Originally published on: http://www.eb5investors.com/magazine/article/potential-options-financing-eb5-investment
Potential Options for Financing an EB-5 Investment
Published on September 12, 2016
By Patrick Findaro
In my opinion, whatever your investment approach and asset allocation might be, it may be worthwhile to explore a few ways to finance your EB-5 investment rather than investing straight cash. An EB-5 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 percent to 6 percent or more per year.
A similar parallel could exist in today’s EB-5 market. Over 90 percent of investors come from emerging markets, and enter the EB-5 market where returns on investment are often less than 2 percent. 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 percent and U.S. treasury bills up to 90 percent. The chart below illustrates a sample portfolio:
|Asset||Market Value||Loan-to-value||Line of Credit|
|U.S. Treasury Bonds||$500,000||90%||$450,000|
|Fixed Income Bond Fund||$500,000||65%||$325,000|
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.
How Much Will it 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 known as advised lines of credit) are indexed to the LIBOR rate. The below chart shows how LIBOR has fluctuated over the past few years.
|Date||3-Month LIBOR Rate|
|Dec 31 2010||0.30|
|Dec 31 2011||0.58|
|Dec 31 2012||0.31|
|Dec 31 2013||0.24|
|Dec 31 2014||0.26|
|Dec 31 2015||0.62|
Banks can offer security based lending lines for as low as LIBOR + 1.00 percent for their largest, longest tenure clients who possess low risk liquid assets in their accounts. Securing a low interest rate from a bank and 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.
What About my Apartment or Home I purchased in the U.S. a Few Years Ago with Cash?
As opposed to the largest U.S. banks like JPMorgan Chase, Wells Fargo and Bank of America, which offer securities lending, most of the mortgage lending for non-resident aliens comes from smaller financial institutions. A non-resident alien is a citizen of a country other than the U.S. or a foreign national legally living in the U.S. Total Bank (a subsidiary of Banco Popular Español, S.A.) and Bank United have strong footholds in the Florida market for foreign nationals looking for mortgages on their properties.
Some banks lend up to 75 percent of the value of the home to non-resident aliens. A cash-out refinance may allow you to convert a portion of your home’s equity into cash, which can provide money for discretionary spending, such as supporting the $500,000 EB-5 investment.
With 25 percent down, a non-U.S. resident can finance up to 75 percent of the property value. Foreign nationals can refinance through a fixed and or adjustable rate mortgage. Adjustable rate are 3/1, 5/1, 7/1 term for 15 or 30 years fully amortized loan. An EB-5 investor with a $1 million home can receive up to $750,000 at approximately a 4.5 percent interest rate and apply the $750,000 to the EB-5 investment and related expenses.
Often times the bank can see if the home or condo qualifies for a cash-out refinance in as little as 72 hours. Then depending on the appraisal and lending review process the loan proceeds can reach the investors account within 45 days. Some of the information that banks require can include: a copy of the executed purchase agreement (or home title); a passport with a valid U.S. visa and personal credit references (e.g. credit card or landlord letter). Some banks require that a checking account is active with at least 12 months of loan payments maintained in the account.
Can I Receive a Loan from a Family Member or Friend, not a Financial Institution?
An EB-5 investor can obtain a loan, secured by their personal or real property from a financial institution (as detailed above), friend or family member. Immigration attorney Edison Samways of the Alexandre Law Firm notes, “It is important that the loan and terms of repayment are properly documented to facilitate the origin and tracing of investment funds.” A number of law firms work with Chinese and Latin American EB-5 investors on different financing mechanisms and are seeing more and more clients who are inquiring about different loan models.
If the investor owns a house, or other real property, and does not want the hassle of dealing with a bank, his friend or family member can agree to loan the funds needed for the EB-5 investment. Some of the documents that might be required include:
- An appraisal of the property securing the loan.
- Proof that you have clear title to this property.
- A signed and executed agreement mortgaging the property evidence of the transfer of the loan proceeds to your account from the lender’s account.
- Proof that the person loaning you the funds obtained the money lawfully.
This is a great way to simplify obtaining funds for an investment and the tracing of the origin of those funds. Always remember, however, that the repayment of the loan cannot be secured by the assets of the EB-5 enterprise. It must be secured only by separate assets of the EB-5 investor.
Given that EB-5 investments often have a 5-year tenure and a low rate of return, it is worth working with your trusted advisor on different ways to finance your EB-5 investment. Many prospective EB-5 investors do not know the options that are available to them, including who can provide the lending and on what terms. The securities lending option is ideal for those with sufficient liquid assets. Lending based on real estate assets bodes well for those investors who had purchased U.S. real estate in the past few years.