In an effort to comply with the requirements of the EB-5 Program and U.S. securities laws, regional centers often defer finalizing loan agreements until the amount and timing of the EB-5 investment is certain. While this caution is reasonable, financial documents protect both investors and the project by allowing parties to agree on the loan structure and terms, and EB-5 project teams must therefore plan thoroughly when executing these agreements after an offer has been made. Similarly, an investor must review the loan agreement in detail to ensure it does not materially affect his or her interests.
This article explores the structure of a typical EB-5 loan agreement involving a regional center and other actors as well as additional financing documents and their importance for EB-5 investors and project teams.
Flow of Funds in an EB-5 Loan
In a regional center arrangement, the transfer of investment funds will typically follow the steps outlined below.
- The regional center, acting as the manager of the new commercial enterprise (NCE), will work with marketers and other agents to attract and secure foreign investors for the EB-5 project. An experienced and legitimate regional center will conduct due diligence and ensure that the loan complies with the requirements of the EB-5 Program as well as U.S. securities laws and the laws of investors’ countries of origin.
- The EB-5 investor will make an investment of $1,000,000 in the NCE as required by the EB-5 Program. This required amount falls to $500,000 if the EB-5 project is in a targeted employment area (TEA), meaning a rural area with a low population or an area with a high unemployment rate. This amount is placed into escrow until it is released to the borrower, the job-creating entity (JCE). Along with the investment amount, the investor will typically pay a subscription fee to cover costs associated with filing the I-526 petition for conditional permanent residence.
- The regional center, or a separate lending company, will administer the loan of the investment amount to the JCE, which will draw on the funds as necessary according to the project plan. The regional center, NCE, and JCE will agree on the terms of the loan, such as the maturity date, interest rate, and prepayment restrictions or requirements. Documents to these effect include the loan agreement as well as a promissory note and loan security document, among others detailed in the sections below. As part of these agreements, the JCE may grant the NCE a security interest in its assets or may make a guarantee of completion or repayment in the event of an I-526 denial or other agreed circumstances, and these guarantees must also be reflected in the loan agreement.
- If necessary, the JCE will obtain other loans in the short term to begin development of the project before the EB-5 investment is disbursed from escrow in accordance with the agreed loan terms. As such, repayment of the EB-5 investment may be subordinated to payment to other senior lenders in the project as outlined in inter-creditor and subordination agreements. Using the above funding sources, the JCE will complete the EB-5 project and repay the loaned investment amount at maturity using revenue from operations, the sale of the business, or other sources.
Structuring an EB-5 Loan Agreement
The loan agreement is meant to finalize terms between the regional center and NCE, the investor, and the JCE. When entering into a loan agreement, investors must consider carefully both whether the JCE will create the ten fulltime jobs required under the EB-5 Program and whether its operations will provide enough revenue to repay the loan amount upon maturity along with any interest as agreed throughout the loan term. Additionally, the JCE must be able to provide the investor with any financial documents required by United States Citizenship and Immigration Services (USCIS) to approve the I-829 petition to remove the conditions of permanent residence.
The JCE will have its own concerns when entering into a loan agreement. Chief among these is the flexibility of the loan terms in that they must not restrict the ability of the JCE to run the business and must not conflict with terms agreed upon with other financing partners and senior lenders. The JCE may therefore wish to introduce a materiality threshold to account for unexpected events during construction or operations and may additionally request a grace period in the event of a default.
As discussed above, the EB-5 investment loan may be subordinate to other loans and may or may not be guaranteed by other parties. Regardless of the unique structure of an EB-5 loan agreement, and aside from standard boilerplate provisions included with each agreement to comply with regulatory requirements, the loan agreement must contain the following key provisions:
- The first section of the loan agreement will define any key terms repeated throughout the agreement and any ancillary documents. These terms are generally capitalized throughout the material.
- The second section of the agreement will detail the borrowing terms, including the amount and term of the loan and the procedure for disbursement; the terms for repayment of the principal and accrued interest on a monthly, quarterly, or annual basis; any options for the JCE to exercise an extension in return for an increased interest rate or other extension fee; and the origination fee, which covers the cost of processing the loan. A loan is typically set to mature following the adjudication of investors’ I-829 petitions by USCIS.
This section primarily discusses how the EB-5 investment amount will be disbursed from escrow. In cases where a regional center has sought out multiple investors, these disbursements may occur over a period of time according to specific milestones. To protect the interests of the EB-5 investors, regional centers must negotiate a binding agreement that the JCE will draw on the loan amount as agreed. As the regional center will have incurred substantial costs to raise the investment funds and as the investors must rely on the JCE to use the full amount of the principal for job creation as required by the EB-5 Program, this element of the agreement is crucial for the lending parties.
- The third section of the loan agreement outlines the conditions for closing, meaning the initial conditions to be satisfied before the first advance of the loan and any conditions applying to subsequent advances. These conditions are meant to protect the NCE and the EB-5 investors, and the JCE must therefore meet these conditions to draw on the loan.
Conditions for closing may include the requirement that the JCE produce any statements related to its business and its capital stack, such as corporate authorization certificates, ancillary loan documents including inter-creditor and subordination agreements, and proof that the JCE has secured any necessary funding to commence the project prior to drawing on the loan amount. These other sources of funding may include government grants or senior loans, as discussed above.
The JCE must also provide due diligence documents regarding the project, such as lien and title searches in the case of a real estate development, as well as proof that any security interests are properly perfected, guarding against claims by third parties. The regional center acting on behalf of the NCE must thoroughly review these documents to ensure the interests of the NCE and investors are protected before funding the JCE through disbursement of the loan.
- The loan agreement may contain representations and warranties made by the JCE to minimize risks for the NCE and investors. These representations and warranties allow the lenders to conduct due diligence on the borrower by gathering material information about its assets and operations as well as monitoring its business throughout the term of the loan, and they additionally allow the lenders to hold the JCE liable if any information provided is proven to be false. The JCE must review this section of the document carefully and may, as mentioned, request the inclusion of materiality thresholds and other mitigation agreements to protect its own interests.
Similarly, the loan agreement may also include covenants to protect the investment and the lenders by requiring the JCE to fulfill certain conditions or refrain from taking certain actions. As with representations and warranties, the borrower wishes to limit interference in its business, but the regional center is obligated to work in the interests of the EB-5 investors by monitoring operations and ensuring the loan is used as agreed. A breach of covenant triggers a default on the loan, so the parties to the agreement must ensure they understand and agree on these terms. The following two types of covenants are typically included in EB-5 loan agreements:
- Affirmative covenants obligate the JCE to provide unaudited financial statements, to notify the lenders of any material change to the business, to pay taxes and maintain insurance as necessary, and to fulfill the job creation and other requirements of the EB-5 Program. They also require that the borrower disclose financial information such as net worth, leverage ratio, and other pertinent details.
- Negative covenants prohibit the borrower from taking certain actions without the written agreement of the lenders. These actions may include selling assets, obtaining additional loans or other forms of debt or otherwise entering into material agreements, and changing the business plan or the scope of the project.
- The loan agreement must also include a discussion of the circumstances under which the loan will default. These include nonpayment or breach of covenant, as mentioned above, and such situations allow the lenders to act to protect the investment amount as agreed. If the NCE is subordinate to a senior lender, the regional center may be limited in remediation, but remedies include accelerating repayment of the loan and pursuing guarantors or security interests as outlined in the loan agreement.
Other Considerations for EB-5 Investors and Regional Centers
Aside from the loan agreement itself and the provisions outlined above, EB-5 loan documents often include a promissory note signed by the borrower, security documents covering any assets to be recouped in the event of a default, a construction draw schedule to determine when disbursements will be made, any guarantees, and any subordination or inter-creditor agreements applicable if the project will draw on multiple sources of funding.
Of most interest to EB-5 investors and regional centers is the use of collateral to secure the loan. In a complex EB-5 scenario involving multiple lenders, perfection of securities is crucial, so lenders must work with knowledgeable representatives to ensure any assets are protected according to U.S. laws. Additional documents may be necessary to prove that the borrower owns these assets and that they are secured against claims by a third party, as in the case of a property lien, for example. The lenders may wish to review lien waivers from any contractors involved with the project, mortgage agreements and title searches, and an appraisal of the assets in question.
While regional centers are experienced in preparing business plans, economic impact reports, and other documents required by USCIS to foster the successful adjudication of I-526 and I-829 petitions, the loan agreement is often overlooked despite its key role in protecting the interests of EB-5 immigrant investors and regional centers themselves. Investors and regional centers must work with experienced brokers and attorneys to ensure that these agreements are acceptable and that they minimize the risks inherent to the EB-5 program by securing the loan amount and obligating the JCE to meet the agreed economic and job creation targets.