Hotelier Roadmap to EB-5 Financing
for New Hotel Construction, Expansion or Renovation:
Ten Steps to a Successful EB-5 Offering
UPDATED BY DILLON COLUCCI and staff
The EB-5 investor visa program allows non-U.S. persons to invest $800,000 (or $1.05 million) in a business that is expected to create at least 10 new permanent jobs per investor, and to obtain a conditional visa upon review and approval by the United States Citizenship and Immigration Service (“USCIS”). Hotel projects are one of the best investment categories for EB-5 investors, because they tend to create more operating jobs than many other businesses, they are investments in real estate, which tend to be more stable in value than some other forms of investment that qualify for EB-5 financing, their business model is easy for investors to understand, and they are often operated by or under franchise licenses with hotel brands such as Hilton, Hyatt, Intercontinental, Starwood and Wyndham that are known around the world by potential EB-5 investors.
For those hotel developers seeking to access EB-5 financing, here are our recommended steps on the road to a successful EB-5 financing:
1. Determine if the project has the necessary characteristics to successfully raise financing through the EB-5 program. The sponsors of EB-5 investment offerings are always looking for good new projects, but the market is competitive, and to be successful, a project will need to have some key markers that demonstrate the project will be attractive to EB-5 investors. It is not necessary that all of these elements exist immediately, but the more of them that do exist when a developer first approaches potential EB-5 sponsors, the better the developer’s chances will be of attracting the most experienced and successful EB-5 sponsors:
- Project preliminary work — The developer should have completed a significant amount of the preliminary project work, such as obtaining a hotel market feasibility study, preparing preliminary plans and budgets for the project, obtaining franchise approval or a hotel management agreement or letter of intent, acquiring the property and determining zoning and permit requirements.
- Developer with Financial Strength and Track Record – The most successful EB-5 projects are those with experienced and financially strong developers. EB-5 sponsors and investors alike want projects run by strong companies with a history of success in developing similar projects.
- Developer Equity Commitment – EB-5 sponsors and investors favor projects where the developer has a financial commitment of its own equity invested in the project – 20% equity or more is expected. There are some EB-5 projects where the developer has less than 20% equity in a project, but these are often more difficult to sell to investors unless there are other counterbalancing factors.
- Commitments to Fund Entire Project Cost– EB-5 investors know that the success of a development will often depend on the developer’s ability to obtain a senior loan or other financing in addition to EB-5 capital, and having a committed senior loan or other financing shows that other lenders or investors have underwritten the project and determined that it has the potential to succeed. If a developer does not have committed capital, it may help to show that the developer is actively seeking this financing and has obtained some indications of interest.
2. Determine the estimated number of direct and indirect jobs that may be credited to the project. The job count will have a direct impact on the maximum amount of EB-5 capital that the developer may raise in an EB-5 offering, using the basic formula of 10 jobs per $800,000 in EB-5 capital. An economist with experience in EB-5 economic models can provide a preliminary estimate of the direct and indirect jobs that will qualify under the EB-5 program using one of several approved economic models, together with information provided by the developer regarding the project, including the size and characteristics of the hotel, the location of the hotel, the development budget (categorized into hard costs, soft costs and financing costs), the hotel brand under which the hotel will be operated, and a five year projection of revenues and expenses for the hotel upon completion. It is always best when determining the amount EB-5 capital that will be raised to leave as large as possible a “cushion” of excess jobs, to show investors that there will be more than enough jobs to support the full amount of the EB-5 investment being sought by the developer.
3. Contact one or more USCIS approved Regional Centers in the project area. Most hotel EB-5 projects are sponsored by a USCIS approved Regional Center, because this is required for the project to receive credit for indirect as well as direct jobs. The USCIS reported that it has approved approximately 792 Regional Centers as of January 6, 2020, so there are many to choose from. The developer should look for Regional Centers with a track record of successful EB-5 financings; however, this information is not always easy to find, because there are no public records of successful EB-5 projects. Therefore, the developer should speak with several experienced people in the EB-5 business to obtain information about the track records of those Regional Centers that the developer is considering. The developer may also consider hiring an experienced EB-5 attorney or consultant to assist with this process who has worked with multiple Regional Centers, but be wary of paying monthly retainer fees, or agreements that cannot be terminated easily. In speaking with one or more Regional Centers, the developer’s goal should be to determine whether the Regional Center is interested in the project, what financial terms the Regional Center would offer to the developer to sponsor the project, how the Regional Center proposes to market and sell the EB-5 offering, and what other EB-5 offerings the Regional Center has successfully conducted.
4. Consider other possible sources of EB-5 capital. There are several U.S. securities broker-dealers currently offering EB-5 capital raising services, and the developer may contact one or more of them to determine their interest in the project, how well they believe it will sell in the EB-5 market, and what financial terms they would offer to broker the project. The broker-dealer can locate a Regional Center to sponsor the project, and the broker-dealer can be responsible for hiring the marketing agents, in the U.S. and outside the U.S., to sell the EB-5 investments for the project. Another option is to contact non-U.S. EB-5 marketing agents directly, and negotiate a marketing arrangement with a lead agent. In every case, it is important for the developer to obtain information about the background of the people who are being considered, as well as their track record in prior EB-5 transactions.
5. Enter a Letter of Intent or Term Sheet with the Regional Center, U.S. Broker-Dealer, or Non-U.S. Marketing Agent. The Letter of Intent or Term Sheet will summarize the key business terms of the proposed EB-5 financing, including the amount of capital to be raised, the rate of interest or preferred return to be charged on the EB-5 financing raised, and the cost of all additional fees that will be paid by the developer. It is also important for the developer to include a timeline for each task that the EB-5 provider will perform, and a right of the developer to terminate the arrangement if the provider is not performing in accordance with the agreed upon timeline. The developer should also negotiate the timing of payments to be made by the developer to the EB-5 provider, with incremental payments rather than a large sum up front, which will be difficult if not impossible to recover if the developer determines to terminate the EB-5 provider for failure of performance later. In addition, the developer should negotiate when EB-5 capital will be released to the developer. Some EB-5 capital providers will not allow the capital contribution of each EB-5 investor to be released until that investor receives approval of his or her initial visa petition (the I-526 petition), which currently takes an average of 13 months from the date the investor files the petition. If the developer needs the funds before that date, the developer should ask for an “early” release of funds before EB-5 investors receive approval of their I-526 petitions, but this will typically require some provision to be made for return of capital for any EB-5 investors’ whose I-526 petitions are denied. That provision may be in the form of a guaranty of return of funds to denied EB-5 investors, or a refund account with a portion of each EB-5 investor’s funds, or both. Alternatively, if early release of funds is not available, the developer should consider obtaining temporary “bridge” financing pending the release of EB-5 funds.
6. Prepare offering documents for the EB-5 financing. Since almost all EB-5 financings are done through limited partnerships or limited liability companies, EB-5 financings involve the sale of securities, and must meet the same requirements as other offerings of securities. In general, EB-5 offerings are made in reliance upon Securities and Exchange Commission Regulation D (for private offerings of securities inside the U.S.) and Regulation S (for offshore offerings of securities outside the U.S.). Both Regulation D and Regulation S can be used concurrently for the same EB-5 offering. In addition, every EB-5 offering requires a business plan prepared in accordance with USCIS requirements, and a full economic report documenting the basis for the estimated number of jobs to be created as a result of the project. The developer or the Regional Center typically prepares a private placement memorandum, limited partnership agreement or limited liability agreement for the fund established to accept EB-5 investments, and a subscription agreement for the EB-5 offering. A business plan writer will prepare the business plan, and an economist will prepare the economic report. In addition, if the EB-5 investment will be made in the form of a loan, loan documents will be required to be prepared. If an escrow is being used, an escrow agent will need to be selected, and an escrow agreement will need to be prepared. The EB-5 provider will usually translate the principal offering documents into the primary language in the market where the EB-5 investment will be sold.
7. Prepare the offering for sale. In addition to the legal offering documents, an EB-5 offering will require high quality investor presentation and marketing materials, such as glossy brochures, videos, power points and websites. If the primary market is outside the U.S., these materials will need to be prepared in both English and the primary language in the market where the EB-5 investment will be sold. The EB-5 provider may prepare some of these materials, but will often ask the developer to work on a video and submit pictures and renderings for the project. EB-5 offerings have to be sold one investment at a time to individual investors, and it is crucial that developers spend the resources to create attractive presentations and marketing materials that will have strong personal appeal to EB-5 investors.
8. Market the project to EB-5 investors. The EB-5 provider, whether that is a U.S. broker-dealer, Regional Center, or non-U.S. lead marketing agent, will be responsible for developing a schedule of EB-5 investor seminars to be held in the country or countries in which the EB-5 offering will be marketed. The developer will often be asked to attend the initial seminars, so that potential investors can meet the developer and ask questions regarding the project. In addition, the developer may be asked to coordinate tours of the project with potential EB-5 investors, and to have a translator available for these tours. Marketing an EB-5 offering is time and labor intensive effort, and the developer must be prepared to help with the marketing effort in order for it to be successful.
9. Obtain subscriptions for the limited partnership or limited liability company interests and commence the EB-5 visa petition process for each investor. Each EB-5 investor will generally sign a subscription agreement for the EB-5 investment, wire the full amount of their investment into an escrow account, and commence the immigration process by filing an I-526 petition through a U.S. immigration attorney. Currently, the USCIS has stated that its average processing time for each I-526 petition is 32.5 to 49.5 months (as of Jan. 15, 2020) from the date of filing. The terms of the escrow agreement will determine whether each investment will be released to the developer before the I-526 petition is granted, or will be held until the I-526 petition is granted. As indicated in step 5, that is a provision that needs to be negotiated with the EB-5 provider and disclosed in the EB-5 offering documents. When the I-526 petition is granted, it will allow the EB-5 investor to apply for a visa to enter the U.S. The investor will then have to obtain the entry visa, and to enter the U.S. within six months of obtaining the entry visa. The I-526 petition approval allows the investor to stay in the U.S. for two years after the date, and the investor is then required to file for an I-829 petition to stay permanently in the U.S. However, please note that there is a 10,000-annual cap on the number of visas in the EB-5 category and a rule that limits investors from any one country to 7% of the annual cap when the cap is reached. Because of this annual cap and the high demand for EB-5 visas from certain nationalities such as China, India and Vietnam, the U.S. State Department has imposed a wait line for certain investors which delays an EB-5 investor’s entry to the U.S. after the I-526 petition is approved. This occurred for the first time ever in 2014, and has continued to occur again every year since. This means that EB-5 investors from China, Vietnam and India may have a delay in receiving their entry visa, which will in turn lengthen the time period within which they will be required to file their I-829 petition. (Retrogression is a topic with several important implications, which cannot be fully discussed here, but are discussed in this EB5 Investors Magazine article by David Hirson and Cletus Weber).
10. Provide periodic reports to EB-5 investors and document the use of the EB-5 investment funds. EB-5 investors will want to be kept informed of the status of the project to be assured that it is progressing to completion, and developers should plan on issuing periodic investor reports. In addition, EB-5 investors will require the developer to prepare documentation of the use of their EB-5 funds, because each EB-5 investor will be required to file that information with that investor’s I-829 petition within two years following the date that the investor enters the U.S., as discussed in Step 9 above. Obtaining approval of an I-829 petition has traditionally taken approximately four to five years from the date the EB-5 investor first invests in an offering, but may take longer depending on how long it takes the investor to receive I-526 petition approval and then obtain an entry visa, because the I-829 petition cannot be filed until 90 days prior to the two-year anniversary of the date the investor entered the U.S. Developers should note that investors are required to keep their investment “at risk” until they end the conditional permanent residency period, which generally means that the project must still be in operation and the EB-5 investment must still be invested in the project until approximately the date that each EB-5 investor files their I-829 petition. At the time of filing the I-829 petition, each investor will be required to prove that the conditions under which the project was approved by the USCIS in the investor’s I-526 petition have been met. That will require that the developer provide evidence that all material terms of the business plan used to demonstrate the creation of new jobs were met. If the project was built and is operating in accordance with the business plan and economic report that were filed with investors’ I-526 petitions, the investors should obtain approval of their I-829 petition and receive permanent visas. If, on the other hand, the project was not completed for any reason, or is not performing in accordance with the business plan as required to establish that a sufficient number of jobs were created, then the investors may not obtain approval of their I-829 petitions. If an I-829 petition is not approved, the investors would likely be forced to leave the U.S. and try again with another EB-5 investment if they still wish to seek a U.S. visa. The stakes are very high for EB-5 investors, because if they invest in a failed project, they lose both their visa and their money. For that reason, it is critically important for the developer to understand that the best projects for EB-5 financing are those with the strongest chance of being successfully built and operated for the length of time necessary for EB-5 investors to receive their initial and permanent visas.