Over the past month we have received a few questions about the use and structure of EB-5 intercreditor agreements. Therefore, we have decided that this topic warrants a public post instead of individual responses.
An intercreditor agreement is broadly defined as an agreement between one or more creditors who have shared interests in a particular borrower. This agreement is used to spell out their relationship to each other and to the borrower so that, in the event of a problem, there will be ground rules in place to govern the situation.
In the EB-5 context, an intercreditor agreement is most often used when EB-5 capital is placed in a mezzanine financing arrangement. Since 2007, mezzanine financing has become an important use of EB-5 capital as traditional commercial banks have become more reluctant to finance projects at loan-to-value (LTV) ratios in excess of 75%. This decrease in LTV ratios across the board has created a gap between what lenders will provide and what developers want from debt sources. Many lenders require that the developer provide 25-30% of the value of the property, while many developers want to limit their equity investments to 10-15%. EB-5 mezzanine financing has often been used to fill the 10-20% gap.
When you hear the term EB-5 intercreditor agreement, it refers to the agreement governing the relationship between the commercial bank lender and the mezzanine loan provider (the EB-5 regional center). This agreement between the parties is very important because it gives certain rights to the mezzanine provider in default events.
EB-5 Intercreditor Agreement Practice Pointers:
- Include a notification of default or non-payment provision. This ensures that the mezzanine lender will be among the first to know if the developer misses a payment.
- Include a right to cure any default by the developer. This is typically a 30-day cure provision before the right to foreclose kicks in for the commercial bank.
- Negotiate the rights that the mezzanine lender will have in the event that the property cash flows cover all of the debt service on the commercial bank loan, but not all of the mezzanine debt service. This is often the real crux of most intercreditor agreements and is heavily negotiated based on the state and local foreclosure laws.
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