REPORT FROM THE U.S.—With the U.S. debt markets still far from stabilized, some seeking capital have turned to the U.S. Immigrant Investor Program to help fill in financing holes.
Also known as EB-5, the federal program was established by the U.S. Congress in 1990 to stimulate the country’s economy via job creation and capital investment from investors outside the U.S. The minimum required investment is $1 million, or $500,000 in high unemployment or rural areas. The investment must create or preserve at least 10 U.S. jobs within two years as well as create or preserve jobs directly or indirectly as a result of the investment.
“My perspective is that there has been a lot of buzz around it largely because the conventional (U.S.) financing markets have been difficult,” said Angelo Stambules, senior VP of capital markets at Hunter Hotels.
In exchange for the investment, the foreign investors are granted visas. Stambules said EB-5 deals can involve between 50 and 100 investors, and he has seen deals valued at up to $100 million.
“What they really want is their visas,” said Robert H. Voelker, shareholder at the law firm Munsch Hardt Kopf & Harr PC.
The program exploded in popularity during fiscal-year 2012, with 7,641 applications—more than double the 3,463 applications during the U.S. government’s 2011 fiscal year, according to the U.S. Department of State. The government does not break out exactly how many of these applications were meant for hotel projects.
Sources said, however, that the hotel industry is a frequent recipient of such financing.
“You can’t find enough equity,” Voelker said. “It helps fill in the gaps.”
Much of the investment is from Asia, and China specifically, with 80.1% of the fiscal 2012 applications coming from that country.
Marty Collins, CEO of Gatehouse Capital, utilized EB-5 funding in the development of the W Hollywood Hotel and Residences in California. He said he would be open to securing additional EB-5 funding in the future as well.
“We’re looking now at a number of projects” that could take EB-5 money, he said. These projects include public/private deals and big box hotels.
Hotels as job creators
Sources contacted for this report said EB-5 deals lend themselves to hotel projects because the properties typically employ a significant number of people. Donald Wise, co-founder and senior managing director of Turnbull Capital Group, pointed to several recent hotel development projects that attained EB-5 capital.
“It makes perfect sense,” Wise said of the relationship between hotels and the EB-5 program. “These are projects that encourage investment.”
In Collins’ case, he said the projects he would get EB-5 financing for are in areas that are in need of an employment boost.
“Hopefully, at the end of the day, it’s creating jobs,” Wise said.
There are, however, challenges as it relates to the EB-5 program, sources said.
For one, Stambules said the deals often involve long lead times. “Understand it can take 12 to 24 months before you have dollars to expend,” he said.
Stambules added that the program also can be cumbersome to obtain all the needed documents and to work with the government to get everything lined up.
Collins said it can also be difficult to hook foreign investors on anything but the best deals. In particular, the investors look for U.S. government involvement.
“You have to have a pretty sexy deal,” Collins said.
Also, there have been signs that the U.S. debt markets are kicking back to life. If that happens, sources said traditional financing methods could come back en vogue.
“As the recovery takes place, it becomes a little less attractive,” he said.
And debt markets are recovering, Stambules said. Renewed activity in the commercial mortgage-backed securities market has meant traditional lenders have had to become more aggressive.
“Overall, we’re very encouraged by the trends for hotel debt and financing,” he said. “This year, there has been steady improvement in the CMBS market where more and more (deals) have been financed.”