Michael, I had mentioned in the introduction that your firm uses RIMS II. Can you talk about the different economic models available to you and why you choose to use RIMS II?
Michael Kester: Kurt, as you mentioned, there are a number of models that are accepted under USCIS EB5, so if you’re looking at having an economic impact study done, it’ll likely be done in RIMS II, IMPLAN, REMI, REDYN and possibly even iRIMS, though I’m not sure if anyone has seen one of those studies or not.
Rupy, as someone who performs due diligence on a regular basis, how do you approach due diligence of economic impact studies?
Rupy Cheema: We start off ensuring that the data in the economic impact study is consistent with the data in the rest of the project’s documents, i.e. the EB5 business plan, market feasibility study and the PPM. I don’t think I’ve ever looked at a project where we did not find inconsistencies between these four documents simply because the economic analysis happened at a certain point and then there’s different versions of documents floating around and the changes don’t get picked up. Those are some of the most common issues we find at the beginning of our review, just reconciling the discrepancies in the documents.
Kurt Reuss: Ozzie, to me the key issue in the Path America offering is the 'related party' aspect of the transaction. How do you deal with related-party disclosures in your PPMs?
Ozzie Torres: It is probably the central focus of the disclosure items. Of course, you want to disclose the project and the parties, and all of the material agreements. Clearly, you’ll find that related party disclosures are the most difficult and yet the most important aspects of disclosure, coupled with other conflicts of interest. You want to make sure that you don't bury these disclosures.
We often assume that being an accredited investor equates to being a sophisticated investor, but that’s often not the case and in many cases accredited investors are filing lawsuits saying, "I didn't understand what was in the offering document. It was ambiguous." From a risk-mitigation standpoint, what we write and how we write it really does count. Hence the push toward Plain English in EB5 documents.
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.
John Tishler: The senior lender is typically a major source of capital for most deals that use EB5. The days where you could finance a 100% of the project with EB5 funds are mostly, if not entirely, gone. Every project needs to have other sources of capital and senior loans are a major source of that capital.
Ronnie Fieldstone mentioned earlier that a typical construction loan would be 60%-80% of the total project cost, certainly a minimum of 50%. So you can knock off a major part of your capital stack with the senior loan.
And right now senior construction loan rates for quality borrowers are very, very low. In fact, they're generally lower than the market rates for EB5 capital when you account for all the associated costs.
Whatever amount you are able to raise on senior capital is certainly going to be cheaper than equity, certainly cheaper than mezzanine and it's actually going to be a little bit cheaper than EB5 capital right now.
Michael Gibson: Generally an intercreditor agreement just defines the terms of the relationship between a senior and a subordinate lender in a transaction. Sometimes if there are multiple lenders in the senior pool you'll see agreements between those lenders as well. With respect to EB-5 intercreditor agreements, the EB-5 capital is going to be in a subordinate position.
The first question to ask yourself is whether you need an intercreditor agreement. Intercreditor agreements are often not very favorable to a subordinate lender. The terms may stipulate that if there is a default under the senior loan, the subordinate lender will be asked to do things like forego rights to collect interest or principal payments, to standstill on exercising remedies, or to give up certain rights in a bankruptcy action including rights to object that a subordinate lender would otherwise have including rights to approve certain aspects of a bankruptcy plan. In general, in a subordinate position, the first thing you want to ask yourself is, do I really want an intercreditor agreement?
Q: Do senior lenders concern themselves with SEC compliance regarding EB-5 fund raising activities?
John Tishler: Yes, I have seen it with certain banks. Remember, the senior lender is not involved in the offering of securities; they have nothing to do with it. They’re simply making a senior loan to an operating company that owns the assets, which in the vast majority of cases isn't even the company that's offering the EB5 securities. So, the bank is really no where in the loop of offering these securities.
So why do they care? Their concerns are about the overall health of their borrower and we've seen banks want to satisfy themselves that the EB5 issuance is being done in accordance with securities laws. Certainly my preference is the banks just diligence it the way they would diligence anything else.
John Tishler: During our pre-webinar conference call today the panelists all agreed that an EB-5 project issue that comes up frequently in our deals is whether it is appropriate to amend the PPM for every 'material change’ that arises. You certainly have to think about amending the PPM whenever there is any change at all to what’s going on with the deal and what’s been disclosed in your offering documents.
Remember that while you may have finished the documents in March and they’ve been put out into the market, and they were as good as you possibly could make them in March, by the time September rolls around there’s been six months of the world turning and it’s fairly likely that something has changed.
This question was submitted by Rohit Turkhud of Fakhoury Law Group.
In general, the issuer of securities can be found liable for any omission of material fact or misleading statement of material fact. This is the Rule 10b-5, often called the “anti-fraud” rule. This standard is measured at the time of each offer and sale of securities. In EB-5, the offers and sales typically take place over time -- sometimes over a year or more.
Accordingly, for sales that take place weeks or months after a PPM is finalized, an issuer can be held accountable for failure to disclose material changes or updates since the date the PPM was finalized, even if the PPM was correct in all material respects at the date it was released. Issuers must continually monitor their project and consider whether any changes require an update to the offering materials so that the issuer can meet the Rule 10b-5 standard.
