preferred equity and common equity . An EB-5 investment through a regional center is typically made to the JCE as a loan , whether senior or mezzanine . A senior loan would
HOW EACH TYPE OF CAPITAL RELATES TO EACH OTHER IN THE CAPITAL STACK
The illustration is a simple view of how each type of capital relates to the others in the capital stack . Senior debt has the lowest reward , meaning a senior lender will not receive any profits or gains if the JCE ’ s value increases , but it is the capital type with the lowest risk - that is , senior debt has the highest chance of being repaid . At the top of the illustration is common equity , which has the highest potential for gains on investment , but the highest risk that the investment would never be repaid because all other levels in the capital stack would have to get repaid before common equity holders receive any money .
SENIOR DEBT be secured by the underlying property and / or other assets of the JCE , while a mezzanine loan is a lower priority loan , and secured by a pledge by the owner of the JCE of the ownership interests in the JCE , rather than secured by the assets of the JCE . An EB-5 investment is sometimes , though not as often , made as an equity investment , which is an ownership interest in the JCE , and can be a preferred equity interest or a common equity interest . A JCE could have different investors with all four types of investments all at the same time . Together , these forms of investment layer together to make up the “ capital stack ” for a transaction . Each EB-5 investor needs to determine where in the capital stack their risk tolerance and desire align .
For an EB-5 investor looking to minimize risk of nonpayment , senior debt would provide the best opportunity to get his or her capital investment back . Holders of senior debt receive first priority within the capital stack . An EB-5 investor who made an investment at the senior debt level would be paid first as principal and interest payments are made on the loan by the JCE . However , the return on investment for senior debt would be limited to the agreed upon interest rate and no additional profit would be made . An EB-5 investor would also need to consider whether a fixed or floating interest rate would be suitable given the market conditions at the time of the loan . These could impact the profitability of the loan . In a real estate transaction , the senior debt would also be secured by a first priority mortgage on the real property further minimizing the risk . If the JCE defaults on the loan , the investor can foreclose on the property . If the value of the foreclosed property is not enough to pay off the principal and interest due on the senior loan , the senior lender still has the right to be paid first out of any other assets of the JCE , before any other lender or equity owner gets paid .
MEZZANINE DEBT
Further up the capital stack is mezzanine debt . Mezzanine debt is subordinate to ( meaning , lower in priority than ) senior debt and typically makes up a smaller percentage of the debt portion of the capital stack . Mezzanine debt holders still have a higher priority than the equity investors in the capital stack , making mezzanine debt less risky than preferred or common equity investments . Similar to senior debt , profits would be limited to the agreed upon interest rate . However , mezzanine debt is paid after the senior debt , which increases the risk of an EB-5 investor not getting his or her capital investment back . Additionally , mezzanine debt is not secured by real property in a real estate transaction . Mezzanine debt is secured by a pledge of the ownership interests in the JCE , meaning that if the mezzanine lender has to foreclose on the loan and take
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