Part One of a Three-Part Series
By: Patrick Findaro, Managing Partner at Visa Franchise LLC
Many prospective EB-5 and E-2 investors have liquid assets. Others are unwilling to sell or possess U.S. real estate assets. Others are not happy with the traditional 0.25 to 2.00% return offered by regional center projects. Whatever your investment approach and asset allocation might be, it would be worth exploring a few ways to finance the investment rather than investing straight cash. An EB-5 or E-2 investor can explore options to leverage their marketable securities, refinance a U.S. real estate holding or receive a loan from a family member.
From my time working as a credit analyst at JPMorgan Chase, I observed a common characteristic among many emerging market clientele. Whether the clients were from Russia, China or Brazil, they were often not satisfied by the low yield on their U.S. and European fixed income (bond) funds and sought to increase their returns. To increase investment yield, banks offered loans secured by marketable securities. With the low cost of borrowing, many clients used strategic leverage to increase the return from approximately 4% to 6% or more per year.
A similar parallel exists in today’s EB-5 market. Over 90% of investors come from emerging markets, and enter the EB5 market where returns on investment are often less than 2%. Furthermore, the investment is held for five years or more. Many of the largest financial institutions like HSBC, Citibank and Morgan Stanley offer security based lending when assets are guaranteed to cover the loan facility. Blue-chip stocks often receive up to 60% and U.S. treasury bills up to 90%. The below chart illustrates a sample portfolio:
In the above portfolio, the bank would assign a loan-to-value (LTV) for each asset class corresponding to the percentage of the market value it is willing to lend against. If the client takes a $600,000 loan to support his EB-5 investment and additional related costs, there is a sizeable cushion should the market value of his securities fall. If the full line of credit of $1,375,000 is drawn down (if authorized by the bank), the client would risk suffering a margin call and having to sell his securities to pay down the loan facility.
So how much is it going to cost to loan against my securities?
The lending rates can vary based on many factors including the clients’ banking relationship (such as assets under management and tenure) as well as the liquidity and risk level of the asset. The lending rate can also depend on the bank’s own cost of capital and external factors outside the bank’s control such as the London Interbank Offered Rate (LIBOR) rate. The LIBOR is a benchmark rate that most of the world’s leading banks charge each other for short-term loans and often serves as the first step in calculating interest rates on various loans. Most security based lending facilities (also know as advised lines of credit) are indexed to the LIBOR rate. The below chart shows how LIBOR has fluctuated over the past few years.
Banks can offer security based lending lines for as low as LIBOR + 1.50% for their largest, longest tenure clients who possess low risk liquid assets in their accounts. Securing a low interest rate from a bank then drawing down on the loan facility allows EB-5 investors to maintain their higher interest generating assets while still investing in an EB-5 project (which returns little more than the principal investment of $500,000). Even our EB-5 direct clients who purchase franchises in the U.S. will take advantage of security lending. Often times they do not qualify for traditional franchise financing available to those who have green cards already and a credit history in the U.S..
More to come in part 2 as we’ll review how to refinance your U.S. property to invest in an EB-5 or E-2 business.