Importance of Reviewing the Senior Loan Documents and Financial Statements: EB-5 Diligence With Investment Banker Siddharth Agarwal

Hear Siddharth Agarwal, a Bay Area Resident and EB-5 Investor,
Explain the Importance of Reviewing Senior Loan Documents & Financial Statements


One thing I want to expound on that you mentioned is the importance of seeing the senior loan documents. Could you talk a little bit more about that? Why is that so important? And in addition to senior loan documents, how critical is it to also see the balance sheet, the financials of the company, and any guarantor company that’s securing the repayment of investors funds?

Yes, that’s extremely important. Let’s hit upon the bank loan documents first. You want to make sure that the bank loan documents do not have any governance in the loan documents, which directly adversely impacts people who sit below in the capital stack; people who sit below the bank loan in the capital stack. Now, most banks will not have anything like that. I have personally not seen a loan document which says, “We are going to take away money from the lower part of the capital stack or whatever.” Most governance will focus on, in case of an adverse scenario, we expect to be repaid in full of whatever our initial investment was. The problem, however, is if that adverse scenario does happen, then the bank has the means to actually go and recover as much of its capital as possible, but other people don’t, or EB-5 investors don’t.

Now, let’s say the bank loan was $100 million. The project fails. The bank is able to recover $105 million. Now out of that $105 million, the bank is going to take out $100 million. It is probably going to also take out the additional interest that has been accumulating over time. It might also want to take out its legal costs, and then whatever $1 or $2 million remain will go to the investors who sit below in the capital stack. That $1 to $2 million versus a $50 to a $70 million pool of EB-5 investments is nothing. You’re basically getting almost nothing from the recovery.

So that being said, I think it makes it extremely important for investors to demand that the regional center that is marketing a particular EB-5 project to provide the financial statements—or to provide enough information that makes you comfortable with the financial position of the company or the developer’s business.

Which means, let’s say the industry standard, and then investors should read all the documentation that is provided by the regional center. I think it’s extremely important to read the memorandum. They should read the debt agreement, the senior loan agreement that any project has. I have come across projects where investors have not been provided the loan documents associated with the loan that the senior lender has made to a particular project.

I have, by God’s grace, been able to help those investors stay away from such projects, because I want to make sure that I know how my capital is going to be treated based on not only the agreement that I have with the builder or the developer. I also want to know how the person above me in the capital stack is going to get treated in the case of a default or a project failure, because that is going to determine to a significant extent as to how I’m going to get treated eventually in a court of law.

But you also have to make sure, and this is something which is not on this page—you have a right to ask questions as an investor to get certainty around your investment. So, I have received calls from investors where they said, ” I don’t know if I can ask this.” I said, “Well, you very well can because it’s your money on the line.” So, feel free to ask for more documentation from your regional center. If they cannot provide it to you, they have to tell you why.

And make sure that you read every document that is provided to you in the VDR. There are certain documents that are just non-negotiable when it comes to investing in EB-5. You have to look at the loan agreement, the senior loan agreement. You have to look at the completion guarantees that have been signed between the developer and the builder of the project or the contractor, and any other documents that are related to the execution of the project, the sourcing of any materials for the project, or any other agreements that the developer has with the service provider.

On that last point there of documentation that’s non-negotiable, the financial statements. Unfortunately, a lot of the other EB-5 companies that we’ve seen, they either don’t have the financial statements or they’re not willing to share them, and that is a major red flag. You’ve got to be able to look at the financial statements because that will very quickly… It’s like an SDT score. It’s easily comparable across applicants, or in this case, projects. You can very quickly determine the financial health of a company by looking at their financial statements. They’re not required by law to be provided, but they are something that you can ask for. And the inability or unwillingness to provide them is a very big red flag. That’s something to absolutely keep in mind.