value of over $29 billion, completed over 100 residential projects, and delivered over 27,000 units. Today, Kolter has investments in 90+ additional residential projects that are expected to deliver 65,000 units.
In over 25 years of completing projects, Kolter has successfully repaid billions in loans and has never failed to repay a loan.
Kolter’s track record of successfully repaying loans and finishing projects provides for strong and long-standing relationships with leading financial institutions in the United States, including some of the nation’s largest banks.
Safeguarding Your Immigration and Financial Goals
Depending on the property type, a GMP contract may be a strong indicator of success in an EB-5 project. EB5AN encourages you to carefully research each option before investing, including whether the project has a GMP contract. Doing so will empower you to choose a financially strong EB-5 project that will help you qualify for U.S. Green Cards and get a return on your investment.
For further information on the best practices for choosing an EB-5 project, schedule a free consultation with EB5AN.
