There is a perception that a first lien is superior. Below, I explain some reasons it may not be.  First, it requires all the EB-5 money to be raised. If not, how will the project be completed.  Second, it means that no bank has reviewed the project to determine whether it is a wise investment. The reality is that having a bank agree to fund a project provides a layer of protection to the investor. There are projects that replace the temporary bank construction loan as permitted under the law and become first liens. Assuming there is sufficient job creation, this is a great option.

Being in the first lien position requires a larger loan as a percentage of the capital stack than being in second position. When this occurs, many times, riskier jobs must be used such as operational jobs (and sometimes direct construction jobs created by a more than two (2) year construction timeline). There are immigration risks when relying on the jobs from a two-year construction timeline and operations. If USCIS does not agree with the two-year construction timeline, a large portion of the construction expenditure jobs will not be permitted to count. Also, if the hotel does not perform as planned (i.e. a lower: (a) occupancy rate, (b) nightly average rate, or (c) restaurant sales), then the amount of jobs projected from operations will not be created. This then causes a problem because if the total number of jobs needed for the removal of conditions based on the number of investors is greater than the total created at least one investor will not receive his permanent residency at the I-829 phase which bring us to that phase. The I-829 phase focuses on confirming the investment was sustained for the two (2) years of conditional residency[1]and the jobs were created. The issue of job creation is the most critical piece of the puzzle for an investor. This boils down to whether the project was completed in accordance with the business plan and the economic report submitted with the I-956F. If so, then, the jobs should have been created. This is why it is so critical to do all that is within your power to select a project that has the incentives – financially and contractually – to complete because if it is not then someone may not receive the permanent residency for lack of job creation. Moreover, if the project was not completed, repayment may be very difficult. If a project is not completed, then, it will most likely go into foreclosure, and the investor EB-5 money could be reduced or completely wiped out. The investor will receive less than the amount invested and could receive nothing. This is where the developer’s financial incentive to complete the project is so critical. Many companies enter into an “efficient breach” of contract when they determine that the financial losses are less when the contract is breached than to continue under the contract. Real estate is no different; nor is EB-5. This is why it is so critical for the investor to consider what was discussed – is the project fully capitalized and EB-5 is replacing more expensive capital, have third parties (like a bank) reviewed the project and made loans to it, does the developer have sufficient cash invested so that it will complete the project to avoid losing the cash? All of the foregoing should be asked and answered before investing because the lack of project completion could have devastating impacts on an investor resulting in the worst-case scenario of neither receiving the permanent green card nor receiving the investment back. While EB-5 is an “at-risk” investment, that does not mean that an investor cannot mitigate risk. And, in EB-5, risk mitigation not financial return should be the focus. The actual return to the investor is the permanent residency with a return of the initial capital.

[1] There is a question under Section 203(b)(5)(C) that states “is expected to remain invested not less than 2 years” which has made some wonder whether the investment must be sustained for the full two years of conditional residency. However, at the time of writing, the Policy Manual still requires the two full years.