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EB-5 program requirements. Covenants are designed to protect
EB-5 Lenders’ 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 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
EB-5 Lender 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
•
•
severability, governing law, jurisdiction, waiver of jury trial, US
Patriot Act and other similar regulatory requirements.
Other Ancillary EB-5 Loan Documents and
Important Considerations
Other ancillary EB-5 Loan documents may include a
promissory note, security document (covering personal and/or
real property), construction draw agreement, 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 and funding during construction. Rules governing security interests are very complex, and EB-5 Lenders must
rely on experienced commercial finance attorneys to perfect their
security interests properly under applicable law (e.g., personal
property under Article 9 of the Uniform Commercial Code and
real property under the real property law of applicable jurisdiction). In such instances, additional items to consider include:
•
Third party construction draw management
•
General contractor and subcontractor consents and waivers
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.
•
Phase I environmental report
•
Appraisal report
•
ALTA survey
•
Title search and lender’s policy of title insurance
Financial covenants: net worth, leverage ratio, coverage
ratio, minimum EBITDA
•
Mortgage recording tax
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 Defaults
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, as discussed herein.
Conclusion
By now, almost everyone in the EB-5 industry has developed
an appreciation for, or at the very least, an acceptance of, the
need for well-planned securities offering materials and EB-5
compl iant business plan and economic impact analysis. EB-5
project teams should give equal consideration to carefully evaluating the EB-5 financing structures and negotiating appropriate
loan documents with EB-5 Borrowers. 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.
★
Miscellaneous Provisions
The last section of all loan agreements will include certain
boilerplate provisions to cover notices, integration, counterpart,
34
Steve Park
EB5 INVESTORS MAGAZINE
Steve Park is a securities attorney and a partner
at Ballard Spahr LLP, in Atlanta, Ga. Park is fluent
in Korean, and focuses his practice on corporate,
securities and finance law. His emphasis is
on corporate governance, corporate finance,
compliance with SEC regulations, private and
public securities offerings and the requirements
of reporting. Park regularly
works on commercial lending
transactions with lenders and
borrowers involved in EB-5
financing matters.