HOUSTON — The use of EB-5 funding in hotel development has grown in popularity, but many developers are still learning the details about how this source of capital works.

EB-5 capital is a green card program, said Samuel Newbold, chairman of immigration law at CSG Law, at the Hospitality Law Conference. It’s a way for companies to raise capital from abroad for projects, and in exchange, investors have the opportunity to apply for green cards. The program has existed since 1990, and it has raised more than $30 billion for hotel, restaurant, event, casino and other types of projects across the U.S.

In March 2022, the federal government passed the EB-5 Reform and Integrity Act that modernized rules for EB-5 financing.

EB-5 capital is highly regulated both from immigration as well as securities stances, he said. Fraud, misappropriation of funds and similar crimes have been reported within the EB-5 program, but these are the types of crimes found in private equity and securities as well.

Awareness of the program is important because it’s becoming a much more common part of transactions, Newbold said.

EB-5 capital is raised most often through a special purpose entity, similar to a traditional private equity offering, Newbold said. The SPE is pooling capital from many different investors, and that money is deployed into a project for a specific purpose. The SPEs are issuers, and they’re issuers of securities, so that is how they’re regulated.

For investors to become eligible for a green card through the EB-5 program, they must invest at least $800,000. The project that receives the investment must also create at least 10 full-time jobs.

The incentive for developers is it's a tax-free source of funding to benefit the economy and create jobs, Newbold said.

EB-5 capital can fund small or large projects — a $400 million Marriott hotel, the $1 billion Hudson Yards project in New York City or a Dunkin Donuts franchise, he said.

Two primary types of EB-5 funding are regional center and direct. The direct program under the revised law allows one investor, usually an owner/operator, to develop a property and open a business that will create 10 direct jobs, known as the 10 headcount criteria.

Under the regional center program, companies can apply for designation from U.S. Citizenship and Immigration Services to pool together EB-5 capital. The jobs created by projects funded through the regional center are calculated according to an economic model, not a headcount. For example, a $400 million hotel will have $400 million in hard construction costs; soft construction costs; architecture and engineering costs; furniture, fixtures and equipment costs; and could generate $80 million revenue after a few years.

“You can actually calculate how many jobs that’s going to create for the U.S. economy,” Newbold said.

EB-5 is flexible and can work within different financial frameworks, Newbold said. The SPE can loan or invest the capital as a project sponsor company or through a holding company. The debt or equity will contribute to the capital stack of a project, which may involve construction financing from a lender, other private equity or additional third-party financing.

As part of the capital stack, EB-5 can be used to fill in where the developer needs more financing, he said. It’s been used as a senior loan, and it’s collateralized by the assets of the company similar to how a senior lender would have a lien on the holding company. If there’s another senior lender involved in the deal, the EB-5 funding is usually subordinated. It can come in as a mezzanine arrangement, or it can just be equity — though mostly preferred, not common.

For a $400 million project, EB-5 funding could make up $100 million, Newbold said. The other $300 million would come from other sources. The EB-5 investor is credited with the job creation for the entire project, not just the $100 million that EB-5 contributed.

One reason EB-5 funding has grown in popularity is because it’s quiet money, Newbold said. For the most part, investors are motivated by the immigration benefit and getting their principal back and maybe a modest return. The money is quiet typically for about five to seven years, giving the property time to stabilize.

It's important to keep in mind that it costs money to raise EB-5 funds, Newbold said.

“How do you go out and raise $100 million in EB-5 capital from all these different investors at $800,000? You need help,” he said.

Developers will need intermediate groups, agents, people on the ground in different countries, broker/deals stateside to manage the securities regulations, and they will all need to be paid, he said. This is all subject to whatever arm’s-length negotiations occur, but in the debt scenario, there is going to be an additional 4% to 7% all in. For equity, the returns are slightly higher, so it might be 5% to 8% for the cost of capital.

For a loan cost of 7%, 50 basis points or 2 points go to the EB-5 investors, he said. The affiliated manager or partner holds 1%, and the rest of that interest is going to the broker to get the capital.

EB-5 capital is usually below the market in costs, but not always, he said.

“It depends on what you’re comparing it to,” he said. “If you’re comparing to more expensive financing, it’s much cheaper. If you’re comparing it right now with interest rates, it’s pretty good. But in low-interest times, it would actually be more expensive than just going out and getting regular construction financing.”

There isn’t a capital call such as with traditional capital, and along with being quiet money, it’s also slow, Newbold said. It usually takes between six to 18 months to raise the capital, so developers need to have a runway to actually do the deal. It’s also usually tied up for at least five years.

That can prove to be a problem with some franchisors, said Marisa Rauchway, an attorney and member at CSG Law. Depending on the system, some franchisors won’t want to deal with timing issues.

“This just came up for one of our clients a couple weeks ago where they wanted to invest in a franchise unit and use the EB-5 funding,” she said. “They were going along and then the franchisor stopped it because the franchisor didn’t want to wait for the timing that needed to happen in order for this money to come into place.”

One advantage is a clear model for job creation, Rauchway said. There are about 75,000 established franchise concepts in the U.S., giving a clear look at how many jobs a hotels or restaurant can create.

Being part of a franchise also means it’s not just the owner-operator working to make the business succeed, she said. There’s an entire system behind the business offering support through advertising, marketing and operations, making it a safer investment. If it’s a global franchise, the investor may already be familiar with it as well.

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