A key aspect of evaluating an EB-5 investment is understanding the capital stack—the structure of financing that funds the project. The position of EB-5 capital within the capital stack directly affects investor risk, repayment priority, and overall project stability. In a recent webinar hosted by JTC Group and CanAm Enterprises, industry experts discussed how capital stack composition impacts EB-5 investments and what investors should look for in a well-structured project.
What is the EB-5 Capital Stack?
The capital stack represents the different layers of financing used to fund a project, typically categorized into four main components:
- Senior Debt: This is the first-priority loan, usually provided by a traditional lender such as a bank. Senior debt holders are repaid first and have the lowest risk.
- Mezzanine Debt: This layer sits below senior debt and is often unsecured or secured against the borrower’s equity rather than the property itself. It carries a higher risk but also offers higher potential returns.
- Preferred Equity: Investors in this tier receive preferred returns before common equity holders but after debt repayment.
- Common Equity: The most junior position in the capital stack, common equity holders own the project and assume the highest risk but also benefit the most if the project is successful.
Walter Gindin, General Counsel at CanAm Enterprises, explained, “Understanding where EB-5 capital fits within the capital stack is critical because it influences repayment priority and overall risk exposure.”
Where Does EB-5 Capital Fit?
EB-5 capital is typically structured as either mezzanine debt or preferred equity, as this allows developers to leverage additional financing while keeping senior debt manageable.
- Mezzanine Debt Structure: In this structure, EB-5 funds function as a subordinate loan, providing capital that fills the gap between senior debt and developer equity.
- Preferred Equity Structure: Some projects structure EB-5 funds as preferred equity, which ranks above common equity in repayment but below debt obligations.
Investors should examine whether their EB-5 funds are well-positioned within the capital stack.
Key Considerations When Evaluating the EB-5 Capital Stack
- Developer Equity Contribution
- A higher developer equity investment signals a strong commitment to the project.
- Investors should look for projects where the developer has substantial “skin in the game.”
- Senior Debt Terms
- Investors should review the senior loan terms, as aggressive debt levels can increase project risk.
- A high loan-to-cost ratio may indicate over-leverage.
- EB-5 Repayment Position
- Projects where EB-5 capital is senior to other junior debt or preferred equity provide more security.
- Reviewing intercreditor agreements can clarify investor rights in case of default.
Sebastian Stubbe, CEO of Pine State Regional Center, advised, “The strength of a capital stack depends on its balance. A well-structured financing plan ensures that each layer of capital aligns with the project’s financial and operational goals.”
Risk Factors in Capital Stack Structures
While each project’s capital structure varies, there are common risk factors investors should evaluate:
- Over-Leveraging: If a project is heavily reliant on debt, financial instability could affect job creation and repayment.
- Weak Exit Strategy: Investors should analyze how the project intends to repay EB-5 capital upon completion.
- Market Fluctuations: Economic downturns can impact financing availability and project performance.
How Investors Can Mitigate Risk
To ensure their investment is well-structured, EB-5 investors should:
- Review the Developer’s Track Record: A history of successful project completions indicates financial discipline.
- Examine Capital Stack Composition: Ensuring that EB-5 capital is positioned securely can minimize exposure to risk.
- Work with Experienced Professionals: Consulting financial and legal experts can help assess financing structures.
Conclusion: A Strong Capital Stack Equals a Strong Investment
The structure of the capital stack plays a crucial role in determining an EB-5 project’s stability and potential for investor repayment. By carefully evaluating financing layers, prioritizing developer commitment, and ensuring a balanced approach to debt and equity, investors can make informed decisions that align with both immigration and financial objectives.
As Christine Chen, COO of CanAm Enterprises, stated, “A well-structured capital stack not only enhances project success but also provides greater security for EB-5 investors looking to achieve their immigration goals.”
