EB-5 Investment Returns: Why so cheap?
Why does EB-5 investment offer such low returns to investors?
EB-5 investment returns are dismal. Why is that? It’s a common question asked to EB-5 regional centers by anyone trying to understand the EB-5 market. There are a few major reasons that stick out. I will refer to EB-5 projects that structure EB-5 investment as mezzanine financing:
Competition: EB-5 Investment Returns V.S. the U.S. Federal Reserve
U.S. Federal Reserve interest rates are at historical lows (currently 0.25% according to bankrate.com) and EB-5 capital now has to compete with traditional financing. Major developers that have substantial balance sheets and long successful track records have access to cheap money at astonishing rates. Construction interest on senior loans can be less than 2% for the strongest of candidates. Pairing cheap rates with lenders whom are now looking at projects and lending up to 75% LTC (Loan to Cost), it doesn’t create much incentive for developers to go scrambling to find a better deal.
Low Investment Risk:
Investors and their agents have been unyielding in their quest for a “risk-free” EB-5 deal. I have heard every protection and guaranty known to mankind being requested from the EB-5 world. Investors want construction guaranty’s, corporate repayment guaranty’s and the blood of your first born child if they can get it. Technically, there is no risk-free projects or they wouldn’t qualify for EB-5 investment, but people still talk like should be providing it.
Naturally, if a deal has low risk (Not to mention “no-risk”) the returns are low as well. It seems the market is playing out in that aspect. Treasury bills backed by the U.S. government do not provide double-digit returns (currently 1.9%) , if investors ask for that kind of security, they should expect that kind of return as well.
EB-5 Capital is Not Actually Cheap:
The investor might walk out with nearly nothing in most deals in today’s market but that doesn’t mean the overall cost of EB-5 capital is cheap. Time to do some real math…
The EB-5 market has maxed out its legal capacity in 2015 (10,000 visa’s per year) and many capital markets groups have even gone so far as to say it is “mainstream”. With over 700 regional centers and 1,000 projects vying for the same market, things get a little crowded. This means it takes more time, more staff and more dollars to acquire the same investor compared to the good ol’ days when EB-5 was a little known job creation program. When you add up the cost of acquiring a deal, getting it properly documented, marketing and then the ever increasing finders fees, EB-5 is the same if not more expensive than other capital found domestically. Many participants in today’s market are placing the cost of EB-5 capital anywhere from 6%-8%, if you can get it…
Because the Market Accepts it:
Its an honest observation. If the market wouldn’t accept low rates, then the projects would be forced to increase the rate of return to investors. Investors today are willing to forgo return to secure a low risk path to U.S. permanent residency but that could change with a few significant adjustments to the program:
- The price of EB-5 might increase from the minimum rate of $500,000 for TEA investment to $800,000 or more. This would raise the opportunity cost of that capital sitting at near zero returns for potentially half a decades time
- Emerging market currency devaluation (namely China). Even if the price of EB-5 doesn’t change in the U.S., that does not mean the local currency won’t fall against the dollar as every emerging market world wide is torching their currency through QE measures and stimulus spending.
- The time frame for full I-829 approval becomes obscenely long. Today’s market leans toward 5-year projects but USCIS looks more like they need 6 years just for the quota to run up to the point of letting the investor enter the United States. If investors realize that their capital may get tied up for a decade in EB-5, they might have second thoughts about accepting no return for their investment.
There will be a day when the market adjusts and someone goes against the grain offering proper risk-adjusted returns with EB-5 investment.