By: Ali Brodie
Although the program has been around for a number of years, it is only recently that EB-5 financing has become popular for hotel development with major flags including Marriott, Starwood, Hyatt, and Hilton successfully utilizing this alternative form of financing. With traditional construction financing difficult to obtain, many hotel developers have turned to EB-5 financing, realizing its benefit as both a creative way of attracting financing from foreign investors, and marketing hotel brands internationally.
Hotel developers favor raising capital through the EB-5 program as it is considered a relatively cheaper source of financing, frequently offering returns of less than 4%, when compared with higher interest rates on debt and other riskier forms of financing. From the investor’s perspective, the United States is attractive because of its political and economic stability, healthcare, and educational opportunities for children. The investors, the majority to-date being Asian, are primarily concerned with obtaining a green card through investing in a regional center project that creates the requisite 10 new jobs per investor and will return their funds (capital at risk) within 5 years, not necessarily with the return on investment.
Many investors select EB-5 regional center hotel projects because they identify with the property operated by an internationally recognized hotel brand, and they see the increasing profitability and stability of the U.S. hotel industry. We suggest the following tactics for EB-5 hotel developers to make your project competitive:
- It is critical to obtain strong branding by associating with a brand that is recognizable in the investor’s home country. This adds to the credibility of the project. Investor’s favor investments with brands which are both familiar and prestigious.
- Similar to hotel branding is the developer’s track record. Investors have to trust the developer of the project investment. Experienced developers should provide investors with information relating to past successes in order to gain investor trust.
- Ensure that your project is located in a Targeted Employment Area (TEA). The TEA designation allows the qualifying investment to be reduced from $1 million to $500,000. The majority of EB-5 projects being marketed to investors are at the $500,000 threshold, and to be competitive in the marketplace, it is crucial that the hotel project be located in a TEA.
- Geographic location of the project should also be considered, understanding that investors often times will invest in projects located in cities that are centers of commerce, appealing, and easy to visit.
- The capital stack must include more than just the EB-5 funds. Investors like to see that the developer has some skin in the game. Likewise, projects that have too much EB-5 financing are perceived as riskier in the event the developer is unable to raise the required amount of EB-5 capital.
- Job creation is critical to the investor being able to obtain a permanent green card. The developer should work closely with an economist to determine the projected job creation and the corresponding number of investors allowed for EB-5 funding. Each investor is required to create 10 full-time jobs. It is always recommended to create more jobs than required in order to have a job creation cushion.
- Every investor will want to understand the exit strategy associated with their investment.
While EB-5 financing can count as a meaningful part of the capital stack, it is important that the EB-5 funds are used appropriately in accordance with requirements established by the U.S. Citizenship and Immigration Services.