At NES Financial, we pride ourselves on our secure administration of funds and documentation throughout the entire EB-5 project life cycle, without gaps, from the marketing and capital raise all the way through return of investment. This week, we had the opportunity to chat with our Assistant General Counsel, Jill Jones, about an often-overlooked piece of the process —transferring the EB-5 funds from the NCE to the JCE — and how NES Financial’s secure Drawdown Solution helps protect issuers and investors alike.
Q: Jill, for those who aren’t familiar, could you explain what a drawdown account is and where it fits into the EB-5 process?
A: For EB-5 offerings that are structured as a loan model, the drawdown account provides a secure vehicle for the NCE to hold the EB-5 funds once they are released from the escrow account and to fund the loan to the borrowers in draws, at the times and in the amounts that are appropriate for the development.
Q: Why did NES Financial create the Drawdown Solution?
A: NES Financial is fueled by the data we have collected and the patterns we have observed. A review of the high-profile defalcations in EB-5 shed a glaring light on the release of funds from escrow accounts and how those funds are held or moved around prior to being loaned to the eventual borrowers.
In the most egregious of cases, the funds were bounced around from account to account and used to fund unrelated projects — or the lifestyles of the purported issuers.
The drawdown account is meant to protect the NCE in its role as lender. It helps ensure that the loan is kept in balance by metering out the draws in appropriate proportions related to the rest of the capital stack.
The drawdown is likewise meant to protect the investors. The controls afforded by the drawdown agreement help ensure the funds can’t be misappropriated or misused, and that there is a mechanism in place to accommodate investors’ potential need for a refund following a withdrawal from the investment.
Q: So a drawdown account is separate and distinct from the escrow account?
A: Correct. The purpose of the subscription escrow account is to accept funds from potential investors and hold them until certain gating triggers are met. At this stage, the ownership of the funds is shifting from the investors to the NCE. A drawdown account is not an escrow at all; rather, it picks up where escrow leaves off. It’s an operating account owned solely by the NCE. It can be counted as collateral in satisfaction of the requirements on other portions of the capital stack.
Q: Is it more difficult to structure/create than other types of accounts?
A: No, it isn’t complicated to set up — and in fact, much of the documentation needed to open the account would have already been collected in the process of opening the escrow account.
The challenge in an EB-5 loan that we do not see in a traditional construction loan is the possible need to refund denied investors. Since the EB-5 funds are most often being loaned prior to adjudication of the I-526 petitions, it is a very real possibility that either a) the borrower will need to prepay a portion of the loan or b) some of the funds will need to be held in reserve. The drawdown account bridges this gap, taking a traditional construction loan structure and building in the mechanics necessary to process refunds to denied or withdrawing investors, utilizing templates that have been preapproved by the NES Financial partner banks offering the drawdown services.
Q: Doesn’t a drawdown account cause delays in the money going to the borrower?
A: Not at all. The drawdown account is still an operating account of the NCE. Segregating the EB-5 funds from other operating funds makes the disbursement process even quicker because funds can only go to one predetermined place (to the borrower).
That said, an EB-5 loan is a construction loan and should be treated as such. A traditional construction lender is not likely to lend the full loan amount on the day the loan closes and then hope that the project continues or the rest of the capital stack falls into place. EB-5 loans shouldn’t be any different. In any properly structured EB-5 loan, there are milestones that need to be met before tranches of money are released to the borrower. The drawdown account doesn’t cause delays in getting the funds to the borrower; it facilitates appropriate metering of funds according to the Loan Agreement and the development schedule.
In terms of best practices, an EB-5 Loan Agreement should at least include the following:
- Consistency with the terms outlined in the private placement memorandum.
- Requirements that all portions of the capital stack necessary to complete the project are in place, and a plan to cover a shortfall in the event that the anticipated EB-5 capital is not completely raised.
- Evidence that the EB-5 lender will receive all applicable reports and information necessary to support the due diligence process.
- Terms and Conditions of loan repayment which do not conflict with immigration rules (i.e., nothing paid back prior to I-829 approval).
- A documented (not just best-efforts) plan to repay investors in the event of an I-526 denial.
Q: What if I want to open a drawdown account at my own bank?
A: That may be possible. However, keeping the drawdown account in an NES Financial partner bank allows us to open the account and implement proper controls on the funds quickly, because the drawdown is already an established product that our partner banks offer. We can also be certain to have the visibility of account activity we would need for the most accurate reporting. If you prefer to have the drawdown account at a different bank, it may not be possible to provide this level of service.
To learn more about how our secure Drawdown Solution could benefit your project, please contact your NES Financial representative.