A Guide to EB-5 Investment Exit Strategies

The EB-5 Immigrant Investor Program has a well-deserved reputation as a reliable way for foreign investors to become lawful permanent residents of the United States. In return for investing in a new commercial enterprise (NCE) that results in job creation for U.S. workers, a foreign national and their qualified family members can get Green Cards.

EB-5 investors often want to know when they will get their money back and what kind of returns they can expect.

It’s important to understand that there is no certainty in the EB-5 program. There is also a chance that investors could lose their invested capital.

However, you can considerably lower your risk of this happening by investing in a regional center project that has a clear and comprehensive exit plan.

In this article, we’ll explain what EB-5 investors need to know about exit strategies.

What Is an Exit Strategy in the EB-5 Program?

An exit strategy is the plan for how a project that an EB-5 applicant has invested in will make enough money to repay capital to investors.

Nearly all EB-5 applicants make their investments via regional centers. A regional center is a business that United States Citizenship and Immigration Services (USCIS) has approved to administer EB-5 projects.

The regional center should provide information to the applicant about the exit strategy in the project’s business plan.

Why Is a Clear Exist Strategy Important for Investors?

A clear, credible exit strategy increases investors’ chances of getting their capital back at the end of the agreed term.

These investment funds must be “at risk” to meet the program requirements. This means they must stay invested for more than two years without the investor withdrawing them.

Thus, the investor needs to understand the potential risks, rewards, and other consequences of the exit strategy.

What Is a Typical Exit Strategy for an EB-5 Investment?

The appropriate exit strategy depends on the structure of your investment and the agreement you make with the entity that borrows your funds.

Strongly Consider a Regional Center Project

Almost all EB-5 applicants choose to invest via the regional center program. This is an essential component of a good exit strategy for the typical EB-5 investor.

The regional center approach involves easier job creation requirements, a more predictable investment repayment timeline, and fewer management responsibilities relative to a direct investment.

As previously mentioned, regional centers have been authorized by USCIS to oversee EB-5 projects. Investors who do business with them are more likely to identify safe investment opportunities consistent with USCIS regulations than direct investors will find on their own.

Regional centers typically invest in real estate projects within their assigned geographic areas. Project developers usually either sell the developments or refinance them to repay investors.

Most investors will get all of their investment capital plus interest repaid within several years. Regional centers can provide information outlining how and when investors will get their capital back.

USCIS has approved two main investment types for regional centers.

Loan vs. Equity Investment Projects

Each EB-5 applicant should understand the differences between loan-based and equity-based investments. Neither is objectively better than the other. The right choice is the one that matches what you consider a successful investment outcome, including one that meets your desired repayment date and risk tolerance.

Loan-Based Investments

Under a loan-based investment, a borrower uses an investor’s money to operate an EB-5 project.

Typical features of a loan-based investment include the following:

• Predictable Repayment Timeline: As with traditional institutional loans, this approach allows an investor to get their money and interest back by a specific date. This is called the maturity date. However, it’s important to evaluate loan terms carefully, as some borrowers want options for loan extensions beyond this date. This could change the repayment date.
• Increased Safety: EB-5 loans may be secured by collateral. This allows the lender to enforce repayment that is overdue if the money was loaned under a guaranty or loan.
• Decreased Profit Potential: Loan-based investments earn money at a low interest rate. These lower financial returns are the tradeoff for improved security.
• Variable Financial Safety Features: A secured loan must have strong collateral behind it to be viable. Otherwise, the lender may not get all of their money back.

Equity-Based Investments

Under an equity-based EB-5 investment, a borrower uses investor capital to buy interests in a project. Investors receive no guarantee of repayment by a fixed date.

Typical features of an equity-based investment include the following:

• Flexible Repayment Timeline: Repayment of equity usually happens after the project is sold or refinanced, instead of by a predetermined date. This means the risk of delayed repayment increases, making it potentially harder for an investor to plan for repurposing those funds.
• Potential for Greater Profits: Equity investments offer potentially higher returns, usually of up to 5% annually. However, the potential for serious losses is also greater. Profits from sales or refinancing are shared among investors.

Note that EB5AN offers both loan and equity projects to suit a wide range of investors.

How to Perform Exit Strategy Due Diligence

An EB-5 applicant needs to conduct thorough due diligence that includes addressing a project’s exit strategy.

Stress Testing

As part of due diligence, it’s wise for an EB-5 investor to perform stress testing on a prospective investment. This means assessing how different scenarios could affect the repayment of capital. This includes:

• Studying Project Documentation: Carefully review the project’s offering documents and financial projections. Confirm the project will be involved in profitable and lawful commercial business activity.
• Consider Possible Risks: Think about how changes in economic conditions or interest rates, construction delays, cost increases, and management challenges might affect your returns and project completion date.
• Examine Scenarios: Identify best-case and worst-case scenarios and how your investment would perform under each. Prepare contingency plans for a worst-case scenario and address possible delays, EB-5 program compliance risks, and alternative exit strategies.
• Follow Project Progress: Monitor how the project is performing financially. Be ready to change plans if necessary based on performance and changes in market conditions.

Key Questions to Ask

An EB-5 investor should also ask themselves and other stakeholders specific questions such as:

• What is the project’s exit strategy for investors?
• If the exit strategy is based on sales, what is the appraised value for the finished project?
• How will investment capital be redeployed after unit sales?
• If the exit strategy is based on refinancing from operations, what are the expected profits and costs?
• Has the project developer or sponsor sold or refinanced similar projects before, and how did those projects perform financially?
• What is the worst possible outcome for the project?
• How likely is this scenario to occur?
• What would be the residual value of my investment if this occurs?
• Would my investment still meet EB-5 program requirements?
• What will I do if I lose this money?

Look for indications of a clearly defined and feasible exit strategy. This is essential to the timely repayment of an investor’s capital.

When responding to your questions, a reputable industry professional should show that it has a strong track record of repaying investors.

Minimize Contingencies

An investor should also avoid projects that have too many contingencies. This could be a warning that the developer expects the project to fail. In addition, too many contingencies make the project more complex.

Finally, an EB-5 investor who wants a successful exit strategy will work with an expert team.

Let EB5AN Guide Your EB-5 Investment Exit Strategy

The EB-5 program is the perfect way for qualified foreign real estate investors to gain U.S. lawful permanent residence. It’s one of the most reliable routes to starting a new life in the United States.

Following through on a winning exit strategy is just one part of the complex EB-5 process. That’s why you need to work with an EB-5 firm that has a strong track record of success that includes repaying EB-5 investors. It’s also a good idea to work with an experienced immigration attorney.

To learn more about obtaining lawful permanent residence in the United States through the EB-5 program, book a free call with us today.