I have always been a big proponent of loan administration as a key EB-5 best practice.
It is essential that for the integrity of the program, given the fact that most EB-5 capital is deployed in a loan model, that loan transaction more closely resemble a traditional loan. It is prudent to provide many of the protections seen in a traditional loan transaction to the EB-5 lending company and its investors.
There are generally three types of EB-5 issuers.
An EB-5 issuer could essentially be the developer's alter ego and raise money for its own project; be formed by a regional center taking an active role in managing the process as the issuer; or the marketing agent who forms the NCE and oversees the process while serving as the manager or co-manager of the project.
Each of these structures have different implications and need to be addressed as far as appropriate structuring.
If the developer is the manager of the NCE, given the obvious and inherent conflict of interest with the developer being the borrower and at the same time overseeing the lender, a third-party should be located. Many agents take full control of the NCE as the manager and make sure the loan is properly administered.
Some regional centers, agents, and other professionals have established a very sophisticated model for underwriting, closing and administering an EB-5 loan. Unfortunately, that may not be the norm.
Best practices in loan administration
The following factors should be considered in reviewing the manager/loan administrator.
- Have an appropriate budget for the loan administration process. This is no different than a traditional lender charging the borrower loan closing costs and related expenses, which cover title updates and loan consultants who review and approve all draw requests.
- Project budget verification.
- Determine the expertise necessary to make and administer the loan.
- Utilize an EB-5 lender counsel to either prepare or oversee the loan documentation and the loan closing process.
- Consider an investment committee. Some organizations have established investment committees who have undertaken on this task, similiar to a traditional lender.
When there is an equity model, it may be appropriate that EB-5 funding goes into a special account with two signatures required to disburse monies into the project. One is the developer, the party receiving the contribution and the other is the representative of the NCE, the independent manager and/or funding administrator (fund supervisor).
It is critical that in addition to underwriting and making the loan, the loan agreement must be properly enforced. As part of the loan process consider the following:
- Create an EB-5 loan checklist dealing with due diligence and closing procedures.
- Completing a detailed background verification of the developer.
- Due diligence the collateral.
- Ensure and negotiate an appropriate Intercreditor Agreement with the senior lender. It should provide at least minimum protections to EB-5 lender (investors), such as notice of default, right to cure, right to acquire the senior loan and the right to take certain actions that otherwise protect the EB-5 lender.
- Many senior lenders are reluctant to provide significant rights to the EB-5 lender unless the lender has the ability to retain an experienced developer with substantial experience in the industry to develop and operate the business, much as a traditional mezzanine lender would do.
- Spot and address irregularities and problems. This includes lien claims, confirmation of real property tax payments, making sure insurance is maintained, making sure the senior loan is maintained, and organizing the documentation to satisfy the I-829 filing.
- The I-829 process starts when the loan closes. Documentation needs to be generated on a regular basis to support the job creation expenditures which, in large real estate transactions, are primarily based upon construction expenditures.
- Receive regular financial statements from the borrower. Ideally, they should be reviewed statements prepared by an independent certified public accountant. *It is becoming more common now to have live website camera showing the progress of construction.
- The NCE's organization documents need to address the ability and authority of the independent manager to modify loan documents to take into account both regular and extraordinary circumstances which require an amendment.
- When there is a material change, its advisable to have a provision providing for a majority consent of the investing members or limited partners, although this can be cumbersome.
- The issue of redeployment needs to be addressed in the organization documents and with the developer. 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 equity in the project.