EB-5 Diligence Webinar: Dealing with Senior Lenders in EB-5

The June 3, 2015 EB-5 Diligence “Dealing with Senior Lenders in EB-5” webinar was related to the utilization of EB-5 financing combined with senior financing and, potentially, bridge financing. Based on my participation as a panel member, I would like to provide an overview of some of the items discussed, as well as share some suggestions.

  1. It is apparent that senior lenders have become more knowledgeable about the EB 5 funding opportunities and have become more accepting of the utilization of EB 5 capital. Many lenders will not want to be involved in an EB 5 program due to the perceived risk of a failed project and the negative publicity that may entail as a result of same. However, several institutional lenders are now accepting and dealing with EB 5 type financing.
  2. From the senior lender’s standpoint, the issues are related to allowing an EB 5 subordinate lender to receive a mezzanine pledge as collateral and the ability of the EB 5 lender to take over the project as a secured creditor. The senior lender’s main problem is the lack of experience of the EB 5 company and its inability to actually take over the position of the borrower in the event of a default. As a result, senior lenders are generally seeking a complete standstill agreement whereby, even upon a default, the EB 5 lender (NCE) is provided no right to take action to foreclose on its collateral until the senior loan is satisfied. As part of this process, the senior lender will generally provide notice of default and opportunity to cure and possibly the right to pay off the senior loan. I have been involved in loan transactions where the senior lender has likewise provided the NCE the right to take over the loan if it brings in a qualified developer, partner or agent that has the track record and ability to assume the first mortgage loan and undertake all matters related to the development and operation of the project.
  3. We discussed the advantages of having a senior loan in connection with the EB 5 program. The main advantage from a marketing point of view is the perception that if the senior lender has approved the financing of the project and is monitoring the funding and due diligence related to the project, this provides additional protection for the EB 5 investors. There is an assumption that the senior lender has done its diligence and will not lend money unless the project is in order and proper documentation is provided, such an environmental, title, zoning, permitting and the like. The other advantage of having a senior lender is the fact that the EB 5 lender can bootstrap with the loan administration and rely upon reports received by the senior lender with respect to inspections and draw requests.
  4. The utilization of bridge financing to pre-fund the EB 5 loan is becoming more common, since the developer is accessing funds and not waiting for an extended period of time to access funds. As part of the bridge financing concept, bridge lenders want to have the EB 5 funds utilized to repay the bridge loan. However, under the EB 5 program, the escrow proceeds cannot be pledged in violation of USCIS regulations. Though, it is feasible to have the EB 5 operating account become subject to a so-called tri-party lockbox agreement, whereby when the EB 5 proceeds are disbursed from escrow and at risk with the NCE, the NCE can then automatically have these funds transferred to payback the bridge loan. In connection, it is very important to confirm that the disbursements made under the bridge loan are consistent with the disbursements that the NCE would have made; namely, all of the money going into the project. Any ancillary expenses not otherwise qualified for project expenditures would have to be paid by non-EB 5 sources in order to ensure compliance with the EB-5 program. The process needs to be monitored very carefully.
  5. Another issue with bridge financing is the potential default under the bridge loan. This usually has a collateral pledge security interest in the borrower entity, as well as the protection of the EB 5 monies that may otherwise come out of escrow and pay down a loan that is in default. This would include a notice and opportunity to cure, extended cure rights upon maturation of the bridge loan, which is usually short term in nature; and the confirmation that EB 5 funds will be utilized to immediately cure any default not only under the bridge loan, but also under the senior loan.
  6. The sophistication of EB 5 financing has increased dramatically over the last few years, and project companies and regional centers should understand that the EB 5 lending process has in and of itself become a major component of the EB 5 program.