The EB-5 immigrant investor program has provided financing for many real estate projects, including hotels. The program is now in limbo, awaiting action by the U.S. Congress and the executive branch.
REPORT FROM THE U.S.—Among many economic and political uncertainties facing hotel developers in the United States, a critical one for some is the fate of the EB-5 financing and immigration program.
The program, which allows developers to raise capital from foreign investors who in turn receive U.S. immigration status, is in legislative and bureaucratic limbo. As a result, some developers are pausing before proceeding on projects that rely on this form of financing.
“This is one of our biggest concerns,” said Carlos Rodriguez, chairman and CEO of Driftwood Acquisitions & Development.
The company has used EB-5 financing to develop the Residence Inn by Marriott Flagler Station in Miami and four other properties under development in Florida.
“You never know what is going to come out of Washington,” he said. “For now, they keep pushing forward the expiration without defining it once and for all. That creates a lot of uncertainty.”
Legislation reauthorizing the EB-5 program was due to expire last September. Since then, Congress has extended the program twice; it now is due to expire in April.
In January, the Department of Homeland Security proposed new rules for the program that if implemented would impose significant higher financial thresholds for investments to qualify for the program. Also in January, a bipartisan bill was introduced in the Senate that would kill EB-5 and reallocate the visas offered by the program to other immigration classifications, such as those based on employment.
Under current law, non-U.S. residents can invest as little as $500,000 ($1 million in projects not in targeted census tracts, such are rural areas or locations of high unemployment) that will create at least 10 new permanent jobs per investor. In return, the investor can receive an immigrant visa that can lead to green-card status. The new rules raise the required financing levels to $1.3 million and $1.8 million and tighten the definition of what qualifies as an area targeted for the lower investment threshold.
The waiting game
While neither U.S. President Donald Trump nor anyone in his administration has publicly commented on EB-5, some analysts believe the president is sympathetic to the program and its ability to help create jobs.
“There needs to be some changes to the program, but Trump is a real estate developer and is certainly aware of the program, which I believe is a benefit to its future,” said John Barrett, co-founder and president of Performance Economics, a consulting firm that performs economic impact studies for EB-5 projects.
He said although the Department of Homeland Security has proposed new rules for the program, it’s Congress that has the ultimate authority to renew, change or eliminate the program.
In the meantime, some developers and foreign investors are taking a wait-and-see attitude before proceeding on additional projects with EB-5 financing components.
“What concerns me the most are the constant warnings that the law is going to change, but ends up not changing and instead action is postponed and postponed,” said Noel Epelboim, president and CEO of Epelboim Development Group, which is developing a 195-room Even Hotel near the Miami Airport financed in part through EB-5 investors from Latin America. “This back and forth also makes it scary to potential investors. I’m also concerned about possible changes to the law in regards to the redefinition of (targeted areas) and the raising of the investment amounts.”
What might change?
Jim Butler, founding partner and chairman of the global hospitality group at law firm Jeffer Mangels Butler & Mitchell, said continuation of EB-5 seems probable. There’s little chance Congress will eliminate the program, he said; however, suggested changes to the rule could threaten its effectiveness.
“Most people in the industry believe there will be an EB-5 continuation,” Butler said. “It’s nearly certain the (final rules) will have a higher minimum investment than the current $500,000, which have accounted for 95% of the visas issued, but the numbers in the proposed rules are probably not tenable.
“The belief is we’re not ready to throw out the program, and people understand getting access to capital may require more than the (current) $500,000 minimum. But when you get up to the numbers talked about at the high end, it’s probably not feasible. Something in the middle will probably happen.”
Barrett agreed and said higher minimum-investment requirements could reduce the number of projects employing this financing.
“My gut tells me an 80% increase in the nontargeted minimum and a more than 80% increase in the targeted-area minimum is going to have a pretty drastic effect on how many people you can market these projects to,” he said.
Barrett added increases in the minimums could also tilt the mix of financing in some real estate projects.
“Given the job-creating requirement in the current law, developers have a ceiling on how much EB-5 cash they can bring into projects because they run out of jobs,” he said. “But if under the proposal you need $1.8 million from each investor and the requirement is to create 10 jobs, you can raise a lot more EB-5 capital for the same project.
“This would tilt the capital stack toward EB-5, and I’m not sure that’s a good thing. It’s better to have a mix of traditional debt, equity and EB-5 capital in which EB-5 is not the majority of the stack; it should be 30% to 40% at most. But if you’re getting $1.8 million from each investor and you have 20 investors, that’s $36 million, where previously 20 investors only netted you $10 million.”
How to decide on using EB-5
Analysts agree EB-5 financing is probably not an ideal vehicle for all hotel projects.
“Even with EB-5 financing, a project that is on the cusp of feasibility probably doesn’t make economic sense,” said David Pollin, co-founder and co-president of The Buccini/Pollin Group and chairman of PM Hotel Group, which secured EB-5 financing for a 153-room Canopy by Hilton property that opens this year in Portland, Oregon.
“A project has to approach feasibility on its own, but EB-5 can typically be the catalyst that takes it over the hump,” Pollin said.
Butler said only experienced hotel developers should consider tapping into EB-5 financing.
“This isn’t a program for everyone; it’s for the best of the best,” he said. “If this is your first or second hotel development project, don’t bother as you’ll waste your time and money. However, it can be a viable source of financing for seasoned experienced developers with good track records and great projects in fantastic locations.”