Hear Siddharth Agarwal, a Bay Area Resident and EB-5 Investor,
Explain Why Investors Should Avoid Bay Area EB-5 Projects
Why EB-5 Investors Should Avoid Bay Area (Oakland) EB-5 Projects: A Data Driven Analysis of The Current Multi-Family Real Estate Development Landscape
Impacts of SVB Failure to Bay Area
Financing for Bay Area EB-5 at Risk
Bay Area Economic Decline
Show Me, Don’t Tell Me: Is the EB-5 Project’s Business Model Viable in the Current Economic Environment
EB5AN and Kolter Offer Projects in Lower-Risk Areas with Financing Secured
EB-5 projects in the San Francisco Bay Area in northern California may be up against a new challenge: decreased access to financing.
On Friday, March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank (SVB) in Santa Clara, California. This after plummeting shares in SVB rocked the financial world on Thursday, March 9, 2023. SVB shares fell by more than 85%—60% before the market closed and another ~25% in extended trade.
The impact of this bank failure is being felt around the world. According to BBC News, the four largest banks in the United States also lost more than $50 billion in market value as of Thursday.
SVB was a major lender to early-stage businesses. Nearly half of all venture-backed technology and healthcare companies in the United States that are listed on the stock market banked with SVB.
Impacts of SVB Failure to Bay Area
The Bay Area has already felt an immediate direct impact of SVB’s collapse. For example, according to CNN, shares in First Republic, a bank based in San Francisco, declined by more than 16.5%. But the full weight of this bank failure are yet to come.
The State of California appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for SVB. The FDIC created the Deposit Insurance National Bank of Santa Clara to protect insured customers. Deposits of up to $250,000 are insured, but any amount beyond this is not. Customers with uninsured funds will receive certificates for those funds. As the FDIC sells SVB assets, they may make dividend payments to uninsured customers.
Technology start-ups and local businesses that banked with SVB have yet to fully realize the extent of their losses. The damage to the Bay Area economy resulting from the failure of SVB may be widespread and long lasting.
As tech companies cope with the crash of SVB, H-1B layoffs are likely to accelerate. Additional H-1B layoffs will further erode the Bay Area economy and drive more outmigration. (The EB-5 visa offers an ideal solution for H-1B visa workers who have been laid off.)
Financing for Bay Area EB-5 at Risk
The sustained interest rate hike by the U.S. Federal Reserve Bank is credited as one of the underlying problems that contributed to SVB’s rapid stock decline and ultimate demise. This prolonged rate hike is putting a strain on banks across the United States and may impact their profits. The Federal Reserve is expected to raise rates by 0.5% another two to three times in the coming months. Ultimately, financing may become unaffordable or unavailable.
As the Bay Area’s economy shrinks and banks struggle to earn profits, EB-5 projects in the Bay Area may not be able to get financing. EB-5 projects that have not yet secured permanent financing are at heightened risk. These projects include those that have yet to finalize a construction loan and those that need to replace a construction loan with permanent financing.
For example, if a multifamily development project is funded by a short-term construction loan, it will need to replace that loan with long-term debt financing once the development is complete. A failure to replace the short-term loan when it expires with permanent financing may result in loan default, foreclosure, and the complete loss of EB-5 investor debt and/or equity investment capital.
SVB’s rapid failure creates uncertainty in the entire region. Uncertainty means risk. The collapse of SVB is one more red flag for EB-5 investors looking into Bay Area projects. And these events will likely make the Bay Area’s declining economy worse.
Bay Area Economic Decline
Bay Area EB-5 projects are more risky due to a shrinking regional economy and sustained outmigration. Real estate projects in the Bay Area are especially risky in current economic climate.
A declining median income and reduced demand have driven real estate prices down. As a result, multifamily, retail, and hotel projects are at higher risk of financial underperformance. EB-5 investments are particularly vulnerable if projects are not economic successes. Typically, EB-5 investors have lower payment priority and are often subordinated behind other sources of capital for the development of the project. Multifamily and hotel projects that were planned based on monthly rent and average daily rate assumptions before COVID are at even higher risk given the decline in apartment rents and hotel rates in the last several years.
Show Me, Don’t Tell Me: Is the EB-5 Project’s Business Model Viable in the Current Economic Environment
Unfortunately, there is no “magic bullet” for identifying the lowest-risk EB-5 investment, but one proven approach to reduce risk and uncertainty is to evaluate the economic viability of an EB-5 project’s current business model based on its profitability to date in the current economic environment.
For example, a large multifamily project in the Bay Area with hundreds of apartments that started in 2018 or 2019 and assumed it could rent a 1-bedroom apartment for $1,800 may only be able to rent that same apartment for $1,200 in 2023 when it’s completed. This difference in rental rates represents a ~33% decline in the monthly market rent. A decrease of this amount means that the project would likely not have enough rental income to cover its debt payments and could face a loan default and foreclosure, which, in turn, would result in a complete loss of EB-5 investment capital.
Said differently, EB-5 investors should not simply accept estimates of how much money a rental property will make in the future. Instead, they should look for actual evidence, like signed leases or sales, showing that the EB-5 project is actually viable. This is true for all project types, including apartments, hotels, single-family homes, or condos. EB-5 investors need evidence that the project can actually make a profit in the current market.
The risk of a project like the example above is clearer when it is compared to the success of a single-family home project like Twin Lakes Georgia. Twin Lakes has already sold more than 480 homes, distributed millions of dollars in profit, and follows the success of several other nearly identical projects in the area that have already sold out. In projects like the multifamily example above, sales, profits, and success are all hypothetical—it has not proven successful yet.
EB5AN and Kolter Offer Projects in Lower-Risk Areas with Financing Secured
EB5AN is offering two compelling projects from the Kolter Group designed to minimize risk to EB-5 investors: Saltaire St. Petersburg and Twin Lakes Georgia. These projects are in growing economies and require no additional financing. Kolter is one of the largest private developers in the United States with a strong track record of success and perfect repayment history.
Twin Lakes Georgia is a single-family home development under construction in a rural TEA, qualifying it for a 20% EB-5 visa set aside and a lower minimum investment of $800,000. More than 480 homes have already been sold, and all required jobs have already been created for all EB-5 investors.
Saltaire St. Petersburg is a luxury condominium tower under construction in an urban targeted employment area (TEA), qualifying it for a 10% EB-5 visa set aside and a lower minimum investment of $800,000. All of Saltaire’s condos have already been sold, and construction is almost finished. All of the jobs needed for EB-5 investors have already been created.
For more information on how to immigrate to the United States through an EB-5 investment in a successful project like Saltaire or Twin Lakes, contact EB5AN today.
