How NCEs Should Deal with a Defaulting EB-5 Project

Aiming for a brighter future in the United States, thousands of foreign nationals make EB-5 investments every year. The EB-5 Immigrant Investor Program is considered by many to be the simplest and quickest way to permanently immigrate to the United States.

Those who conduct sufficient due diligence in the EB5 investment process typically receive U.S. permanent resident status. However, an EB-5 investment is never guaranteed to result in green card status. One risk EB-5 investors face, especially during the COVID-19 pandemic, is an EB-5 project owner defaulting on their loans.

A defaulting EB-5 project endangers both an EB-5 investor’s immigration status and financial capital. However, the new commercial enterprise (NCE) in which the EB-5 applicant invests maintains its responsibility to its investors in the case of a project default. While a defaulting project places its investors at risk, it does not necessarily eliminate the chance of the investors to attain permanent residency. Here are the steps an NCE should take if its EB-5 project defaults.

1. Review the Investment Documents

An NCE should first review the relevant agreements and documents for its investment with the EB-5 project. This review allows the NCE to discover what rights it has and research what solutions are available.

2. If Applicable, Review Both the Senior Loan Documents and the Intercreditor Agreement

The NCE is usually not the senior lender in the project. If indeed it is not, the NCE should review any senior loan documents and intercreditor agreements the NCE has signed with the senior lender. An NCE is often required to enter into an intercreditor agreement, which typically prohibits certain actions the NCE can take.

Before sending a written notice to the senior lender or project owner, an NCE should fully understand the conditions of the senior loan documentation. Written notices may accelerate a foreclosure sale initiated by the senior lender, and NCEs should work to avoid a foreclosure sale, as it often prevents repayment of its loan.

3. Determine Which Solutions Are Available

After examining the relevant documentation, the NCE should consider its available options. Among other considerations, an NCE should contemplate what actions it can take against the EB-5 project owner, what actions it can take to protect its investors’ interests if a foreclosure sale occurs, how much capital is required to pay off the senior loan, how viable the EB-5 project is at the current stage, and whether the NCE can find a “white knight” third-party entity willing to save it while protecting the NCE’s interests or to take over the project itself.

4. Obtain Documentation to Calculate Job Creation Numbers

An NCE should request the documentation and records it needs to determine job creation as soon as it discovers that the project owner is under any potential financial distress. If the project owner ends up losing control of the project, the NCE may no longer access this documentation. When the NCE obtains the necessary documents, the next step should be to have its economist prepare a new economic report to determine whether the number of jobs that have already been created will satisfy the EB-5 program requirements. This determination can affect the final decision of the NCE.

5. Research How the Default Will Affect the Investors’ EB-5 Eligibility

The NCE is responsible for placing its EB-5 investors in the best possible position to attain green card status. If the number of jobs created is not sufficient, it must work to protect its investors’ immigration eligibility. Specifically, the NCE should examine actions that might result in a “material change.” If an NCE believes that such a change may have occurred, it should register it with United States Citizenship and Immigration Services (USCIS).

6. Decide on the Best Course of Action

After collecting the relevant facts and researching possible solutions, the NCE must determine its best course of action and communicate this plan to the EB-5 project owner, major investors including the senior lender, and, if applicable, a prospective third-party buyer. As an NCE approaches these conversations, it can be useful to first consult with business legal counsel.

7. Decide How to Communicate the Situation to the EB-5 Investors

When material changes occur to an EB-5 project, the NCE has a fiduciary duty to notify its EB-5 investment participants. In this communication, the NCE should tell EB-5 investors what the project’s state is, whether enough jobs have already been created to satisfy EB-5 requirements, why the NCE believes action is necessary, and why the NCE has decided on the intended action. However, the NCE may choose to keep this information confidential until it has decided on the strategy they will then implement.

Before the NCE reveals its plan to its EB-5 investors, it should consult its business legal counsel in regard to how to break the news.

8. Document the Decision’s Justifications

If an NCE ends up losing its investors’ EB5 investment capital, it may face lawsuits from the investors. An NCE can best protect itself by compiling documentation showing that its decision was made in good faith using reasonable business judgment while also considering the evidence available when the decision was made.

To this effect, the NCE should maintain detailed records of its deliberations and all justifications for its decision.