The hotel industry might be headed into a new year, but many of the same issues it faced in 2023 will carry over. Namely, high interest rates that have made it difficult to fund new projects.
To fill the capital stack, hotel investors are more inclined to look at and tap alternative debt methods that go beyond traditional lending. One of these is EB-5 financing, a program that provides expedited visa processing for foreign investors making a minimum required investment in a project that directly creates at least 10 new jobs in the U.S. One of the reasons hotels make a compelling EB-5 investment is because of the job-minimum threshold of 10, which is typically easily attainable in most hotel projects.
Though China and to a lesser extent Taiwan continue to dominate the outflow of EB-5 capital, other countries, including Vietnam, India, South Korea and Brazil, are still producing investors for EB-5. According to the U.S. Department of State, the total number of EB-5 visas issued to countries around the world in 2022 was 10,885.
As a lending option, EB-5 stands out—a win-win for both parties: on the one hand, investment money for a project; on the other, the opportunity of obtaining a green card. Now is the time to take advantage, particularly for new hotel construction, which has been constricted since the pandemic, but will pick up as capital markets thaw out. What past cycles have shown is that, regardless of the operating environment, the hotel industry is resilient and, unlike other asset classes, is able to dynamically price rooms daily.
For investors searching for yield, hotels provide a safe hedge against inflation and other exigent variables; for developers, EB-5 is a cheaper form of debt than they could normally raise or tap into, noted Rohit Kapuria, a partner at Saul Ewing, whose practice includes handling private offerings under the EB-5 investor visa program, representing lenders, borrowers, banks and regional centers, among other stakeholders. “At the end of the day, [EB-5] rates are far more attractive than senior or any other form of traditional financing,” he said, adding that secondary or mezzanine rates were as high as 17%, in some instances. “EB-5 is still, most times, sub 10%,” Kapuria said. “It’s been one of the driving forces for developments that need to proceed.”
It is a finance vehicle that many of the largest real estate companies in the U.S. are putting to good use. Consider HomeFed Corporation, a real estate development company based in Carlsbad, Calif., which specializes in mixed-use master-planned communities, but also dabbles in hospitality—it has an equity position, for example, in the 667-room New York Marriott at the Brooklyn Bridge, part of Brooklyn Renaissance Plaza. EB-5 capital has played a significant role in many of the company’s projects.
“EB-5 capital has been an integral part of HomeFed’s project capitalization for nearly 10 years,” said its president, Chris Foulger. “Whether in a senior or mezzanine position, EB-5’s attractive rates and flexible terms enable projects to get built in today’s challenging financing environment.”
RESTART
In March 2022, the EB-5 immigrant investor program was renewed for five years, through September 30, 2027, as part of a massive U.S. government funding bill, giving hotel developers renewed opportunities to tap into this alternative source of funding.
The EB-5 Reform and Integrity Act of 2022 (RIA) was part of the overall U.S. Omnibus Spending Bill and reauthorized regional centers to manage pools of investments from non-residents who want to invest and gain access to green card residency for them and their family members in the U.S.
The EB-5 program sets aside nearly 10,000 visas a year for investors and their families; since the family size averages 2.5 people, this means that about 4,000 new investments a year can come through this route.
Most EB-5 money is directed into real estate as opposed to, for instance, tech startups, because foreign investors understand and are more comfortable with investing in hard assets. One of the significant revisions to the RIA reset how much capital had to be spent on a particular project by location. The bipartisan bill determined that too much investment money was being directed to urban locations, bypassing rural areas, defined as locations outside of a metropolitan statistical area (MSA) with a permanent population of less than 20,000 people.
As such, the bill bifurcated the thresholds for investment dollars based on geography, with a minimum amount of $800,000 needed for a rural investment in what are also known as Targeted Employment Areas or TEAs. The amount is $1,050,000 for other areas.
Another benefit afforded investors who apply through projects in rural areas is that their application is processed as a priority over investors who apply through projects located within the top MSAs.
Hotel development outside major urban centers is making eminent sense for developers in the post-pandemic environment, especially if one acquiesces to the notion of how we live and work has permanently changed. “We’ve seen quite a few hotels in these rural locations. These hotels are kind of trophy assets,” said Nima Korpivaara, partner at KLD LLP, whose focus is on EB-5 financing for institutional grade development projects. He cited, for example, One&Only’s first U.S. property currently being developed in Big Sky, Montana, near Yellowstone National Park. One&Only Moonlight Basin, Korpivaara said, is being partially funded by EB-5 capital. “The idea of building a Hyatt in Manhattan—I don’t think those days are here anymore,” he said. “A lot of these projects have struggled with COVID and seen other failures or massive delays. The market for urban development has moved into what makes sense in a high-interest-rate environment.”
It’s also moved there because of the expedited processing time of EB-5 investment in rural spaces provided by U.S. Citizenship and Immigration Services or USCIS. One of the historical drawbacks of EB-5 is the wait time, where processing times have been known to take more than two years. It’s nettlesome for an impatient investor. However, under the RIA, 20% of visas were reserved for rural investors and 10% for those investing in high unemployment areas, creating a quasi-E-ZPass lane for those investing in rural projects, where processing times have been drastically reduced to as low as under a year.
“Hospitality, post-COVID, has actually jumped as one of the most attractive asset classes that we’re seeing in EB-5,” said
Kapuria. “There used to be a point in time where office was more attractive, but we’re back to the old days where investors are looking for luxury; they want brands and rural, to the extent it’s available, is flying off the shelves.”
TAKING ADVANTAGE
With sticky, high interest rates that don’t appear to be abating soon, sourcing alternative financing for a hotel project is a counter-cyclical measure that has never been more apparent or necessary than now. Hotels are expensive to build, but in the current low-supply environment, a timely investment.
In Portland, Ore., Yoav Gueron, COO of Sous la Rose, is developing a 72-room boutique hotel connected to what will be a 48,000-square-foot private social club, converted from an existing building, one of the city’s oldest Christian churches. EB-5 financing is the senior loan on the $100-million-dollar project, the rest filled in with equity and a PACE loan, or a Property Assessed Clean Energy loan, which is a type of financing available to make energy efficiency upgrades and renewable energy improvements at a commercial property. The project is slated to break ground in Q2 2024, with an expected opening date in 2026.
Gueron said that EB-5 capital is particularly attractive right now to developers due to the state of current market dynamics that have made traditional lending routes less appealing. In many cases, traditional lenders have backed out altogether, Gueron said. “With prime rates being at the height they are right now, and construction loans being turned down by many conventional banks, EB-5 is more flexible and more beneficial,” he said.
EB-5 capital need not be the entirety of a project’s financing to reap the rewards. It makes up a portion of the capital stack and can be used as the senior debt, which now makes sense due to higher rates in the market, or the mezzanine piece. In a typical hotel project, around 60% is financed with the remaining in equity, establishing a 60/40 LTV ratio.
Though EB-5 is an investment vehicle, investors are likely more motivated by the immigration benefits that come with it, not, explicitly, the returns. Clearly, realizing the “American dream” is one of the main motivators, along with profiting from the project itself. In an environment shorter on options for ground-up hotel development, for the sponsor and the investor, few options are as dually beneficial as EB-5 financing.
Hotel developers and projects sponsors interested in learning more about EB-5 are encouraged to attend the annual EB-5 & Global Immigration Expo, Jan. 15-16, at VEA Newport Beach, A Marriott Resort & Spa, in Newport Beach, Calif. The event will help developers access EB-5 capital and will include all the main players in the EB-5 space. Registration can be found here. To learn more about EB-5 and its opportunities, visit www.eb5investors.com.Â