Due diligence
Jun 04, 2015
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Kurt Reuss
Kurt Reuss
Kurt Reuss is a registered securities broker who has been specializing in EB-5 since 2012. He offers advice on investment structuring and market conditions related to EB-5 investments.

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When Does the Senior Loan Get Finalized?

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.

You would typically put those conditions into the loan agreement and they would go to protecting the lender’s interest in the property and its collateral; making sure there are no liens on the title for the property; making sure the money being asked for by the borrower is actually spent on improvements to the property; making sure that the materials being funded are actually on the site and not offsite or with third party.

All sorts of minutia of construction lending that a senior lender wants to ensure it is funding costs and improvements that are going to increase the value of the property that it holds as collateral. I think the EB5 lender has the same interest and so should be monitoring the same things.

Rupy Cheema: So this question is for the securities attorneys on the panel. Do you typically include these types of loan terms in EB5 loan agreements because I never see any of those details in the loan agreement between the NCE and the borrower when it comes to draw downs.

Ronnie Fieldstone:  First of all, when you do a PPM (Private Placement Memorandum), a lot of times you don't necessarily have all the details;  there may be a senior loan commitment but it may not be final.

I think we all agree that you would clearly try to describe the terms and conditions of the senior loan in the offering document because it's material, but you may not know the details of the intercreditor arrangement. 

John Tishler: I think it has become the norm out there for the offerings to commence before a loan agreement has been signed. That's not always the case and I personally think when you have an unrelated NCE (New Commercial Enterprise) and JCE (Job Creating Enterprise), such as when you have a regional center that's doing the offering and lending to a project, there are major advantages to negotiating that loan agreement in advance. 

But with most projects, people are in a hurry to get to market and also there's an expense associated with putting that loan agreement together if you're going to cover all the things that Mike talked about today. I think for both time and cost considerations people like to get to market and worry about their loan agreement later.

Yet I can't imagine a more material issue for the PPM then what you expect the loan agreement to say given that the indirect interest in that loan agreement in the sole asset of your investment. It's pretty clearly material what that loan agreement is going to say. 

Lastly, I think that this issue of construction lending and what is needed to protect a construction borrower is still a significantly overlooked issue in EB5. People will often come to us asking for a quote regarding the corporate or deal representation they need; they’re thinking of the PPM, the subscription agreement, a partnership agreement and an operating agreement.

They usually don't have loan agreement on that list or they think that the loan agreement is a template that we spit out of our computers and everyone will just sign it. That is just not the case if a lender's going to be taking reasonable steps to protect themselves as any commercial lender will do; the loan agreement is a very very complex document.

Ronnie:  I have found that with some larger deals, some of the marketing agents in China are requiring that the loan agreement be signed. They want it signed and they want it available to investors because investors in China actually want to see the signed loan agreement. 

Even though the loan has not been funded, you sign that agreement and then you do the ancillary documents when you get to closing. It's actually become more stringent for the reasons you just said because it's so material. The loan agreement's actually ... That's your protection.

You now have agents that are extremely proactive in thinking of themselves as a lender. Over the last three years I’ve seen a tremendous focus on the loan part of the transaction compared to what it used to be. They’re acting like a bank. It's not just going to be a form document you sign and put into a drawer and then hand the check to the developer, those days are gone.

Rupy: But isn't that a challenge if you don't yet know how much EB5 money is going to be available for lending? How can you draft loan agreements?

Ronnie:  Yes, very good question. Let’s say the maximum offering is $50 million. Then there's a minimum where the developer says, "If I can't get at least $10 million EB5 I'm not going to take a penny." 

So what we put in the loan documents and in the offering documents is what we call subordinate bridge financing which means to the extent that the EB5 company has not funded or prepared to fund the entire alone balance of its EB5 capital raise, the developer can go out and access loan funds that take a superior position to make up the difference because at the end of the day you’ve got to finish the EB5 project

That's what we've typically done and most agents are okay with that because if they don't raise the money then it's only logical that EB5 needs to subordinate to senior debt. But the total debt amount does not increase.

Rohit Kapuria:  I recently saw a clause in one of the loan agreements where that was the case. If the EB5 lender failed to raise a certain minimum amount within 8 months, then the lender had the ability to walk away.

The problem was that there was an expectation that once an investor subscribed to the fund (the NCE), they had 2-3 months to file the I-526. So theoretically you would have a case that if they didn't meet the minimum raise, the borrower could disclaim the EB5 loan, leaving the investors who filed, maybe 7-8 months earlier, in trouble because the loan basically was rejected even though it wasn't withdrawn. These investors would have to pull out and refile. That becomes dangerous for investors.

Kurt: How frequently do see incomplete loan documents?

Rohit: I would say 80% of the cases the investment is going to market with a draft loan agreement and I-526's are being filed with that. Of course there is a danger that when you file the I-526 with draft loan terms, USCIS is going to come back with an RFE saying, "Okay we saw that draft but, what's the final version? We want to know whether it materially deviates or if there's something that's going to not comply with EB5. But there is a rush at this point because it is taking longer for deals to fund principally because the China market is so saturated with deals right now.

Rupy: I would say about half the time I'm looking at loan term sheets without a loan agreement being drafted.

Kurt: And do you list that as a risk on the due diligence report?

Rupy: Yes!

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