What is the benefit of having a bank in the capital stack?

Before a bank approves a loan for a project they have to conduct due diligence to ensure that the project meets the bank’s credit standards.  During this process, they will explore every aspect of the proposed project including: the source of the equity, the developer’s experience, the demand for the project, the neighborhood, the development timeline, the cost, the projected rent roll etc.  They will do a multi-step analysis and make sure they are comfortable with that project to give the bank comfort that the loan will be repaid upon maturity.

As an investor in a project, the more due diligence conducted by professionals not affiliated with the developer, the better it is for you.  You want to ensure, to the best of your ability that the project specifications meet actual demand in the market and the projected rents are achievable.  You want to have comfort that the developer has a strong track record and good relationships with lenders. 

At the same time, it is important to recognize that not all lenders are equivalent.  Some are willing to accept riskier projects to justify the higher interest rates they charge.  As an EB-5 investor, it is likely that you will not be earning a meaningful return on your investment.  Consequently, you should consider finding a project with a lender that has similar interests to you: requiring minimal risk in a project and providing a loan with moderate interest rate in return.

Remember, there’s always a chance that the developer will default.  If that happens, the bank will be in the first position to recoup its investment with the EB-5 investment behind it. However, the advantage of having a bank as a participant in the capital stack is it is capable of conducting deeper due diligence on the project than most investors and thus, will hopefully, minimize the chance of developer failure at the outset.