PHOENIX — After years of being completely dormant, the federal EB-5 Immigrant Investor Program is back with new funding that opens up a new path to relatively low-cost financing for commercial real estate developers.
Speaking during the "EB-5 Is Back! What Does That Mean for Hotel Developers?" panel at the 2022 Lodging Conference, Jim Butler, chairman of JMBM Global Hospitality Group, said EB-5 is almost universally a better financing mechanism for projects compared to traditional debt, assuming there is a high level of certainty they'll be completed.
Because of the complexity of the program, the regional centers that administer the financing are going to be looking for high-quality borrowers, Butler said.
"It's [about] the sponsorship, the quality of the project, the certainty of execution, the track record that's behind it," he said. "The regional centers' future and business reputation depends on getting the green cards for investors who put up the money. So if the deal goes bad and people don't get their visas, this isn't just a bad loan."
The EB-5 program is part of the U.S. Department of Homeland Security. As part of the program, foreign nationals put up capital for investment within the U.S. in exchange for lawful permanent resident status. The investment must be enough to fund at least 10 American jobs.
That investment is sourced by hundreds of "regional centers" that find the foreign investors and do the accounting to make sure the job requirements of the program are met.
The program has existed since the early 1990s but went dormant in September 2020 until it was reauthorized and funded in March 2022. The reactivation of the program came with some changes, though, and has been followed up by conflicting guidance from Homeland Security officials, panelists said.
The trade-off for all the administrative and bureaucratic hurdles is more favorable pricing on debt, especially compared to things like mezzanine financing.
Noreen Hogan, president of CMB Regional Centers, said in hospitality EB-5 funding can serve as "quasi-mezz" at more attractive rates.
"Obviously rates are different," she said. "If we are in a senior position, I'm looking somewhere under 8%, and then for mezz" low double digits.
Angelique Brunner, founder and CEO of EB5 Capital, described it as a "counter-cyclical financing mechanism" with financing available at points — like right now — where traditional bank lenders step away from hotel construction and financing.
"We're able to bring that capital stack when the bank only wants to show up with 40% [loan to value] and bring it up to 80%," she said.
One of the big changes as the program comes back online is the program is highly favoring rural projects, or anything not in a metropolitan statistical area as defined by the U.S. Census which has a population of less than 20,000. All of the panelists said it's still unclear what the new rules that give priority to rural projects ultimately mean, but they are all looking to fund as many projects that qualify as possible.
"We have a lot of demand right now for rural hotels, and rural projects in general, and that is what we're going to see through 2023," Brunner said.
One sticking point with EB-5 financing is the employment requirements, with many hoteliers worried that their properties don't have enough employees to satisfy those rules.
But Daniel Healy, CEO of Civitas Capital Group, said the employment requirements of the law actually have nothing to do with the number of employees on property, and they simply boil down to a financial calculation.
"This is partly why sponsor quality is so important, because I think for probably everyone at the table the worst-case scenario for us as regional center managers is a job creation shortfall," he said. "We can deal with a lot of financial issues — distress, whatever restructuring — but if there's not going to be enough jobs, that's a real problem. And so speaking just for myself, we're very aggressive about construction slowing down, or if there's some sort of execution problem, I will take your project over. I will ensure it gets built."
Hogan agreed that employment on property is not the issue and is something developers can lean on the regional centers for.
"For the developers in the room, you have zero responsibility to create new jobs," she said. "That is a 100% why you're hiring us and working with us."
Panelists said that in the past some larger developer groups have tried to run their own regional centers and cut out the middle man. But Healy said that's almost always a wrong choice because most of the risk and liability is carried by the regional centers, and there are inherent conflicts of interest when developers try to run their own compliance, along with finding and developing relationships with international investors.
Butler agreed.
"Running an EB-5 regional center is a different business," he said. "It's the immigration business, not real estate development. You really need to have the contacts and the networks."