by Osvaldo F. Torres Esq., Shareholder, Torres Law
The overwhelming majority of projects using funds from foreign immigrants investing in the Employment Based Fifth Preference Immigrant Visa Program (“EB-5 Program”) use a loan model structure (the “Loan Model”). As depicted in the chart below, under the Loan Model, the EB-5 investor funds that are pooled into the new commercial enterprise (“NCE”) are in turn loaned to a borrower, usually on a secured basis. The borrower will be the job creating entity (“JCE”) or, in the case of a mezzanine-type structure, an affiliate of the JCE, which will usually be a JCE holding company that will borrow the funds and in turn contribute (or loan) them to the JCE for the financing of all or a portion of the development costs of the EB-5 project.
Despite the popularity of the Loan Model, NCE project principals sometimes neglect to pay sufficient attention to the EB-5 loan documents or fail to apply best loan practices to the administration of the EB-5 loan. Because critical rights of the EB-5 lender are at stake in the Loan Model, this article aims to guide NCE project principals on how to best ensure that the EB-5 loan documents adequately protect EB-5 investor funds.
The EB-5 loan agreement should, of course, include standard loan provisions. These would typically include loan term, maturity date, interest rate, repayment terms, representations and warranties, conditions precedent to any loan advance, affirmative and negative covenants, terms of collateral, clear descriptions of events of default (and notice of such events, as well as cure periods) and remedies, among other standard loan provisions. Without question, the EB-5 lender should make every effort to ensure that all loan provisions meet the requirements of the EB-5 Program. As such, having properly drafted loan documentation in place is a fundamental requirement.
Even if strong and compliant EB-5 loan documents are in effect, the EB-5 lender must properly administer the EB-5 loan. The goal of proper loan administration should be to effectively implement the provisions of the EB-5 loan documents. Proper administration should also reinforce lending best practices. Of course, properly drafted EB-5 loan documents should embody the critical elements of lending best practices. If that is the case, effective administration of properly drafted loan documents will ensure the implementation of lending best practices. Importantly, then, lending best practices begins with the EB-5 lender’s proper focus on the negotiation and drafting of proper and compliant loan documents.