An EB-5 Repayment Guaranty Is Only as Strong as Its Guarantor

While the main draw of an EB-5 investment is obtaining a Green Card, if you’re a prospective or current EB-5 investor, you undoubtedly also want to recover your invested funds.

If an EB-5 project performs well financially and is able to repay its EB-5 loan, you will recover your investment as outlined in your project’s offering documents.

Even the most promising EB-5 projects, with solid business plans and strong capital structures, can encounter financial difficulties. The U.S. real estate market—one of the most popular markets for EB-5 projects—can change swiftly, and unexpected changes can impact EB-5 real estate projects. And crucially, the EB-5 program does not allow individual investors to receive contractual guaranties for repayment.

This does not mean, though, that projects can’t safeguard investors’ funds.

One of the strongest measures that EB-5 projects can take to protect their investors is to establish a repayment guaranty. Under this arrangement, a third-party entity—the guarantor—pledges to repay the EB-5 loan in case the borrower is unable to do so.

However, an EB-5 repayment guaranty is only as strong as its guarantor. Unless the guarantor is well-capitalized—and can actually repay the EB-5 loan if needed—a repayment guaranty won’t protect your funds.

In this post, we delve into how repayment guaranties work in the context of EB-5 real estate projects. Then we explain why the guarantor’s financial health is key in protecting EB-5 funds. Lastly, we examine risk factors to look out for before investing in an EB-5 project with a repayment guaranty.

Financial Risk in EB-5 Offerings

To understand how EB-5 repayment guaranties work, let’s first consider the flow of EB-5 funds from an investor to an EB-5 project and back.

Generally, EB-5 investors first wire their capital to an escrow account set up by a regional center’s investment fund. This investment fund functions as the EB-5 lender.

After being released from escrow, and according to the terms of the offering documents, the investment fund then loans the capital to the EB-5 project entity in charge of the real estate development. This project entity is the borrower of the EB-5 loan.

According to the terms of the offering documents, the project entity should repay the EB-5 loan to the regional center’s investment fund once the loan reaches maturity. The investment fund will then distribute repayments to each EB-5 investor.

However, repayment to each EB-5 investor depends entirely on the repayment of the EB-5 loan.

Only if the project succeeds financially and is able to cover its debts will it be able to repay the EB-5 loan. The rules of the EB-5 program do not allow individual EB-5 investors to receive direct guaranties for repayment or any similar arrangements.

In other words, an EB-5 investment must have the potential for either financial loss or financial gains.

Investors should also be aware of the project’s capital stack. The EB-5 loan is typically positioned at a lower priority tier in a project’s capital structure. This means that EB-5 projects generally repay their senior lenders before returning the EB-5 loan.

Even well-capitalized EB-5 projects can encounter financial setbacks and face changing market trends. These factors create a degree of financial risk for every EB-5 applicant.

With the program requiring a substantial investment of $800,000, EB-5 investors naturally want to decrease their financial risk as much as possible.

How EB-5 Repayment Guaranties Protect Investors’ Funds

An EB-5 loan repayment guaranty can be one of the most effective ways to mitigate risk in an EB-5 offering.

Under these arrangements, a third-party entity (known as the guarantor) pledges to repay the EB-5 loan to the lender if the borrower is unable to do so—for instance, if the borrower encounters financial delays or even defaults on the EB-5 loan, the guarantor will repay the EB-5 loan to the regional center’s investment fund.

The exact terms of the guaranty are outlined in the project’s loan agreement and repayment guaranty, which specifies whether the repayment guaranty will cover all or part of the EB-5 loan and the conditions under which the guaranty is activated.

Crucially, repayment guaranties are legally enforceable. You can think of them as a form of collateral that secures the EB-5 loan in case the borrower defaults.

Why Are Repayment Guaranties Allowed in EB-5 Offerings?

As mentioned previously, the EB-5 program does not allow individual EB-5 investors to receive a contractual guaranty for repayment—to meet the program’s requirements, an investor’s EB-5 funds must be at risk. While a loan repayment guaranty can significantly reduce investors’ risk, it does not eliminate their risk entirely.

The guarantor in a repayment guaranty pledges to repay the EB-5 loan, but there is no guaranty for repayment to individual investors.

As a result, the investor’s EB-5 funds remain at risk of loss because the guarantor itself may encounter financial difficulties. But if the guarantor is financially strong, then this risk is significantly reduced.

Further, a repayment guaranty is established between the EB-5 lender and the borrower. This is not the same as guaranteeing each EB-5 investor’s principal, thereby preserving the USCIS “at risk” requirement.

USCIS has approved many EB-5 projects with repayment guaranties, including EB5AN’s own offerings. So investors don’t need to worry that a repayment guaranty will cause their investment to not meet the “at-risk” requirements.

What Makes a Strong EB-5 Repayment Guaranty?

As previously mentioned, an EB-5 repayment guaranty is only as strong as its guarantor. EB-5 investors should look for several key factors that help them gauge a guarantor’s financial position.

Is the Guarantor a Holding or Parent Company of the Developer?

A developer’s holding or parent company often holds a significant amount of equity (a company’s net assets after subtracting liabilities). Large developers and holding companies often possess a diversified asset base, spread throughout several real estate projects in various locations, meaning they have more than enough equity to cover the total principal of the EB-5 loan.

If the EB-5 project you invest in runs into financial difficulties, the developer’s holding company will be in a better position to repay the EB-5 loan through its other assets.

Additionally, you should find out whether the guarantor has a strong track record of completing projects and repaying its loans. This can be one of the most important indicators of your EB-5 project’s safety.

Does the Guarantor Have a Minimum Equity Coverage?

The safest repayment guaranties include a minimum equity coverage for the guarantor. Under this arrangement, the guarantor pledges to maintain a certain level of equity relative to its obligations under the repayment guaranty.

For example, if the minimum equity coverage ratio is set at 150%, then for every dollar of guaranteed debt, the company must have at least $1.50 in equity.

If the guarantor’s equity drops below the agreed level, the terms might require the developer to inject additional capital into the guarantor, restrict dividend payouts, or take other corrective measures. These provisions ensure the guarantor will increase their equity to the necessary amount.

As long as the guarantor has a strong balance sheet and diversified assets, minimum equity coverage can significantly increase the chances of prompt repayment of the EB-5 loan—even if the EB-5 project underperforms.

You can think of a strong EB-5 repayment guaranty as an investment in a well-capitalized, reputable company with an excellent track record. Take Microsoft as an example.

If Microsoft were the guarantor under a repayment guaranty, your invested funds would still be at risk. There is, after all, technically a chance that Microsoft would be unable to repay the loan.

But with Microsoft’s significant, diversified asset base, the chances of a full repayment are very high.

Risky EB-5 Repayment Guaranties

Not every repayment guaranty has the safety features described above. Without a strong backing, an EB-5 repayment guaranty may, in effect, add little to no safety to your investment.

Several factors can contribute to a weak repayment guaranty.

The guarantor may have insufficient equity to cover the total amount of the EB-5 loan. In such a situation, if the repayment guaranty is triggered, the guarantor will be unable to pay the total amount, possibly leaving the EB-5 investors without any of their funds.

The guarantor may lack a strong operating record—or your EB-5 project may be unwilling to provide you detailed information on the developer or the guarantor, such as their financial statements. This would be a major red flag, and you should avoid any projects that refuse to give you detailed financial information.

Additionally, the guarantor may be related or affiliated to the EB-5 lender (the regional center), creating a dangerous conflict of interest for EB-5 investors.

EB5AN’s Repayment Guaranties—Backed by The Kolter Group

At EB5AN, we believe in offering our EB-5 investors the highest possible level of safety—even when this means going beyond the industry standard. To achieve this goal, we only work with developers with strong track records and more than enough assets to complete their EB-5 projects and repay investors.

Since 2014, EB5AN has worked with The Kolter Group to provide multiple EB-5 loan projects. Each of these projects has either had a repayment guaranty from Kolter or the ability to add one.

With such a repayment guaranty, the entire balance of each EB-5 loan is secured with the sufficient assets and net equity of a guarantor company—far more than needed to cover the amount of the EB-5 loan.

In its nearly 20-year history, Kolter has never failed to complete a project or repay a loan—even through economic downturns such as the 2008 financial crisis. Over this time, Kolter has invested in real estate projects valued at over $20 billion, and it has long been one of the most successful developers of residential projects in the Southeast United States.

Every single EB5AN–Kolter project has received USCIS approval. And all of the EB-5 funds have either been repaid or remain in good standing.

This track record makes Kolter an ideal guarantor for an EB-5 loan.

Kotler-backed repayment guaranties are currently offered for our Twin Lakes, Rocky River, and ONE Tampa projects.

Recover Your Invested Funds—Find an EB-5 Project With a Strong Repayment Guaranty

It’s true that individual EB-5 investors are not guaranteed to receive their funds back through an EB-5 loan repayment guaranty. But by carefully selecting a project with a loan repayment guaranty, they can significantly lower their risk and go on to enjoy living in the United States as Green Card holders.

“We’re very pleased to offer what we believe are the safest EB-5 projects on the market,” says EB5AN managing partner Sam Silverman. “The flawless track record and significant asset base of The Kolter Group makes them an ideal partner for our EB-5 offerings—both as a developer and as a guarantor.”

If you would like more information about how repayment guaranties work or have other questions about making an EB-5 investment, schedule a free consultation with EB5AN.