EB-5: A Development Funding Alternative?
While the hospitality industry seems to be rebounding, financing for new hotel and shared ownership projects is still not easy to come by. That’s why Eliot Brown’s recent article in the Wall Street Journal caught my eye.
The EB-5 Program (a/k/a “The Million Dollar Green Card”)
WSJ reporters Brown and Lynnette Khalfani-Cox aren’t the only ones who have been writing about the EB-5 Program. Some web sleuthing indicates that some other prominent news outlets have been reporting on the “Million Dollar Green Card” fairly regularly since the beginning of the Great Recession.
Update: Robert Frank at the Wealth Report also recently wrote about this program
In a nutshell, the EB-5 Program allows citizens of foreign countries to obtain a 2-year conditional US immigrant visa based on an investment made in the United States. In order to qualify, the investment must create 10 new full-time jobs in the United States. Generally, the investment must be in the amount of $1 million, but this amount may be decreased to as little as $500,000 depending on the economic conditions of the area in which the business would operate. Passive investment (i.e., ownership of real estate) would not qualify even if the job creation criteria was somehow satisfied. After two years, the conditions on the visa can be lifted and the foreign citizen and his/her family would then become lawful permanent residents of the United States.
Of course, the EB-5 Program rules are much more complicated than summarized above, and the number of visas granted are limited to 10,000 annually. In addition, the EB-5 Program expires in 2012 unless reauthorized. Given some reported abuses in the program, reauthorization may be predicated on some significant changes.
Application to the Hospitality Industry
A look at the projects sponsored by EB-5 Regional Centers indicates that several, if not most, are looking to attract EB-5 funds for hotel and resort development. There is even something called the EB-5 Vacation Club.
I have worked with similar programs in the Caribbean, and its striking how they can alter the structure and marketing of a development project. At a very basic level, it’s obvious that “passport” investors are making investment decisions on criteria other than the core business plan. As we advised in a previous post, these are the type of investors a business (and its primary investors) may not appreciate down the road, especially if things don’t go as well as planned. Investment documentation must specifically plan for and protect against this inherent risk.
Developers also need to consider the passport investor’s timeline. While the business may need at least 3, 4 or 5 years to reach stabilization and profitability, the passport investor may only want to hold his/her investment for the minimum period required by the applicable program. After that, it’s time to cash out. Funding such requests could prove debilitating.
In the shared ownership context, developers need to consider at least two other issues if marketing through “passport” programs:
- Passport investors will typically look to cap any additional financial outlays after the initial investment. Thus, these investors may look for predictability (read: guarantees) with respect to ongoing assessment obligations.
- If passport/residency rights are the primary purchase driver, a passport investor may be more motivated to resell his/her ownership interest immediately after fulfilling the program’s investment holding period. Presumably, resale pricing may reflect a discount equal to the perceived value of the passport/residency rights received. This scenario could present unwanted competition for the developer’s sales program, especially in larger developments where sell-out may take a number of years.