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or mezzanine EB-5 investment , an investor should be aware that they are taking on more risk in that position and should be adequately paid for absorbing that risk . All else being equal , if two projects are offering EB-5 investors the chance to invest , one in a senior loan structure at 0.5 %, versus a competing project offering an equity investment structure at 5 %, the senior loan provides the better risk-adjusted value based on how experts in the United States price real estate risk .
The bottom line is : the capital stack matters , and EB-5 investors must have confidence that the capital stack is solid to ensure the project will be built , enabling the job creation required for the green card . The relative position within the capital stack also matters , as each layer represents a different level of risk . Just because a well-known bank supplies the senior loan of a capital stack , it should not be assumed the bank is endorsing the EB-5 investment . Remember , the bank is underwriting their risk , and they will have no problem foreclosing out EB-5 investors to protect the bank ’ s interest . If EB-5 investors aren ’ t paid significantly more to take junior positions in the capital stack , they might want to consider a senior loan project . important for job creation and capital return . In this case , a prudent capital stack avoids excessively high leverage . For instance , 90 % leverage is commonly recognized as extremely risky . As an example , a typical capital stack on a $ 100 million apartment project might be $ 60 million ( or , 60 %) of first position “ senior ” mortgage debt , with $ 40 million ( or , 40 %) of equity advanced by the owner of the project . A common variant of this structure is when a developer includes an additional level of riskier second-position debt called mezzanine or “ mezz ” debt between the senior loan and the equity . In this example , the $ 100 million apartment project above would still have the $ 60 million of first position senior debt . Still , it would layer in another layer of subordinate or mezz debt ( let ’ s use $ 25 million in this example ), reducing the owner equity investment in this example to $ 15 million .
In the United States , pricing , or the return required by investors in each of these various portions of the capital stack , would be approximately as follows : Senior Loan ; 7 %, Mezzanine Loan ; 13 %, Expected Equity Return ; 18 %. This pricing is relevant because it shows the relative risk each party is taking ; as the risk goes up , the expected return goes up . EB-5 opportunities are offered in every layer of the capital stack .
Although there is nothing wrong with an equity
EB5 INVESTORS MAGAZINE EB5INVESTORS . COM
The bottom line is : the capital stack matters , and EB-5 investors must have confidence that the capital stack is solid to ensure the project will be built .
Product Type for EB-5 Projects
EB-5 projects have come in all asset classes . Hotels , office , industrial , manufacturing , retail and residential have all benefitted from EB-5 financing . Each asset class has advantages and disadvantages that investors must consider when evaluating the investment .
Hotels are known for their ability to change their rate daily . This is a double-edged sword , as a hotel will outperform other asset classes in a hot market and underperform in a down market .
Office has been known for the stability of its long-term leases and stable cash flow . Because of this history , few foresaw the work-from-home trend that exploded during the COVID-19 pandemic , causing vacancies to spike and financial ruin for many owners .
Like office , retail relies on long-term leases . Still , it has been largely out of favor from investors and developers as it has struggled to retain its footing in response to online purchasing becoming ubiquitous . Industrial has perhaps the longest average leases , with 10-20 year leases common . This asset class has been enjoying a golden era as online retailers have had an insatiable appetite for warehouse space , fueled further by the pandemic .
Manufacturing is not glamorous and there is a long history of outsourcing to countries with lower labor costs , though certain industries have
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