Hotel developers can avoid common mistakes when using EB-5 financing

EB-5 financing is an important and viable source of construction financing for hotels, hotel enhanced mixed-use, and other development projects. It is used by many institutional players including government entities such as port authorities, major hotel brands like Marriott and Hilton, and some of America’s most successful and wellrespected companies, such as Great Wolf Resorts, the Related Companies, and Silverstein Properties.

EB-5 financing is generated through the EB-5 Immigrant Investor Program, administered by the USCIS. Created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment, the program enables foreign investors to apply for permanent U.S. residency if they make the necessary investment in a qualified commercial enterprise in the United States that creates at least ten permanent full-time jobs for qualified U.S. workers.

EB-5 financing is used most effectively by top developers with superior projects and outstanding track records. The EB-5 loan is typically no more than 30 percent of total project costs. (For new hotel development, total loan-to-cost ratio generally should not exceed 80‒85 percent.) The actual amount of the maximum EB-5 raise is limited by the number of jobs that the development will create.

EB-5 Immigrant Investor Program

It is always better to ‘do it right the first time’ rather than trying to untangle a mess.

Although utilizing EB-5 financing as part of the capital stack for new hotel development is becoming more commonplace, developers still overlook some simple steps that can help them avoid wasting time, money, and resources. Here is our advice, based on our involvement in many dozens of EB-5 projects over the last eight years:

1. Bring in the EB-5 experts as early as possible.

All of the common mistakes can be avoided if the developer brings in an experienced advisory team early in the process, rather than blundering around and trying to figure it out themselves. There is a steep learning curve! It is always better to “do it right the first time” rather than trying to untangle a mess.

2. Document the intention to raise EB-5 money at the very outset, before you spend any money.

Failure to do so will significantly reduce (or eliminate) the amount of EB-5 funding available.

3. Do not form your own regional center.

Most developers should not consider forming their own regional centers. Doing so means going into an entirely new business—the immigration and securities business. This can be time-consuming, frustrating, and unproductive.

4. Do not do anything with the regional center before you have proper guidance.

It is too easy to stumble into the “wrong” regional center and get your shoelaces tied together with early discussion. As of May 1, the USCIS has approved approximately 883 regional centers. We estimate that 20 percent of the regional centers have raised more than 90 percent of the EB-5 capital. In most cases, it is a waste of time and resources to work with a regional center that lacks substantial experience and a great performance track record for both developers and for immigrants.

5. Do not forget to count all the parts of a mixed-use project.

In terms of generating the critical jobs count for sizing an EB-5 financing, all elements of a project, and sometimes immediately adjoining projects, should be considered. Just because you want to put all the EB-5 money into a hotel, this does not prevent you from counting the jobs created from other parts of the project (as long as the jobs created by these other elements are not being used for another EB-5 financing).

6. Due diligence. Due diligence. Due diligence.

Do not start talking to anyone about EB-5 financing until you know the right questions to ask and have performed enough due diligence to take the next steps. Congress recently extended the EB-5 program through September 30, 2017. The many stakeholders in the EB-5 program, including hotel developers, are working together to ensure the viability and longevity of the program


ABOUT THE AUTHOR

Jim Butler is Chairman of JMBM’s Global Hospitality Group and the author of the HotelLawBlog.com. He and his team have closed more than $1.5 billion in EB-5 financing for clients’ development projects. Reach him at jbutler@jmbm.com.

Jim Butler