The majority of EB-5 issuers use the loan model. Under this model, investors’ funds invested in the New Commercial Enterprise (NCE), or Lender, are loaned to the Job Creating Enterprise (JCE), or Borrower. Just like any loan, the terms of the loan agreement will dictate the specifics of the interest rate, payment frequency, and repayment options between the Lender and the Borrower.
In the EB-5 world, unique circumstances often merit consideration of outsourcing the servicing of the loan to a third party.
EB-5 loans continue to be complex
EB-5 loans can be structured from very simple to very complex. Components will vary in complexity but generally include:
- Number of investors
- Invoicing & collections tracking
- Multiple interest rates and calculations – by partner type, agent, etc.
- Frequency of loan payments
- Distribution frequency
- Form of distribution – wire, check, etc.
- Draw schedule
- Statement of generation requirements
- Updating waterfalls and reports
In general, EB-5 loans have been trending toward the more complex. As issuers continue to expand their reach to include investors from different countries, they must deal with many of the above-listed issues in order to meet the needs of investors in the different countries. As such, we expect this trend of complexity to continue.
Outsourcing loan administration can reduce risk
Another reason to consider outsourcing is for compliance/best practice purposes. In projects where there is some affiliation between the Regional Center, NCE, and/or JCE, it is generally considered a best practice to outsource the loan servicing responsibilities. In this way, investors are assured that a third party is closely monitoring this important aspect of their overall investment. Outsourcing is commonplace in most traditional investment funds.
While the majority of EB-5 projects use the loan model, many still administer the loan in-house using spreadsheets as the tool. Spreadsheets are an effective tool for many things but are also prone to costly errors. It is always a best practice to use the right tool for a job, and purpose built EB-5 solutions exist to help issuers reduce cost and risk and add value for investors.
Before trying to go about it yourself, talk to your EB-5 team about utilizing the experience and expertise of a third party loan administrator to help you provide the highest levels of security, transparency, and compliance for your investors.
NES Financial welcomes your questions and opinions. Allow us to address your business needs by contacting us. We look forward to hearing from you!