Coordinating the Disbursement of EB5 Funds can be Tricky

Rohit Kapuria: It can be somewhat tricky when the EB5 lender needs to disburse funds into the project because the EB5 funds are just sitting in the New Commercial Enterprise’s (NCE) operating account and the construction loan is being disbursed. Michael, have you seen a situation where there is a requirement that the construction loan must be completely exhausted before another source of funding comes in, or can they both go into that pool and the borrower is able to utilize both, because from my perspective I get uncomfortable if the EB5 money is sitting in the NCE's operating account for 8 or 9 months and construction is close to being done. I want to fund before construction is complete.

Michael Gibson: Yeah absolutely, you want it to fund before construction is over. It's kind of interesting because in a typical construction project, the borrower will be required to fund all of its equity into the project before it can draw down a dollar of the construction loan.

And it's basically balanced so that when you get to the end of the project you've zeroed out the budget meaning, the equity plus the construction loan will fund all the dollars going into the project. If there's any excess costs, the borrower is obligated to fund those costs and, if borrower fails to do so, it triggers the completion guarantee so the borrower or guarantor goes back into its pocket to come up with that money.

When EB5 comes into a project, sometimes it is replacing that initial equity that went into the deal and sometimes it's funding construction draws that are going to happen in the future. So you want the money into the project before construction is complete and how you document that and how you show the flow of funds depends on factors we just talked about, in other words, whether it's going to be replacing equity that's already been put into the project or funding new draws.

Ronald Fieldstone: The other factor that is also common today is that developers are getting bridge financing to cover the gap and usually at pretty high interest rates. 

EB5 money is allocated to pay back the bridge loan, which is perfectly permissible under USCIS guidelines. The bridge funding jump starts the project, while money is being raised or being held in escrow pending certain conditions being satisfied. 

The developer, together with the consent of the senior lender gets a traditional short term mezzanine bridge loan, usually one year with a 6-month extension, at a fairly high interest rate, and then that bridge lender requires the EB5 company together with the consent of the developer (borrower) to enter into some type of tri-party agreement whereby as money comes out of escrow and into the EB5 company account (NCE), the EB5 company has something akin to a lock box where the money automatically goes to pay down the bridge. 

The problem is you've got to make sure that the bridge money is utilized exactly like the EB5 money would have been utilized to pay project costs that are within the budget as approved by ‘Matter of Ho’ and thus result in job creation. So you have to make sure that if you’re replacing bridge money, that bridge money needs to be funded in an identical manner and for the same purpose as EB5 capital.

Rohit Kapuria:  It doesn't necessarily mean that EB5 money must go in only for hard construction and can't go into soft construction, so long as that was contemplated in the economic impact report. As long as some other source of funding within that capital stack was utilized we should be fine. 

But, you are correct that from an intention prospective, if we tell USCIS this is how we're going to utilize the EB5 funds (to pay down the bridge loan) then that's the intent we must follow because we could have problems down the line with material changes.