# Reading the Capital Stack: Where EB-5 Money Sits

> An explanation of senior debt, mezzanine financing, EB-5 capital, and developer equity, how subordination works, what completion guarantees do and do not cover, and why EB-5's share of total capital matters.

- URL: https://eb5policy.com/projects/capital-stack-explained/
- Language: en
- Category: projects
- Published: 2026-08-21
- Tags: capital structure, due diligence, risk

The "capital stack" is the full set of a project's funding sources arranged by repayment priority from highest to lowest. Reading it is the first step in judging how much risk EB-5 capital carries in a given project. This article explains each layer in plain terms, describes where EB-5 capital usually sits, and sets out what investors should verify in a private placement memorandum (PPM). It discusses no specific project; every statement is general.

## The four typical layers

From highest to lowest repayment priority, a real estate development's capital stack generally contains the following:

| Layer | Typical provider | Priority | General features |
|---|---|---|---|
| Senior debt | Commercial banks, insurers, debt funds | Highest | First mortgage on project assets, lowest rate, strict funding conditions |
| Mezzanine | Mezzanine funds, private credit, **a common EB-5 position** | Below senior debt | Secured by a pledge of JCE equity or a subordinate mortgage, or unsecured; higher rate than senior |
| Preferred equity | Institutional investors, **another common EB-5 position** | Below all debt | Preferred return and distribution priority, no fixed maturity |
| Common equity / developer equity | Developer and partners | Lowest | First-loss position, residual upside |

When EB-5 capital flows from the new commercial enterprise (NCE) into the job-creating entity (JCE), it most often takes the form of a mezzanine loan or preferred equity. It is rarely in the senior position. For the differences between the loan and equity forms, see [Loan Model vs. Equity Model](/projects/loan-vs-equity-models/).

## What subordination means

Subordination means that a lower-priority layer's rights yield to a higher-priority layer. In practice it is implemented through an **intercreditor agreement** or **subordination agreement**, whose core provisions include:

- **Payment order.** Project cash flow and disposition proceeds go first to senior debt; only the remainder reaches mezzanine and equity.
- **Enforcement limits.** The senior lender typically requires the mezzanine lender to observe a standstill during a senior default, or to intervene only by purchasing the senior loan.
- **Cure and purchase rights.** Mezzanine lenders often have the right to cure a senior default on the JCE's behalf or to buy the senior loan at par. These are the mezzanine layer's main self-protection tools.
- **Funding order.** Some structures require EB-5 capital to be deployed before the senior loan funds; others the reverse. If EB-5 goes in first, investors bear the risk that senior financing never closes.

Investors should ask whether the NCE has signed a subordination agreement, what it prohibits the NCE from doing, and whether the NCE can act independently if the JCE defaults.

## Completion guarantees and other guarantees

Senior lenders on large developments usually require the developer's parent to provide a **completion guarantee**, promising to fund cost overruns or delays so the building is finished. For EB-5 investors, three distinctions matter:

1. **Who the beneficiary is.** A completion guarantee given to the senior lender does not automatically benefit the NCE. Only if the NCE is a named beneficiary can it enforce the guarantee.
2. **What the guarantee covers.** A completion guarantee covers finishing construction, not repayment. A "bad-boy" guarantee covers only specified acts such as fraud or misappropriation.
3. **The guarantor's strength.** A guarantee is worth only what the guarantor's net worth and liquidity can support. The PPM should identify the guarantor, and investors may ask to review a financial summary.

Any arrangement that promises an individual investor "principal protection" or a "guaranteed return" conflicts with EB-5's at-risk requirement. A compliant guarantee is a project-level credit enhancement, not a guarantee of the investor's capital.

## Why EB-5's share matters

EB-5's proportion of total capital drives two kinds of risk.

**Completion risk.** If a large share of construction funding depends on EB-5 subscriptions and fundraising lags, the project may be delayed, scaled back, or halted. A project in which senior debt and developer equity are already in place and EB-5 is a modest share depends far less on subscription pace.

**Job-creation risk.** In regional center projects, jobs are derived mainly from construction spending and operating revenue run through an economic model. If spending shrinks, projected jobs fall, and the job cushion may disappear. See [How Job Creation Is Calculated](/projects/job-creation-methodology/).

Investors should also look for **shortfall provisions**: whether the PPM explains who fills the gap if EB-5 raises less than planned (additional developer equity, a standby loan), whether there is a minimum raise, and what happens to funds already received if the minimum is not met.

## "Funded" versus "committed"

Every layer in a capital stack table should show its status. Common labels include:

- **Funded / closed.** Capital has actually been invested, or the loan agreement is signed and advancing.
- **Committed.** The lender has issued a binding commitment letter but has not yet funded, usually subject to conditions.
- **Term sheet / letter of intent.** Non-binding indication only; it can change at any time.
- **Projected.** No source has been secured.

A project whose senior loan is only at the term-sheet stage while EB-5 subscriptions are already being collected carries markedly higher completion risk than one whose senior loan has closed. Investors can ask to see the commitment letter or the key pages of the loan agreement.

## Checklist for reading a capital stack table

1. Are the amount, percentage, and priority of each layer clearly stated, and do they sum to total project cost?
2. Which layer is EB-5 in: mezzanine loan, preferred equity, or something else?
3. Has senior debt closed? If not, what are the conditions precedent?
4. What is the developer's equity share, has it been contributed, and does it include land at an appraised value?
5. Has the NCE signed a subordination agreement, and does it retain cure or purchase rights?
6. Is there a completion guarantee, who benefits, and who is the guarantor?
7. What is the fallback if EB-5 raises less than planned?
8. What is the repayment source (operating cash flow, refinancing, or sale), and does its timing match the EB-5 loan maturity?

## Key takeaways

- The capital stack ranks funding by priority: senior debt, then mezzanine, then preferred equity, then common equity. EB-5 usually sits in the mezzanine or preferred equity layer.
- Subordination agreements define the NCE's rights behind the senior lender; cure and purchase rights are the mezzanine layer's key protections.
- Completion guarantees usually run to the senior lender. They help EB-5 investors only if the NCE is a beneficiary, and they are not repayment guarantees.
- The larger EB-5's share and the less certain the senior debt, the more completion and job creation depend on subscription pace.
- Distinguishing "funded" from "term sheet" for each layer is the most direct and important step in capital stack due diligence.