Redefining EB-5 Investments: The Unmatched Value of Diversification to an EB-5 Investor

Across the EB-5 investment industry, the concept of diversification is completely ignored. Offerings are single assets, individual syndications, one-off deals. It doesn’t matter if it’s looking at EB-5 project offerings, the regional centers or even the EB-5 investors’ preferences, the concept of reducing risk through diversification is almost nonexistent. Diversification is incredibly important to every other aspect of investment, so why don’t investors see diversification in their EB-5 investments?

This article will explore what diversification is, why its lacking in the EB-5 visa world, and how that is going to change. Spoiler alert: Diversified offerings are now here and EB-5 will be changed forever.    

Understanding Diversification

Diversification is a fundamental investment strategy that entails spreading investments across a variety of assets, locations, or sectors. This approach serves to mitigate the risks associated with individual asset performance, thereby reducing the overall volatility of an investment portfolio. The saying “Don’t put all your eggs in one basket” exists for a reason. This quote underscores the importance of diversification as a tool for minimizing risks. This article will delve into the intricacies of diversification, its seldom-seen application in EB-5 investments, and how Behring’s newest offerings, the Legacy Fund and RISE Fund are the leading solutions to achieving diversification for your EB-5 visa investment.

The Mathematics of Diversification in EB-5 Investments

To comprehend diversification’s impact, let’s start with a conservative assumption in the EB-5 context: assume a single project has a 20% risk of failure, which translates to a complete loss of the initial investment (i.e., $800,000 for an EB-5 investor). However, since investors come to us overly fearful due to what they read on the internet, we’ll illustrate our point using a heightened 50% risk of failure. It’s worth noting that, in my experience as a seasoned professional in this field, the actual failure rate of any major EB-5 project that was investment grade to begin with is likely closer to 5% or less.

Now, consider an investor with a single asset. If this asset performs poorly, the entire investment faces a 50% risk of loss. However, if the investor diversifies into two assets with similar risk profiles but independent performance, the probability that both assets fail simultaneously drops significantly. Here’s the breakdown:

Risk with Two Diversified Assets: For two assets each with a 50% failure rate, the probability of both failing simultaneously is 25% (0.5 x 0.5 = 0.25 or 25%).

Risk with Five Diversified Assets: Expanding the portfolio to five assets, each with a 50% failure rate, the combined risk of all failing simultaneously is 3.125% (0.5^5 = 0.03125 or 3.125%).

Risk with Fourteen Diversified Assets: With 14 assets, as in Behring’s RISE fund, the cumulative risk of all failing simultaneously is approximately 0.00006% (0.5^14 = 0.00000064 or 0.00006%). Learn more about Behring’s RISE Fund.

The EB-5 Visa Landscape: Why A Lack of Diversification?

Despite the undeniable advantages of diversification, it remains conspicuously absent in the realm of EB-5 projects. This absence sparks curiosity: why is such a beneficial strategy not embraced more widely?

The answer lies in the dynamics of the EB-5 market as well as the difficulty and dedication it takes to achieve diversification as a sponsor and ultimately the reward for doing so. Regional centers, typically the architects of these investment structures, do not prioritize or even consider creating diversified portfolios. Similarly, agents, crucial in promoting these investments, show little interest in selling diversified options because it is more difficult to market or explain, and they don’t really make more money. For an agent, their version of diversifying is just offering multiple single-asset deals, allow the investor to choose any one of those assets perceived to be the least risk, and collect a commission just the same. Also, EB-5 competitors are not offering diversification; thus, the status quo remains a very low bar.

This alignment—or rather, misalignment—of interests among market makers, developers, and promoters creates a scenario where diversification, despite its apparent benefits to investors, is not just underutilized, but often completely overlooked. This raises an intriguing question: why are EB-5 investors not being given the opportunity to diversify their portfolios? Let’s delve deeper into this puzzle.

Why EB-5 Developers Avoid Diversification

Project developers play a pivotal role in shaping the EB-5 investment landscape, and their tendencies towards single asset syndications can be attributed to several intertwined factors.

First, adding EB-5 financing to a development project is hard.

Real estate development complexity discourages offering diversified investment options. Structuring multi-asset ventures involves coordinating with each project’s own set of stakeholders – including senior lenders, banks, capital partners, and asset managers. Each participant’s incentives and goals can cause conflict in or complicate the development process. The intricacies of EB-5 financing make coordination even more daunting, often pushing developers (and regional centers) to choose the simpler route of single asset projects.

Second, Developer financial incentives are not typically aligned.

Developers typically adopt a business model centered on a single asset, involving a general partner, a limited partner. Compensation under this model is largely revolves around a single fixed asset and a fixed schedule for exit. That single metric of Internal Rate of Return (IRR) generates carried interest or a cash incentive for the developer to exit the project. IRR, being a time-based metric, inherently encourages a quick turnaround, leading developers to frequently exit deals rather than maintain them for longer terms.

This tendency to exit deals promptly stems from a short-term mindset, often a result of the prevailing incentive structures within the industry. For instance, focusing on IRR means developers are constantly chasing short-term gains rather than considering the long-term benefits of holding onto and managing a diverse portfolio of assets. This short-term approach leads to a cycle where developers repeatedly ‘kill the golden goose,’ opting to cash out early rather than nurture a range of investments that could offer sustained cash flows and growing returns over time from multiple assets.

While this approach may simplify management and align with the developer’s short-term goals, it exposes EB-5 investors to heightened risk. By putting all their investment in a single project, EB-5 investors lack the safety net that diversification could provide. Consequently, the market witnesses a paradox where the potential for greater stability and long-term gains through diversified investments remain largely untapped due to the prevailing short-term focus and the complexities inherent in the development process. This scenario leaves a critical question unanswered: how can the developers in the EB-5 industry shift its paradigm to embrace a more diversified, long-term investment strategy that benefits all parties involved?

What type of developer can deliver on diversification to EB-5 investors?

The answer already exists in practice, just not typically in EB-5. The developers who can make a diversified, multi-asset EB-5 qualified project offering are growth focused, long-term hold owner/operators who also build new developments to grow the portfolio (a portion of their efforts needs to be job-creating for EB-5 purposes). In traditional real estate, core funds, REITS, family offices and some select opportunistic or value-add funds would fit the bill. It would be more preferred to have a longer-term player such as an evergreen open-end fund that has no termination date rather than a closed-end fund with a 5-7 year life where the projects exit regardless the needs of the EB-5 investor. In EB-5, the most likely candidate to fulfill this role is going to be a vertically integrated developer with a dedicated EB-5 industry platform that can control the entire decision-making process up and down the value chain.

Regional Centers and Diversification

Regional centers are the crux of the EB-5 ecosystem and have traditionally operated with a focus on facilitating a single specific project. Initially, these regional centers functioned more as intermediaries than developers, connecting projects in need of funding with investors seeking a green card. This model, straightforward in its approach, involved matching one project to one group of investors, earning a fee from this pairing. Over time, while the role of regional centers has evolved, their structural and operational frameworks have largely remained unchanged, not being conducive to offering a diversified portfolio of investments.

The simplicity and familiarity of handling a single project make it an attractive option for many regional centers. This ‘one-trick pony’ approach is perceived as less complex and does not demand extensive expertise (until things get hard). Adding to this, most regional centers face limitations in accessing multiple high-quality properties, lack the resources to effectively underwrite a diverse portfolio, and struggle with raising capital swiftly enough to justify the involvement in multiple projects. Moreover, the majority of regional center staff lacks significant real estate experience, which hinders their ability to competently market and sell varied assets. It’s a sad reality when an EB-5 investor looks back and realizes he or she picked an investment only because it’s the only thing the regional center offered or the agent knew how to sell.

Expanding into a diversified investment strategy introduces complexities that many regional centers are unprepared or unwilling to manage. Handling multiple projects simultaneously requires a more sophisticated underwriting and loan administration, a more substantive marketing approach, extensive training for agents, and a higher level of coordination and EB-5 management and compliance – tasks that are more demanding and labor-intensive than what many regional centers are equipped to handle. This additional complexity often leads to a reluctance to deviate from the established single-project model, maintaining the status quo rather than venturing into the more challenging terrain of diversified offerings. The result is a landscape where regional centers, due to these operational, expertise, and resource constraints, generally shy away from the strategy of diversification, despite its potential benefits to investors.

Innovating with Diversified Investments: Behring’s EB-5 Platform

Behring prides itself on being forward thinking and constantly reinventing the EB-5 investment industry to not only catch up but exceed the benefits seen in the traditional investment space. If an investment can dynamically solve for permanent immigration status (U.S. greencard), diversify risk, and provide the prospect of wealth generation, Behring’s EB-5 investment opportunities could transform the lives of investors and their families for the better.

Behring saw this opportunity early and with the ability to leverage a vertically integrated development, investment, and immigration platform, we knew we had the ability to deliver a powerful EB-5 investment structure that would eventually shift the gravity of the EB-5 offerings entirely. It did not happen overnight though. We strategically started small and held our mantra of “nail it, then scale it”.

Behring’s 1^st Diversified EB-5 offering was Small but a Tremendous Success.

In 2016, Behring Regional Center offered the Madison Park project that was a $17.5 million portfolio loan against 3 multifamily apartment projects in Oakland, California. The project achieved USCIS approval on all EB-5 petitions. I-924 approved, I-526 exemplar approved, I-526 investor approval and even I-829 approval for investors. The job creation strategy was approved directly with zero delay from any USCIS requests for evidence (RFEs). Investors who have reached the end of their sustainment period and minimum investment commitments have begun receiving full repayment of their capital. This was Behring’s first diversified offering that served as a positive case study for diversified EB-5 investments going into the future.

Behring’s Legacy Fund Took Diversification to a Whole New Level.

In 2019 Behring launched its Legacy Fund, an open-end real estate private equity fund with a mandate to create a portfolio of multifamily and mixed-use properties for both traditional shareholders and immigration investors alike. The mission was to enjoy the benefits of consistent cashflow, shield income from tax with depreciation, and grow wealth over time. This is the EB-5 industry’s first known open-end fund with an evergreen vehicle (no maturity date) that engages the portfolio investment approach. For investors who need to diversify their risk exposure, the Fund offers both Common Equity units and Preferred Equity units. Having multiple assets, multiple share classes, and a redemption plan allowing the sale of some or all of an investor’s units offers EB-5 investors unprecedented flexibility in structuring their EB-5 investments. The Legacy Fund was also fully approved on all petitions by USCIS including the I-924 petition, I-526 Exemplar Petition, I-526 Investor Petition and even the Post-RIA approvals including I-956F and I-526E petitions.

After the RIA passed in March 2022, EB-5 investor demand surged. By the end of 2023, the Legacy Fund investor base and assets under management increased 355%. The dynamic diversification across multi-assets, locations, and investment structures attracted a huge amount of interest and is now the fastest growing EB-5 fund in the industry.

RISE Fund – Redefining Diversification in EB-5 Investments

The RISE Fund by Behring is not just an advancement in EB-5 investment diversification, it’s a complete overhaul of the concept. Compared with traditional single-asset EB-5 investments, which are often limited by their singular focus and associated risks, the RISE Fund introduces a multi-layered approach to diversification that significantly enhances risk insulation and potential returns.

• Diversification Across a Large Portfolio: the sheer number of different buildings – a total of 14 – within the RISE fund portfolio underscores its commitment to diversification. This broad spread across multiple properties not only cushions the fund against the underperformance of any single asset but also opens up multiple avenues for investor returns.
• Diversified Locations: The RISE Fund encompasses diversified locations and markets, spanning Oakland, Emeryville, and Berkeley (specifically adjacent to U.C. Berkeley). This geographic diversity ensures investment resilience against local market fluctuations, providing a broader base for stability and growth.
• Diversified Product Types: The diversity in residential product types within the RISE Fund portfolio is unparalleled. By including market rate apartments, workforce housing, student housing, and affordable (tax-exempt) housing, the fund caters to a wide array of housing demands. Thereby reducing dependency on any single market segment.
• Diversified Construction Types: Moreover, the fund’s diversified construction types – from 3-story walk-ups to 8-story podiums (Type V) and townhome products – further amplify its risk mitigation strategy. This variety in construction types not only caters to different market needs but also spreads construction-related risks across different building methodologies.
• Diversified Delivery Schedule: The staggered timing and delivery schedules of these projects, ranging from 18 to 36 months, with start dates spread over 2-3 years, add another layer of diversification. This staggered approach ensures continuous momentum in development and investment return, as opposed to the all-or-nothing risk of single-project timelines.

In conclusion, the RISE Fund by Behring takes diversification in EB-5 investments to an unprecedented level. Its multi-dimensional approach to diversification starkly contrasts with the limitations of single-asset EB-5 investments. For investors seeking to mitigate risks and maximize potential returns, the RISE Fund stands as a pioneering, comprehensive solution in the EB-5 investment space. This is not just diversification; this is diversification redefined and optimized for the savvy EB-5 investor.

For more information or details on the RISE Fund and its unique offerings, visit Behring’s RISE Fund . To get qualified for EB-5 investment and speak with our team of experts including award winning developers, immigration attorneys and former USCIS adjudicator, make an appointment here .