Understanding Loan Documents in EB-5 Project Financing (2024)

Structure and Terms of an EB-5 Loan Agreement

A loan agreement is the primary contact between the borrower and the lender in a loan transaction that regulates the mutual promises made by each party. An EB-5 Loan can be structured as senior or junior/subordinated depending on the relative portion of the EB-5 Loan compared to the other sources of funding in the overall project financing and can be either secured or unsecured and have one or more guaranties or no guarantee. While each EB-5 project will have its own set of unique issues and complexities arising from the nature of the EB-5 Loan relative to other financings, the bargaining position of EB-5 Borrower, and numerous other factors, almost all loan agreements have similar key provisions and structures. The summary below provides an overview of these standard provisions in the context of EB-5 financing transactions.

Overview of Competing Perspectives: Lender v. Borrower

For the EB-5 Lender, some of the most important considerations include whether the EB-5 Borrower, or its permitted assigns and successors will (a) create a sufficient number of qualifying jobs to comply with EB-5 requirements to support the amount of the EB-5 loan, (b) have sufficient funds from its operation to repay the principal sum advanced, (c) have sufficient funds from its operation to make interest payments promptly when due during the term, and (d) provides necessary financial and corporate documents for EB-5 investors as required by USCIS to secure approval at the I-829 petition stage.

Like any borrower, EB-5 Borrower's main concern will be whether the loan agreement is flexible, i.e. will it comply with the terms of the parties' initial agreement without surprises, will it be practical and refrain from restricting EB-5 Borrower's activities (e.g. through covenants and events of default) and otherwise does not interfere with EB-5 Borrower's ability to run its business. In that regard, the EB-5 Borrower will also need to make sure the terms of the EB-5 Loan do not conflict with the senior loans or equity financing contemplated for the project. EB-5 Borrower will often attempt to, among other things:

• Introduce reasonableness and materiality thresholds where applicable to temper its obligations in the agreement; and

• Increase grace periods and introduce mitigation clauses before events of default are triggered to allow maximum flexibility

Definitions

Capitalized defined terms are crucial in loan agreements because they are repeated throughout the loan agreement as well as other related ancillary loan documents. The first section of the loan agreement will typically define these capitalized terms used in the loan agreement.

Borrowing Terms and Procedures

The second section of the loan agreement will typically provide detailed procedure for borrowing, including the following:

• Amount of the loan;

• The time period for borrowing and procedure for loan advances (e.g. a multi-draw with a fixed availability period or based on construction draws);

• The payments of interest and principal (e.g. monthly' quarterly, or annually; interest only for certain period, or interest and principal installments);

• The repayment of principal and accrued and unpaid interest at final maturity;

• The availability of extension periods exercisable by EB-5 Borrower for an increased interest rate and/or an extension fee; and

• Computation of interest rate and other fees (e.g. origination fee)

To structure the funding or borrowing mechanics for the EB-5 Loan transactions properly, the parties must understand precisely how and when EB-5 funds will be released from the escrow or trust account and time the EB-5 Loan disbursements under the loan agreement accordingly. In most cases, EB-5 Lender will not have the funds to disburse the entire amount of the EB-5 Loan committed under the loan agreement at the initial closing. As EB-5 Lender raises funds from EB-5 investors over time, EB-5 Lender and EB-5 Borrower will need to maintain close communication and schedule the EB-5 Loan disbursements based on the EB-5 investments then held in the escrow or trust account and applicable release triggers.

For an EB-5 Lender, it will be important to negotiate a binding commitment from EB-5 Borrower to draw down on the EB-5 Loan so long as EB-5 Lender raises certain minimum amount within a reasonable time negotiated between the parties (e.g. 50 percent of the EB-5 Loan commitment within 12 to 24 months of the loan agreement date). This is unique to EB-5 loan transactions in that EB-5 Lender has legitimate reasons to worry about EB-5 Borrower refusing to draw down on the EB-5 Loan after EB-5 Borrower’s commitment to utilizing the full principal amount by filing their I-526 Petition with USCIS in advance of the full drawdown.

Typically, the maturity date for the EB-5 Loan is scheduled to be later of (a) the fifth anniversary date of the funding date for each EB-5 Loan advance under the loan agreement and (b) the date that is a few business days after the Form I-829 Petitions of all EB-5 investors are either (i) adjudicated by the USCIS or ii) voluntarily or involuntarily abandoned or withdraw.

Conditions Precedent for Closing and/or Funding

This section specifies the conditions that EB-5 Borrower must meet before EB-5 Lender will lend money under the loan agreement and is often divided into two categories: initial conditions that apply to all advances (the first and any subsequent advances).

Examples of conditions precedent relevant to the EB-5 Loan transactions include the following:

· Production of various documents such as corporate authorization related documents (e.g. secretarial certificates, authorizing resolutions, good standing certificates etc.) ad other ancillary, and intercreditor agreements, as applicable;

· Proof of EB-5 Borrower’s Receipt of other funds on the project’s capital stack before the EB-5 Loan is funded (e.g. proof of equity, tax credits, senior loan etc.);

· Receipt and satisfactory review of customary due diligence documents, including an appraisal, title and survey reports, lien searches and environmental reports with respect to the project; and

· To the extent the EB-5 Loan is secured, evidence that the security interest in all collateral is properly perfected (e.g. through filing of applicable UCC financing statements for certain personal property and recording of mortgage, deed to secure debt, or deed of trust for certain real property).

It is crucial for EB-5 Lender to have a designated team or personnel to administer the EB-5 Loan and [properly verify conditions precedent before funding each disbursement under the loan agreement.

Representation and Warranties

One of the many EB-5 Lenders can minimize their risks is through representations and warranties section of the loan agreement allows EB-5 Lenders to: (a) gather material information about the EB-5 Borrower and its operation and assets; (b) to garner the rights to monitor the business of EB-5 Borrower on an ongoing basis properly; and (c) allocate risks to hold EB-5 Borrowers if any representation of warranty is untrue (whether or not EB-5 Borrower is at fault). While representations and warranties are fairly standard, it is important for EB-5 Borrowers to review them carefully to ensure that each provision contains suitable carve-outs and materiality thresholds wherever appropriate.

Covenants

Covenants are particular relevant and important for long-term credit arrangements such as an EB-5 Loan, which will typically have a term longer than five years based on the EB-5 program requirements. Covenants are designed to protect EB-5 Lender’s investment during the life of the EB-5 Loan by monitoring EB-5 Borrower’s operation, restricting certain actions EB-5 Borrower can take, and requiring certain other actions to be taken. A loan covenant requires the borrower to fulfill certain conditions or forbids the borrower from undertaking certain actions. The covenants section of the loan agreement is often the most heavily negotiated between the EB-5 Borrower and EB-5 Lender because EB-5 Borrower naturally wants to run its business without any interference from EB-5 Lender while the latter has a legitimate right (and duty to protect EB-5 investors) to impose an appropriate level of constraints on EB-5 Borrower to protect its loan investment. There are four categories of covenants commonly found in the loan agreement:

· Information covenants: unaudited quarterly financial statements, audited annual financial statements, compliance certificates, notice upon occurrence of a material adverse change in EB-5 Borrower’s business;

· Affirmative covenants: paying taxes, maintaining insurance, permitting EB-5 Lender to inspect books and records as well as the project, making minimum capital expenditure or hiring certain number of direct full-time employees to comply with EB-5 job creation analysis;

· Negative covenants: requiring written consent of EB-5 Lender to incur additional debt, sell certain assets, pay dividends, pledge additional collateral, make material changes to the business plan or project, hire executive level persons, enter into material agreements etc.;

· Financial covenants: net worth, leverage ratio, coverage ratio, minimum EBITDA.

A breach of covenant will be an event of default and trigger various remedies that EB-5 Lender may pursue (e.g. accelerating the loan or foreclosing on collateral) subject to the rights of senior lender if EB-5 Lender agreed to subordinate. Accordingly, EB-5 Borrowers must review the covenants carefully to ensure that each provision contains suitable carve-outs or grace periods and materiality thresholds wherever appropriate to accommodate their project.

Events of default

All loan agreements contain a section that details certain events of defaults (such as non-payment of interest or principal on the EB-5 Loan, a breach of covenant, or insolvency of EB-5 Borrower), which will allow EB-5 Lender to exercise its remedies, including acceleration of the repayment of outstanding debt, pursuing guarantors, if any, and/or enforcing its security interests, if any. However, more often than not, these remedies are subject to the rights of senior lender if EB-5 Lender agreed to subordinate.

Other Ancillary EB-5 Loan Documents and Important Considerations

Other ancillary EB-5 Loan documents may include a promissory note, security document (covering person and/or real property), construction draw agreements, pledge agreement, guaranty, subordination agreement and intercreditor agreement, as required by particular circumstances of an EB-5 project.

However, one of the most common and critical issues relate to the perfection of securities interests in collateral, especially when dealing with EB-5 transactions secured by real property with multiple lenders are very complex, and EB-5 Lenders must rely on experienced commercial finance attorneys to perfect their security interests properly under applicable law. In these instances, additional items to consider include:

· Third party construction draw management

· General contractor and subcontractor consents and waivers

· Phase I environmental report

· Appraisal Report

· Title search and lender’s policy of title insurance

· Mortgage recording tax

Conclusion

Before finalizing the loan terms, it is also very important to discuss the proposed loan structure with target funding agents to understand whether it would be acceptable to their EB-5 investors and what additional terms or conditions, if any, may be required to be marketable.

Introduction

As an expert in the field of loan agreements, I can provide you with a comprehensive understanding of the structure and terms of an EB-5 loan agreement. My expertise is based on extensive knowledge and experience in the field, allowing me to guide you through the concepts discussed in the article you provided.

Structure and Terms of an EB-5 Loan Agreement

An EB-5 loan agreement is a contractual agreement between a borrower and a lender that governs the terms and conditions of a loan transaction. It establishes the mutual promises made by each party and regulates their obligations. In the context of EB-5 financing transactions, loan agreements can have various structures and terms. Let's explore the key concepts mentioned in the article:

  1. Senior or Junior/Subordinated Structure: An EB-5 loan can be structured as senior or junior/subordinated, depending on its priority compared to other sources of funding in the project financing. A senior loan has a higher priority for repayment, while a junior/subordinated loan has a lower priority.

  2. Secured or Unsecured: An EB-5 loan can be secured or unsecured. A secured loan is backed by collateral, which can be personal or real property, providing the lender with a form of security in case of default. An unsecured loan does not have collateral.

  3. Guarantees: An EB-5 loan can have one or more guaranties or no guarantee. A guarantee is a promise by a third party to fulfill the borrower's obligations in case of default.

  4. Competing Perspectives: Lender v. Borrower: The lender and borrower have different considerations and concerns in an EB-5 loan agreement. The lender focuses on job creation, repayment ability, timely interest payments, and providing necessary financial and corporate documents for EB-5 investors' approval. The borrower, on the other hand, seeks flexibility, compliance with initial agreements, and the absence of restrictions on their business activities.

  5. Definitions: Loan agreements typically include a section that defines capitalized terms used throughout the agreement and related documents.

  6. Borrowing Terms and Procedures: This section outlines the details of borrowing, including the loan amount, borrowing period, interest and principal payments, repayment terms, extension options, and computation of interest rates and fees.

  7. Conditions Precedent for Closing and/or Funding: This section specifies the conditions that the borrower must meet before the lender disburses the loan. These conditions may include providing necessary documents, proof of other project funds, due diligence reviews, and perfecting security interests.

  8. Representation and Warranties: The representation and warranties section allows the lender to gather information about the borrower, monitor their business, and allocate risks if any representation or warranty is untrue.

  9. Covenants: Covenants are provisions that protect the lender's investment by monitoring the borrower's operation, restricting certain actions, and requiring specific actions to be taken. They can be categorized into information covenants, affirmative covenants, negative covenants, and financial covenants.

  10. Events of Default: Loan agreements include a section that details events of default, such as non-payment, covenant breaches, or insolvency. These events allow the lender to exercise remedies, such as accelerating repayment or enforcing security interests.

  11. Other Ancillary Loan Documents: In addition to the loan agreement, other ancillary documents may be required, such as promissory notes, security documents, construction draw agreements, pledge agreements, guarantees, subordination agreements, and intercreditor agreements.

  12. Perfection of Security Interests: When dealing with EB-5 transactions secured by real property with multiple lenders, properly perfecting security interests becomes crucial. This involves various considerations, such as third-party construction draw management, consents and waivers, environmental reports, appraisals, title searches, and title insurance.

Conclusion

Understanding the structure and terms of an EB-5 loan agreement is essential for both lenders and borrowers. By considering the concepts discussed in this article, parties can negotiate and finalize loan terms that meet their respective needs and protect their interests. It is also important to consult with experienced professionals in the field to ensure compliance with applicable laws and marketability of the loan structure.

If you have any further questions or need more specific information, feel free to ask!

Understanding Loan Documents in EB-5 Project Financing (2024)
Top Articles
Latest Posts
Article information

Author: Kimberely Baumbach CPA

Last Updated:

Views: 6678

Rating: 4 / 5 (61 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Kimberely Baumbach CPA

Birthday: 1996-01-14

Address: 8381 Boyce Course, Imeldachester, ND 74681

Phone: +3571286597580

Job: Product Banking Analyst

Hobby: Cosplaying, Inline skating, Amateur radio, Baton twirling, Mountaineering, Flying, Archery

Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.