I have always been a big proponent of loan administration as a key component of EB-5 best practices. It is essential for the integrity of the Program, given the fact that most EB-5 capital is deployed in a loan model, that the loan transaction more closely resembles a traditional loan, in order to protect the EB-5 lending company and its investors in the same manner that a lender would protect itself in a traditional loan transaction. In relation to this topic, I was a panelist on a webinar for EB-5 Diligence on June 29. As in past webinars, there was an excellent group of panel members, who dealt with the concept of loan administration and matters related to it.

The following items are noteworthy:

  1. Understanding the Roles of the Various Entities and Participants. There are generally three types of issuers that undertake an EB-5 Program. One is the NCE that is formed by the Developer as an alter ego to raise capital. The next is an NCE formed by a Regional Center which takes an active role in managing the process and serves as the issuer. Finally, there are occasions when the marketing agent itself actually undertakes the formation of the NCE and oversees the entire process, and also serves as a manager or co-manager of the process. Each of these structures has different implications and need to be addressed as far as appropriate structuring.
  2. In most cases, the Regional Center does not serve as a manager of the NCE and, therefore, the Developer ends up being the Manager or a third party needs to be located. It may be appropriate if the Developer is a manager of the NCE, provided that the Developer does not otherwise oversee and control the loan administration process, given the obvious and inherent conflict of interest between the Developer being the borrower and, at the same time, overseeing the lender entity.
  3. Many organizations do it right and take full control of the NCE through the manager entity and make sure the loan is properly administered. Some Regional Centers, agents, and professionals have established a very sophisticated model for underwriting, closing and administering an EB-5 loan. Unfortunately, that may not be the norm.
  4. In reviewing the concept of the co-manager/loan administrator, the following factors should be noted.
    1. An appropriate budget needs to be prepared for the loan administration process. This is no different than a traditional lender charging the Borrower for loan closing costs and related expenses, including the title updates, loan servicing, and loan consultants who review and approve all draw requests.
    2. The actual availability or utilization of an investment committee that would undertake the loan underwriting and confirm the validity of the transaction. Some organizations who are not developers have well established investment committees that have undertaken this task, much the same as a traditional lender.
    3. Developer project budget verification.
    4. Expertise in making and administering the loan.
    5. Utilization of EB-5 lender counsel to either prepare and/or oversee the loan documentation, as well as the loan closing process in much the same manner as a traditional lender.
  5. When there is an equity model, it may be appropriate that the EB-5 funding goes into a special account whereby two signatures are required to disburse monies for the development of the project, one from the developer who is the party receiving the equity contribution, and the other from a representative of the NCE, which would be the independent manager and/or funding administrator.
  6. In addition to underwriting and making the loan, it is critical that after same is accomplished the loan be properly enforced. There are various procedures that are appropriate, and I have attached a schedule outlining many of the key loan administration procedures that should be considered under the circumstances.
  7. As part of the loan process, it would be very appropriate to consider the following components:
  8. Creating a loan checklist that addresses due diligence and closing procedures.
  9. Performing detailed due diligence on the background of the Developer and the collateral.
  10. Negotiating and ensuring there is an appropriate Intercreditor Agreement in place with the senior lender that, at least, provides minimum protections to the EB 5 subordinate lender such as notice of default and right to cure, the right to acquire the senior loan, and the right to take certain actions that otherwise protects the EB-5 lender. Many senior lenders are reluctant to provide many rights to the EB-5 lender. One solution would be for the EB-5 lender to have the ability to retain an experienced developer who has substantial experience in the type of industry involved in the project, much the same as a traditional mezzanine lender would do, given its expertise in the lending business, and the ability to develop and operate a project, if necessary.
  11. A need to spot and address irregularities and problems. This would include lien claims, confirmation of payment of real property tax, making sure that insurance is properly maintained making sure that the senior loan is maintained in good standing, and the project proceeds to not only satisfy economic conditions, but also generate the necessary information to support the I-829 filing, when necessary.
  12. The I-829 process starts upon the loan closing, given the fact that the documentation needs to be generated on a regular basis to eventually support the job creation expenditures which, in large real estate transactions, are primarily based upon the construction expenditure model.
  13. Receiving regular financial statements from the Borrower. Ideally, they should be reviewed statements prepared by an independent certified public accountant.
  14. It is becoming more common to have live website access showing the progress of construction.
  15. The organization documents of the EB-5 company need to address the ability and authority of the independent manager to modify the loan documents, where necessary, to take into account both regular and extraordinary circumstances which require an amendment. To the extent of any material change, it may be advisable to have a provision providing for a majority consent of the investing members/limited partners, although this could be cumbersome.
  16. In addition to the loan administration itself, the issue of redeployment needs to be addressed in the organization documents and, possibly, with the Developer, to the extent that redeployment may be undertaken with the same Developer in another real estate project that could already be completed. In this model, we have recommended the concept of a MAI appraisal, with the total debt percentage not exceeding a specific percentage of the appraised value in order to protect the maintenance of the equity in the project.

Please click here for a link of the July 29 Administration of the NCE’s loan to the JCE webinar, which includes slides used during the presentation.