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EB-5 Investment Voice
Mona Shah & Associates Global Podcast Series
Reported by Hermione Krumm, Esq.
With a withering (and if the author may dare say, dying) interest in EB-5 visas from Mainland China, due to, no other than the long visa waiting lines for current and future investors, EB-5 capital raising has dramatically slowed, in turn increasing the need for alternative capital to fund the projects. Savvy developers have looked into alternative markets, which has proven to carry different characteristics than the Chinese model, with bespoke projects that tend to be smaller in scale and embrace the inclusion of private equity.
However, why should investors prefer a deal that features private equity? Specifically, how does it positively affect the investor’s rate of return? To address these questions and the potential in private equity-funded projects for EB-5 investors, Mona Shah, Esq. welcomes Nicholas Salzano of National Realty Investment Advisors (NRIA) onto the EB-5 Investment Voice series - the first and only Podcast series that focuses on the US immigrant investor visa, EB-5 and foreign direct investment, to explain why Nick’s firm uses a combination of EB-5 capital and private equity to provide higher than average rates of return to its investors and how they have come to be one of the most trusted real estate development firms in the business.
Nicholas Salzano, Senior Independent Advisor at National Realty Investment Advisors, has over 20 years of experience in the fields of real estate development, finance and property management. He has supervised the development of over 900 investment property units, valued at more than $700 million, and managed numerous large-scale development projects. His development firm has a portfolio of rental projects in Philadelphia, north New Jersey and Palm Beach County totaling $800 million.
How does the inclusion of private equity fit in with EB-5? When incorporating private equity in an EB-5 project’s capital stack, developers often combine EB-5 capital with private investments at the onset of a project. NRIA, however, provides a different approach that might be insightful for industry stakeholders in considering bringing in EB-5 capital at the most opportune time.
At the onset of a development project, the financing is sourced from three distinct groups: construction bank loan that makes up for approximately 60-65% of the required capital, private equity from accredited investors (20-25%) and developer equity (5-10%). This capital stack allows the fully-financed project to close and construction to begin as soon as possible, which often expedites one’s developments to completion in under three years.
Immediately upon closing, private equity is refinanced out, i.e. it is pulled out of the current project and redeployed to other development projects. EB-5 capital is brought in as a substitute to refinance out a project that is already fully financed and approved, and the EB-5 requirement is met as the funds are considered at risk and the capital is brought in early enough (before the shovels hit the ground!) to satisfy the job creation requirements.
High Return on InvestmentPrivate equity investors typically anticipate a return as high as 15-21%. Factors that influence the success of a deal range from choosing the location of a development to cutting down unnecessary costs, by, for example, eliminating the middle man.
The NRIA experience has been always choosing prime urban real estate that might boast high growth rates in contrast to rural areas where, although less costly upfront, might render higher risks and lower profits upon completion (the good old discussion on rural vs. urban!). Downtown urban areas tend to have higher demands for housing, and with expertise, a skilled developer will know how to negotiate for a fair price and execute a value-engineered build.
In contrast to the typical 0.5% return most EB-5 investors receive from real estate development projects, a deal that structures private equity might be able to offer EB-5 investors higher return that ranges from 3% to 6%. This is especially attractive for EB-5 investors from countries in backlog (China and Vietnam) or facing backlog (India), as their investments can be tied up for years.
Additionally, in the NRIA model, private equity investments are capped at 21%, with any upside beyond the cap going straight to the developers. By ensuring alignment of interests, the developers are therefore highly incentivized to maximize returns in order to retain anything in excess.
How Do Private Equity Firms Make Money?Most private equity firms, like NRIA, collect a development management fee. It is important to remember that when structuring the deal, for EB-5 compliance, the fee should never be taken directly from the investment capital, but rather be charged separately.
Please see the link below for access to the podcast episode: http://mshahlaw.com/cashing-in-on-private-equity-experience-in-eb-5-with-nicholas-salzano-of-nria/ .
About the Author:Hermione Krumm, Esq. is an associate attorney with Mona Shah and Associates Global. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione writes and comments frequently on current business and immigration issues. Her articles have been published by LexisNexis, ILW, EB-5info, EB-5 Supermarket, etc. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.