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Is an EB5 Loan Monitor Important?

Posted by Kurt Reuss on June 10, 2015

How much risk do you associate to not having an EB5 loan disbursement monitor identified in the offering documents?

(Rupy Cheema): I consider it a huge risk, especially when the lender and developer (borrower) are the same party. I’ve seen multi-phased projects where infrastructure costs are shared by two projects but only one of the projects is being funded by EB-5, so there's clearly a lack of transparency with regard to how the EB-5 funds are being spent.  It is potentially a very big risk in conflict of interest situations.

When Does the Senior Loan Get Finalized?

Posted by Kurt Reuss on June 04, 2015

Rupy Cheema: Typically a senior loan will have conditions regarding draw schedules and construction monitoring, but in most cases I don't see these items in the EB5 loan documents. Where would you typically find the terms and conditions a borrower must meet before drawing down the EB5 loan?

Michael Gibson: Typically the conditions to drawing down a loan would be in the loan agreement. There's a separate 'Conditions to Funding' section and kind of a typical senior construction loan that can be very expansive about all the conditions that have to be met before the borrower can draw down money under that construction loan.

Balancing the Needs of the Borrower, the NCE and the Investor's At-Risk Requirements

Posted by Kurt Reuss on April 16, 2015

(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. 

Removal of EB-5 Manager and a Succession Plan

Posted by Kurt Reuss on February 10, 2015

Darren Ofsink: In EB-5 it's likely that when investing in a limited partnership or a limited liability company, there isn't much in the way of statutory law that describes what the investor's rights are. 

There are basic fiduciary obligations of the company as well as management of the limited partners interest, but it's the limited partnership agreement and the operating agreement that are going to be the source of the primary rights of the investors. And so, it's important to understand that what is within the four corners of those documents is really going to be the sum total of the rights that you have.

Annual Reporting and Auditing of EB-5 Investments

Posted by Kurt Reuss on February 06, 2015

The EB-5 issuer is required to make reports to investors, to retain appropriate personnel to handle the bona fides of not only evaluating the investment, but to evaluate the internal controls of the manager.

Most of the time in a private placement memorandum (PPM) or in the operating agreement, an EB-5 fund will require some basis of an annual report to be provided to investors, either in the form of financials or in the form of a written report. But there's no state corporate laws requiring the issuance of annual reports, nor is there a requirement for audits.

When you review EB-5 offering documents you ought to concern yourself with:

  1. Are you being provided annual reports?
  2. Is there an audit?
  3. If there is an audit, who’s actually doing the audit. You clearly want people who are experienced in the fund business.

Is the Extensive Treasury Regulations Language in the NCE Agreement Relevant?

Posted by Kurt Reuss on February 05, 2015

Rupy Cheema: We typically see operating agreements and partnership agreements go to great lengths talking about possible tax allocations and treasury regulations language and these provisions are very confusing unless you're a tax expert and I can't imagine the typical investor understanding what those provisions are saying. 

Is this language relevant to EB-5 investors considering that in most cases investors are receiving 1/4% to 1% which is a trivial amount.

Robert Cornish: Those provisions are pretty important because they all relate to the investment vehicle as a partnership with flow-through tax treatment to the investors.