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What is an EB5 Inter-Creditor Agreement?

ROHIT KAPURIA, JOHN TISHLER, MICHAEL GIBSON, RONALD FIELDSTONE

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Michael Gibson
Securities Attorney, Sheppard Mullin

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Ronald Fieldstone
Securities Attorney, Arnstein & Lehr

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Rupy Cheema
Due Diligence Analyst, EB5 Diligence

 

 

Inter-Creditor Agreement in concern with EB5 Projects

(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 EB5 intercreditor agreements, the EB5 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?

That decision involves an understanding of the structure of the deal and the relative bargaining position of the senior and the subordinate (EB5) lender. Sometimes the senior lender will insist on an intercreditor agreement and in that instance obviously you have to negotiate that to the best of your ability but often times as the subordinate position it might be better not to have one. 

Ronald Fieldstone: One benefit of an intercreditor agreement for an EB 5 visa subordinate lender is that as a junior lender you get notice of default, opportunity to cure, and the opportunity to exercise in a mezzanine pledge default, so you can take over for the borrower and potentially pay off the senior loan or get it refinanced in order to continue the project and prevent getting wiped out.

Senior lenders do have issues especially on large projects where their attitude is "We made a loan to a developer. We didn't make a loan to an EB5 company." And an EB5 company does not have the developer expertise to step in and take over a project, unlike a hedge fund that does mezzanine loans and has billions of dollars in assets and a whole team of experts that come in and take over a project.

The EB 5 visa requirements to compile and execute an offering are quite complicate. The dilemma of EB5 in this case is the lack of ready expertise to take over the position of the developer if they want to exercise a mezzanine pledge. One of the ways to get around this, the NCE (New Commercial Enterprise) could bring in a partner or developer manager as a qualified substitute to take over the project. That's kind of been the compromise we've found so if the General Manager of the NCE can find somebody that the senior lender accepts, the senior lender may let them cure the default in order to step in and take over.

(Michael): I think that's right though the question you have to ask yourself if you're in an subordinate position and are considering an intercreditor agreement is, will that remedy be a viable remedy for me, meaning can you actually do what you need to do to take over the borrower’s position and finish the project.

And that involves injecting money into the project either in the form of curing monetary defaults under the senior, or sometimes paying off the senior at par which obviously can be a very difficult proposition for the typical NCE (the entity the EB5 investors invest into). That type of liquidity is not typically available.

So if you can partner with someone who has access to that capital and experience in completing construction projects, whether it's a hotel or whatever it is, then you get closer to saying this is a viable remedy and it's worth pushing for and undergoing some of the difficulties that are always involved in getting an intercreditor agreement to get investor visa usa.

What remedies are available without an Intercreditor Agreement?

(Rupy Cheema): If there is no intercreditor agreement and the EB5 loan is a mezzanine loan then what can we generally assume the remedies available are to the EB5 lenders?

(Michael): If there is not an intercreditor agreement, the remedies available would depend on the security provided to the EB5 loan.

If they were to obtain a second lien on the real property they would have the rights and remedies of second lien holder which would be structurally subordinate to the senior lender even without an intercreditor agreement. In terms of the first lien mortgage, it would be recorded first and then the EB5 lenders mortgage would be recorded. Essentially the senior lender in that case would drive the ship in a foreclosure proceeding and could wipe out the junior lender if they foreclosed on their interest (on their senior mortgage).

In terms of a second lien mortgage, that's how it would be set up. Now if there were any proceeds after the first lien had been paid in full, those should be distributed to the second lien holder before any proceeds of a foreclosure sale are made available to the borrower entity.

Structurally they would be subordinate and then with respective proceeds they probably wouldn't see anything because senior lenders typically did not made whole in foreclosure proceedings.