(John Tishler): Assuming we're talking about the loan model, you have to start with what the deal is between the new commercial enterprise (NCE) and the job creating entity (JCE). There are so many iterations related to the structure, the needs of the developer and what the agents are looking for, that this quickly gets to be a very complex problem; Probably the most complex problem that we have right now in terms of structuring an offering and we have to rely on our immigration partner firms or colleagues to advice us.
If I could sum up the advice I’ve received in three words it would be: “We don't know” and so then we have to structure a real offering around “We don't know”.
Getting investors their visas is always paramount. Everyone who expects to be a long-term player in the EB5 industry knows that if they do anything that would defeat people's visas, that's the end; there would be no real recovery from that.
Different EB5 models
With some deals the NCE and the JCE are under common control, so the left hand is essentially lending to the right hand. In that case everyone’s goals are aligned with flexibility of capital and having successful visa adjudications. When the same people control the NCE and the JCE they can always waive or not follow what their loan agreement says because they have the same interest.
So let's say it turned out that repayment of a 5-year loan after retrogression is deemed illegal. By the way, I don't think that's going to happen, but if it did and the NCE and the JCE are the same people they can amend the loan agreement and maybe that works with USCIS EB5 compliances and maybe it doesn't, but for commercial purposes they can do it.
If they are separate people who’ve got different interests, with a JCE (the borrower) wanting to do what it wants with the money and not as concerned as the NCE would be about the visas, it’s going to be different advice, such as thinking about the loan maturity date in terms of how long we expect the adjudication to take along with loan extensions.
There are some deals that say the JCE cannot repay the loan even though it's matured.
And then there are deals that say you can prepay but only if all the I-829s have been adjudicated since you may not be able to limit prepayment to only the investors whose I-829 has been adjudicated. I suppose that adds a measure of safety for the visas so I can appreciate why this would be desired.
For a developer though, that is really, really tough, because they don't know when they're going to be able to repay the loan. Typically developers repay an EB5 loan by refinancing their entire capital stack, so if they have to leave a part of the capital stack in place it significantly restrains their refinance options.
As per eb 5 visa requirements, what does that mean to investors? Well, refinancing is how the investors are going to be paid back, so when you constrain the developer's ability to refinance or sell the project, you haven't really done the investors any favors.
Another thing we get into are deals that allow repayment of the loan on maturity with maturity being far enough out that people feel pretty safe that at least a 2-year period of conditional residency will be satisfied.
We also get into prepayment because developers would like to be able to prepay to reduce their interest costs.
Some loans say they can't be prepaid at all, some loans say they can be repaid but only with the permission of the NCE and some go further and say only with the permission of the NCE and only if doing so would not jeopardize anybody's I-829 under current USCIS adjudication policy.
Ronald Fieldstone: I look at the problem of loan repayment with two perspectives. One is the developer (borrower) and the other is the NCE. They're very different. The borrower cannot from a practical standpoint be put in a box where they can't repay a loan for an indefinite period of time. It's ridiculous to say that in a commercial setting that a loan can't be prepaid.
I think it is a mistake when it says the loan can't be repaid earlier than I-829 approvals. You can have one outlier who has a personal problem and their I-829 is extended for an indefinite period of time. Not only have you hurt the developer but you've hurt all the other investors who've received I-829 approval and can't get their money back. I’m against having a repayment condition until everybody receives I-829 approval.
Carolyn Lee: The lender can waive in that instance.
Ronald Fieldstone: Yeah, the lender can waive. But if I'm a borrower I don't want to be at the mercy of a lender saying, "Sorry, this loan's staying out there." The other issue the interest component which is not necessarily that low given the state of the marketplace, where agents as we know are typically participating in the interest payments.
Today we see condominium projects which go through their natural trend in 3-4 years; construction, sellout, completion, money refunded. This is not a rental project, it's a condo project, so the project gets funded and they're done and there's no need to refinance. Now what do you do? You have a couple of options.
- Probably the easiest one from an immigration standpoint is that the developer takes that money and substitutes collateral based on some pre-established standard. Now the developer's not repaying the loan, they're taking the loan proceeds and they're redeploying it in another investment which I assume does not have to be job creating because you've already created the jobs. It just needs to be 'at-risk' to comply with Izumi. The EB5 loan hasn't been repaid, the money's just being redeployed in another to keep it ‘at-risk'.
- If a loan is not repaid because the developer doesn't have that option, I've seen negotiations where the interest is reduced to passbook rate. The money is already in the account of a developer because they're not paying the loan back.
But typically we're seeing is the first option.
As a practical matter, given retrogression in China, we’re looking at potentially well beyond 5-years. That’s a time period for a loan that was never intended because traditionally there was a 5-year term and often a 1-year extension to give enough time for the adjudication of investors I-829s.
Kurt Reuss: Rupy, from your standpoint representing investors, what language do you like to see in the loan documents?
Rupy Cheema: We like to see that the NCE and the borrower are committed to protecting the investors and making sure that the loan is not repaid before the I-829s are approved. I disagree with the fact that it's an indefinite period. I think right now it's not a period probably more than 7-years so if they’re electing to choose EB5 investment as part of your capital stack, I think developers should be willing to take on that risk and have as part of their business plan that there's a potential that they will have an EB5 loan, for a certain amount of time.
I think that's what would give an investor the most comfort because if the loan is going back to the NCE and they have vague language concerning redeployment, thats concerning. I think the investors want to see that the manager and the borrower are committed to making sure that the I-829s are adjudicated prior to repayment.
John Tishler: Rupy, I absolutely appreciate the point and I appreciate you expressing it. I think there's another dimension to it though from the investor's side which is markets go in cycles. If you stop developers from refinancing or selling the property when they deem it most economically advantageous and tell them to hold the money another year; the money may not be there in another year, the property might drop in value or the credit markets might dry up. I think you have to have that perspective on this issue as well.
Rupy Cheema: John, I recognize the potential of a market downturn and the risk of the borrower being unable to repay the loan later, but the investors face a similar risk. If the money is repaid to the NCE and the NCE redeploys it, the investors capital is still ‘at-risk', and if the manager has very flexible rights to redeploy it for an indefinite period of time in risky investments without sharing any of profits with the investors, the investors face additional risk.
So whether their money is in the NCE or the JCE, I don't believe that their risk goes away. If the redeployment language is vague there's a possibility of abuse if a manager has the ability to use that money for an indefinite period of time and the investors don't have any voting rights in the issue. That's my fear.