Money and structure
Mezzanine debt
Also called mezz, mezzanine loan.
Mezzanine debt is a loan ranking below the senior lender and above every equity holder, and in a regional center loan model it is a common position for the loan the new commercial enterprise makes to the job creating entity. It describes that loan, not the investor's own stake, which has to be equity in the new commercial enterprise rather than debt.
What it decides
In a loan model offering the new commercial enterprise lends pooled investor capital to the job creating entity, commonly as mezzanine debt secured by a pledge of ownership interests in the borrower rather than by a mortgage on the property, when it is secured at all. That ranking describes the loan between the two entities and nothing else. The investor's own contribution cannot take the same form: 8 CFR 204.6(e) and 8 U.S.C. 1153(b)(5)(D)(ii)(III)(bb) both exclude capital contributed in exchange for a note, bond, convertible debt, obligation or any other debt arrangement between the investor and the new commercial enterprise, and a guaranteed rate of return is not capital at risk. What an investor receives is a distribution of profits from the new commercial enterprise, not interest on a loan. The USCIS Policy Manual says the business plan filed with Form I-956F should identify the form of the investment from the new commercial enterprise into the job creating entity, offering an equity stake, a loan or some other financial arrangement as examples and adding "if any", so this is guidance on what a plan should show rather than a condition of filing; the statutory list of what the application must contain is at 8 U.S.C. 1153(b)(5)(F)(i). A subordinate ranking normally commands a higher return, so it does not explain the low return offered on EB-5 capital, which is priced off the immigration benefit instead. Where the ranking does bite is on loss: equity is wiped out first, mezzanine debt takes loss next, and the senior lender takes loss last. No federal source defines the term. It comes from commercial real estate finance and appears nowhere in the INA, in 8 CFR part 204, or in Volume 6 Part G of the USCIS Policy Manual.
Where this is explained properly
Pages here that go into mezzanine debt rather than mentioning it.
Related terms
- Capital stackThe capital stack is the ranking of a project's funding sources by priority of claim, from senior debt, which is paid first and absorbs losses last, down through mezzanine debt and preferred equity to common equity, which is paid last and absorbs the first losses. It is a finance term rather than an EB-5 one: nothing in the EB-5 statute or regulations fixes where a project's EB-5 money must rank.
- Senior debtSenior debt is the borrowing that ranks first in a project's capital stack, normally secured by a first lien on the project assets, and it is paid ahead of every junior claim, an EB-5 loan included, out of project cash flow and out of the collateral if the borrower defaults.
- Loan modelThe loan model is the regional center structure in which the new commercial enterprise lends the pooled investor capital to a separate job creating entity, most often a company the project developer controls, instead of taking an ownership stake in it.
- Preferred equityPreferred equity is an ownership interest that ranks ahead of common equity for distributions and for the return of its capital, and behind the debt of the entity that issued it. In EB-5 the phrase most often describes the form the new commercial enterprise's investment in the job-creating entity takes.
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