Intercreditor agreements take place among two or more lending parties, typically involving a senior and a junior lender, to establish certain safeguards for the involved entities. Without such agreements, there could be legal complications among the parties.

EB-5 projects have access to various loan types, and the choice of financing impacts the specifics of the intercreditor agreement, which usually benefits the senior lender. This is why it’s crucial for junior lenders and borrowers to closely review the terms and conditions.

In this article, we explore the different loan options, the framework of intercreditor agreements, and the advantages and disadvantages of securing one for an EB-5 investment.

Types of EB-5 Financing

The EB-5 financing structure incorporates a special purpose vehicle (SPV) set up to receive funds from EB-5 investors and channel these funds as loans to the EB-5 project. This financing arrangement carries a risk of financial loss for both parties, making it essential for both to have sufficient resources or alternatives in the event of project failure, and for the loan conditions to be explicitly detailed in the offering documents.

Senior, subordinate, junior, and mezzanine loans represent the typical financing options available to an EB-5 borrower.

Senior Loans

Senior loans are backed by collateral, like real estate, and have priority over subordinate loans. This entity is the principal lienholder and is entitled to payments on senior debt.

Subordinate Loans

Subordinate loans are positioned after senior loans in terms of rights to assets, encompassing both junior and mezzanine loans. It is crucial for investors to fully understand the conditions of a subordination agreement.

Junior

A junior loan, like a senior loan, is a subordinate loan that is secured by collateral.

Mezzanine

A mezzanine loan is secured by a company equity pledge or assets by the borrower.

Considerations When Selecting a Loan

EB-5 borrowers must scrutinize the offering documents, especially when the SPV is a regional center or a company with several affiliates involved. Key points to consider include:

• What’s the loan amount, and is there flexibility to increase it through an accordion option?
• What are the defined minimum and maximum loan amounts, and under what conditions can these change?
• When will interest start to accumulate, and when are payments due? Is the interest calculated on a simple or compound basis?
• What are the terms for the repayment of the loan?
• What fees are associated with the loan, are they justified, and to whom are they payable?
• Are there any loan terms that restrict fund distribution?
• What guarantees and assurances are provided in the agreement?
• What purpose do affirmative or negative covenants serve in the agreement?
• Is collateral securing the loan, what form does it take, and what is its value?
• Does the lender hold a primary or secondary position in the case of repayment?
• Is the project’s equity substantial enough to cover both senior and junior debts in a foreclosure scenario, emphasizing the importance of a robust capital structure for the EB-5 project?
• What are the consequences of a borrower’s default, including potential interest rate hikes or immediate loan repayment demands?
• Is there a guarantor for the loan, and are they financially capable of fulfilling their obligations if needed?
• How affiliated are the parties involved, and are they reliable?

The Basics of EB-5 Intercreditor Agreements

An EB-5 intercreditor agreement outlines specific conditions between a senior and junior lender, clarifying their mutual relationship and their connection with the EB-5 investor obtaining the loan. Sometimes, intercreditor agreements may also occur between two senior lenders, which can significantly affect EB 5 investors.

For the subordinate lienholder, it’s critical to act swiftly on their rights to mitigate the threat of substantial financial loss due to defaults or bankruptcy, as well as to avert potential immigration issues for the borrower. If the junior lender defaults, it could jeopardize the EB-5 investors’ eligibility for U.S. visas.

Advantages and Disadvantages

There are potential advantages and disadvantages of an intercreditor agreement for a subordinate lienholder to consider. Keep in mind that these may not all be applicable, as each intercreditor agreement is different. This is why it is essential to understand the complete range of terms.

Benefits of an Intercreditor Agreement

The junior lender might benefit from:

• Receiving notice of default.
• Having the chance to remedy a default and assume control of the project.
• The option to enforce a mezzanine pledge.
• Lowering loan expenses owing to the senior lender’s use of administrative infrastructure, which provides updates on project progress and loan disbursements without requiring additional resources.

Drawbacks of an Intercreditor Agreement

The subordinate lienholder could face the loss of:

• The ability to receive principal or interest payments.
• The power to sanction a plan of action during bankruptcy proceedings.
• The right to seize collateral through foreclosure.
• The privilege to seek remedies from guarantors shared with the senior lender.
• The capacity to amend the terms of the subordinate loan agreement.

The Importance of Intercreditor Agreements

The intercreditor agreement aims to protect the interests of all parties involved, ensuring that lenders can repay EB-5 investors in case the project runs into financial issues.

However, it’s common for intercreditor agreements to primarily benefit senior lenders, who often have priority over collateral and decisions in default situations. Therefore, entering into an intercreditor agreement might not always serve the best interest of a junior lender unless they, or the borrower, have significant negotiating power to secure favorable terms.

Such negotiating power for an EB-5 lender could come from having the financial capability to independently complete the EB-5 project without the senior lender’s involvement, or when their loan contribution is critical to the project’s success.

Borrowers who have a positive track record with their senior lender, or the flexibility to switch lenders easily, also hold valuable leverage that can lead to a more advantageous agreement.

Crucial Aspects of EB-5 Intercreditor Negotiation

Without enough bargaining power, it might be better to go without an intercreditor agreement unless required by the senior lender, as such agreements can potentially increase the risk for investors. While reviewing the offering memorandum, both the junior lender and borrower should assess various aspects to decide on their course of action.

The junior lender ideally needs:

• The capacity to foreclose on the subordinate collateral.
• The power to put a temporary halt on the senior lienholder’s foreclosure actions.
• The privilege to be paid back the owed amount.
• The option to intervene and complete the project if there is default.
• The opportunity to acquire the senior debt during a default scenario.
• Adequate financial resources to assume control of the project in the event of the borrower’s failure, or a partnership with a capable entity.
• Proven experience in finalizing projects of a similar nature, or access to necessary resources.

While these criteria may not always be fully satisfied in the offering memorandum, if many of them are, it will be more advantageous for both the borrower and the junior lender.

Navigating EB-5 Intercreditor Agreements

Intercreditor agreements play a vital role for EB-5 investors and lenders, as they outline the specific terms of the EB-5 loan and protect the rights of the junior lender. However, it’s important to note that not all intercreditor agreements provide equal protection, and some may even harm the rights of the junior lender. This is why EB5 investors should carefully review the offering documents and seek help from qualified industry professionals.

EB5AN has helped more than 2,300 families from 60 countries relocate to the United States as lawful permanent residents. Our expert team has more than a decade of experience, and offers clients first-rate, low-risk EB-5 regional center projects with 100% USCIS project approval rate to date.

For detailed insights into how intercreditor agreements work with EB-5 investments, book a call with our EB-5 team today.