Every year, thousands of foreign nationals make EB-5 investments, aiming for a brighter future with their families in the United States. The EB-5 Immigrant Investor Program is largely seen as the quickest and simplest means to permanent U.S. immigration, and generally, those who prioritize care and meticulous due diligence in their EB5 investment process successfully receive U.S. permanent resident status. However, an EB-5 investment is not a guaranteed ticket to a green card, and one risk—one that is especially pronounced during the COVID-19 pandemic—is the EB-5 project owner defaulting on their loans.
When an EB-5 project defaults, an EB-5 investor’s financial capital and immigration status alike are endangered. The new commercial enterprise (NCE) through which the applicant is investing has a duty to protect the immigration eligibility of its investors, and while a defaulting EB-5 project is a precious situation, it does not necessarily nullify the investor’s chance at a life in the United States. Below is a guide of the steps an NCE should take if its EB-5 project is defaulting.
1. Review the Investment Documents
The first step an NCE should take is reviewing the agreements and documents in place for its investment with the EB-5 project. Such a review allows the NCE to ascertain what rights it has and what solutions are available to execute.
2. Review the Intercreditor Agreement and Senior Loan Documents, If Applicable
If the NCE is not the senior lender in the project—and usually it is not—then it is also imperative to review the senior loan documents and any intercreditor agreements the NCE may have signed with the senior lender. In most cases, an NCE is required to enter into an intercreditor agreement. The intercreditor agreement may prohibit certain actions permitted under the investment documents with the project owner, shortening the list of potential actions the NCE can take.
The NCE should seek to fully understand the conditions of the senior loan documentation before sending written notices to the project owner or senior lender, as such actions could evoke negative consequences that accelerate a foreclosure sale initiated by the senior lender. It’s usually in the best interest of the NCE to avoid a foreclosure sale, as this often prevents repayment of its loan.
3. Determine the Solutions Available
After combing through the relevant documentation, the NCE should carefully consider the options available. Factors it should contemplate include what actions it can take against the EB-5 project owner, what actions it could take to safeguard its investors’ interests in the event of a foreclosure sale, how much capital is needed to pay off the senior loan, how viable the EB-5 project is in its present state, and whether the NCE can take over the project or find a “white knight” third-party entity willing to save it while preserving the NCE’s interests. This list is non-exhaustive—NCEs should consider all possible factors for the most accurate analysis.
4. Obtain Documentation to Determine Job Creation Numbers
To protect the immigration eligibility of its EB-5 investment participants, an NCE should request the records and documentation it needs to determine job creation immediately upon catching wind of potential financial distress of the project owner. If the project owner loses control of the project, the NCE will no longer have access to such documents, so speed is key. Once the NCE has the necessary documents, it should have its economist prepare a revised economic report to determine whether a sufficient number of jobs have already been created to satisfy the EB-5 program requirements. This determination will help shape the decision the NCE ultimately makes.
5. Determine the Effects on the Investors’ EB-5 Eligibility
The NCE must carefully consider the immigration status of its EB-5 investors, and if an insufficient number of jobs have been created, it must work carefully to safeguard the immigration eligibility of the investors. The NCE should take into account which actions would be most beneficial from an immigration standpoint and whether a given action would result in a “material change” that must be registered with United States Citizenship and Immigration Services (USCIS).
6. Determine the Best Course of Action
With all the facts on hand and careful deliberations made to determine the available solutions, the NCE should determine its best course of action and communicate its plan with the EB-5 project owner, senior lender, other major investors, and a prospective third-party buyer, if applicable. It should first speak with its business legal counsel to determine the best means of communication with these parties, however, as premature discussions could jeopardize the NCE’s ability to execute its strategy.
7. Determine How to Communicate the Situation to the EB-5 Investors
NCEs have a fiduciary duty to notify EB-5 investment participants of any important material changes to the EB-5 project that could affect their financial or immigration status, but they may keep this information confidential until they have reached a decision on the strategy they will implement. Before it reveals the plan to investors, an NCE should also consult its business legal counsel to determine the best way to break the news. In its communication, the NCE should tell EB-5 investors what the state of the project is, whether enough jobs have been created to satisfy EB-5 requirements, the factors that lead the NCE to believe action is necessary, and why the NCE has deemed the intended action the most appropriate.
8. Document the Justifications for the Decision
Finally, the NCE should keep comprehensive records of its deliberations and justifications of its decision. Despite its best efforts, an NCE may still end up losing the EB5 investment capital of its investors, which could result in lawsuits from the investors. The best way for the NCE to protect itself is to compile ample documentation showing that the decision was made in good faith with reasonable business judgment in consideration of the evidence available at the time of the decision.
