Investment construction loans have become an increasingly popular financing tool for real estate developers, especially for middle-market companies undertaking mid-sized projects. Compared to traditional mezzanine loans, construction loans used in EB-5 investment have lower interest rates but also unique requirements on job creation. While costs are rising, construction loans still have key advantages like less stringent loan terms and more flexibility when unanticipated situations occur during the loan period. Overall, properly leveraging construction loans can help developers secure low-cost financing and smoothly carry out real estate projects.
Construction Loans Fill the Funding Gap for Real Estate Projects
In real estate development, construction loans from commercial banks are usually only 50%-70% of total project costs. Developers need to fill the remaining 20%-45% funding gap with equity capital or mezzanine loans like EB-5 investment. However, banks prohibit second mortgages on the property, so developers have to find gap financing without using the property as collateral. This is where construction loans can provide flexible bridge financing at reasonable costs compared to expensive mezzanine loans charging 11%-14% interest rates.
Construction Loan Interest Rates are Lower for EB-5 Investment
EB-5 construction loans have much lower interest rates, often below 1% for investors after fees. But EB-5 loans require job creation while traditional mezzanine loans don’t have this requirement. Still, the low rates make EB-5 attractive for developers compared to mezzanine rates of 11%-14%. Costs are rising due to third-party Regional Center fees, but developers can save costs through in-house Regional Centers.
Construction Loans Have More Flexible Terms Than Mezzanine Loans
Mezzanine lenders often have stricter loan covenants and aggressively enforce defaults. But EB-5 investors are more flexible before getting green cards. Construction loans allow developers to remedy problems before lenders take legal action. The immigrant intent behind EB-5 financing makes such loans more developer-friendly.
New Construction Projects Are Ideal for EB-5 Construction Loans
New ground-up developments generate substantial direct and indirect jobs ideal for EB-5 visa requirements. Construction-based job creation models have natural advantages in proving required job numbers. As long as project budgets and expenditures are verified, construction loans provide solid evidence that expected employment has been created.
Construction loans are an effective financing tool for real estate developers to bridge funding gaps, lower costs, and maintain flexibility during the loan period. Properly structured, construction loans can provide a win-win solution for both developers seeking financing and EB-5 investors looking to create jobs.