News for the Hospitality Executive |
By
Jim
Butler
and the Global Hospitality Group®,
Author of www.HotelLawBlog.com July 27, 2011 Hotel
Developers: Why a "regional center" may be the key to financing your
next hotel development or expansion. And what you need to know about
finding a
regional center to sponsor your EB-5 hotel financing program. JMBM's
hotel lawyers have represented hotel developers for decades. We know
first hand
that today's financial environment is one of the toughest for financing
new
development ever seen, even for experienced hotel developers with great
projects. But
the EB-5 Immigrant Investor Visa Program may be one of the best
financing
sources now available. If you missed it, you will want to read, How
to use the
EB-5 Immigrant Investor Visa Program for financing. Simply
stated, the EB-5 investment program offers an alternative means of
raising
capital for hotel projects in the U.S. Our goal is to help hotel
developers
access this source of financing. In
this article, my partner, Catherine Holmes, gives you the information
you need
to understand how EB-5 Regional Centers work -- what they are, why you
need
one, and how to find one or create one. EB-5
Investment Essentials for Hotel Developers: Why
a regional center
is necessary and how to find one for a hotel financing by
In a
previous article, we described how the EB-5 investment program can be
used by
hotel owners and developers to provide an additional source of
financing for
hotel development, expansion and acquisitions. Although EB-5 financing
is not
new, the number of potential investors seeking EB-5 visas from mainland
China
has increased dramatically just in the past year, which is why the
amount of
financing available through the EB-5 investment program has grown
exponentially, and has the capacity to bring over $1 trillion of new
financing
into the United States. Since traditional sources of hotel development
financing continue to be extremely limited, any hotel developer who is
looking
to finance a hotel development project over $10 million should consider
whether
the EB-5 investment program could provide a portion of that financing. In
this article, we explain why hotel developers need to seek EB-5
financing
through regional centers, how to find a regional center for a hotel
project,
how to negotiate with a regional center and whether a developer can
establish
its own regional center for a hotel development. What
is a
regional center? A
regional center is an entity, which can be either a public or private
entity,
that is formed for the purpose of sponsoring EB-5 investment programs.
In order
to be a sponsor of EB-5 investment programs, a regional center must be
approved
by the United States Citizenship and Immigration Services (USCIS). Anyone
can apply for a regional center by filing an application, a business
plan and
an economic analysis showing that the business plan will create new
jobs
meeting the EB-5 investment visa requirements. There are currently
approximately 150 existing regional centers operating in 39 states, and
83 new
regional center applications pending. In
many cases, regional centers have been created by private parties who
are not
themselves developing any specific projects, in the hope that
developers will
bring projects to their regional centers for financing. This is why you
will
often find, when you visit the websites of many regional centers, that
they
have no specific projects mentioned on their websites. The good news
for hotel
developers is that many of these regional centers are eager to attract
projects
to sponsor - which we will talk about more in this article. Can
any
regional center sponsor projects anywhere in the U.S.? No.
Each regional center is approved to develop projects only within their
specific
geographic region. Typically, a regional center is established for one
county
or a group of contiguous counties within one state, although in some
cases
regional centers have been established to cover an entire state. No
regional
center has any exclusivity rights over their geographic territory, and
the fact
that one or more regional centers already exist in any geographic area
does not
mean that new regional centers cannot be opened in the same territory. There
are many geographic areas that already have multiple regional centers
approved
to sponsor projects in their areas, which means that a hotel developer
looking
for a regional center to sponsor an EB-5 financing may be able to get
competing
bids from regional centers eager to participate in their projects. Why
should a
hotel developer seek EB-5 financing through a regional center? Over
90% of all EB-5 visas are issued for financings sponsored by regional
centers,
and there are a couple of good reasons for that: (1) how you count jobs
to
decide how much you can raise in your EB-5 financing and (2) how you
prove how
many jobs were created when your project is complete. The next two
paragraphs
talk about these two very important issues. Before we get to that
topic,
remember that the basic requirement for an EB-5 financing is that, for
every
investor who invests $500,000, there must be 10 new permanent,
full-time jobs
created. How
do you
count jobs to decide how much EB-5 financing you can raise through a
regional
center? An
EB-5 financing done through a regional center has a very different --
and much
more favorable -- way of counting the number of new jobs created by a
development project. When an EB-5 financing is done without using an
approved
regional center, all of those jobs have to be direct jobs of the actual
business in which the EB-5 investment money is invested. That
would mean, for example that a single hotel that raised $20 million in
EB-5
financing would have to have 400 full-time employees - - which would be
highly
unlikely. However, when an EB-5 financing is sponsored by an approved
regional
center, the number of new jobs counted towards the EB-5 requirement
includes direct
jobs (hotel employees), indirect jobs (such as jobs at suppliers of
goods and
services to the hotel) and induced jobs (such as jobs created by other
new
businesses surrounding the hotel). Every
project is different, but counting the indirect and induced jobs can
often
multiply the number of jobs by 2, 3 or more times the number of direct
jobs.
For every 10 more jobs that can be counted, the developer can raise an
additional $500,000 more in EB-5 financing. So, for example, a hotel
that will
create at least 300 new direct, indirect and induced jobs, could raise
$15
million in EB-5 financing. From a hotel developer's perspective, this
fact
alone is enough to show that an EB-5 financing should be done through a
regional center. How
do you
show that the jobs were actually created when the project is completed?
Keeping
in mind that the EB-5 visa program was created to promote job creation
in the
United States, the USCIS wants to make sure that the projects it
approves
actually create the jobs promised by the developers who use this
financing.
This is done when the EB-5 investors are required to apply to the
USCIS, within
two years after they received their conditional visas at the time they
made
their investment, to have their visa conditions removed. At that time,
the
investors have to show that their money was invested in the manner
described in
their initial visa application, and the results of the investment were
as
projected in their initial application. When
an EB-5 financing is done without using an approved regional center,
the
investors have to produce the actual W-2 employment income forms for
every
single employee of the business in order to show that there were
actually 10
new direct jobs created for every EB-5 investor. However, when an EB-5
financing
is done through a regional center, there is no way to count all of the
indirect
and induced jobs that have been created as a result of the project, and
so the
USCIS requires instead that the investors show that all of the material
terms
of the business plan have been satisfied -- the money has been
invested, the
project has been built as planned and is in operation, and any other
material
terms of the business plan have been satisfied. If the
investors can meet those requirements, the USCIS will issue the
investors a
permanent visa, and they will become eligible to apply for U.S.
citizenship.
From the EB-5 investors' perspective, the regional center offers them a
more
secure way of obtaining a permanent visa, which is why EB-5 investors
prefer to
invest through a regional center. How
do you
find a regional center? A
hotel developer looking for EB-5 financing will want to know if there
are one
or more regional centers already approved in the geographic area in
which the
hotel project is located. While there are various ways to track down
regional
centers, it is unwise to pick a regional center just because is
approved in a
given area because regional centers are NOT all alike. Some offer far
more in
the way of experience, integrity and capital raising ability than
others. Also,
the amount of compensation that the regional center will take from a
hotel
developer varies widely - some will take a flat fee, some will take a
percentage of the amount raised for the number of years that the funds
raised are
outstanding, and some will require a piece of the ownership of the
project. A
hotel developer needs to find out about the track record and marketing
ability
of a regional center, before signing a commitment to work with any of
them. In
some cases, it may make more sense to work with a regional center that
is not
already approved for a specific area, if that regional center can apply
for an
extension of their existing geographic area, because that regional
center has a
significantly greater ability to raise the financing than any other
available
regional center. Experienced EB-5 financing consultants and attorneys
can help
hotel developers with this process. What
are the
terms that a hotel developer should negotiate with a regional center to
sponsor
an EB-5 financing? The
key terms of an agreement between a regional center and a hotel
developer are:
(1) the amount of EB-5 financing that the regional center will commit
to raise
for the hotel developer and the time within which the financing will be
raised,
(2) the compensation that the regional center will charge to the hotel
developer as the cost of the regional center's sponsorship and
services, (3)
the amount of control that the regional center sponsor will have over
the
project, (4) how the regional center will market the EB-5 financing,
and (5)
who will pay the various costs of the offering, including the costs of
the
offering documents, any amendments to the regional center's approval,
and
marketing costs (including printed materials, website, travel expenses,
translation services, among other things). All of
these terms are open for negotiation between the hotel developer and
the
regional center, and the hotel developer should discuss all of these
points
before signing an agreement with any regional center. Can
you form
your own regional center? Yes.
Anyone can create their own regional center. A hotel developer could
decide to
form its own regional center for a project, rather than engage an
existing
regional center for a project. However, at present there is a
significant delay
in processing time for new regional center applications at the USCIS.
That
could change at any time if the USCIS adopts its proposed "premium
processing" for regional centers, as published earlier this year. If
that happens,
it will allow a hotel developer to create its own regional center,
rather that
accepting the terms offered by existing regional centers. In the
meantime, we
believe that for most hotel development projects, a hotel developer
will want
to work with an existing regional center. We are
excited about the opportunity that the EB-5 investment program provides
to
hotel developers seeking financing for development of projects in the
United
States. We help developers select the best regional centers for them,
negotiate
fair terms, and avoid unnecessary pitfalls. We will provide more
information
about this program in future installments. EB-5
issues
are similar wherever the capital comes from. EB-5
investment is driven by foreign nationals seeking a "green card"
(permanent U.S. residence). The EB-5 immigration rules are the same for
eligible investors, wherever they come from. Because so much or our
work on
inbound direct foreign investment involves Chinese investors, we have
formalized a working group which we call the Chinese Investment Group™.
Chinese
investors from mainland China account for more than 70% of the EB-5
visa
applications. And Chinese investors from Taiwan, Hong Kong, Singapore,
Malaysia, Indonesia and other parts of the world add to that number. Members
of JMBM's Chinese Investment Group™ also work on inbound (i.e. into the
U.S.)
investment from other foreign countries. ________________________ Catherine
Holmes is a transaction and finance expert with
JMBM's Global Hospitality Group® and specializes in resort and
hotel purchase
and sale transactions, resort and urban mixed-use financing and
development,
hotel management and franchise agreements, and hospitality asset
workouts. With
her background in securities transactions, she also assists hotel
developers
with public and private offerings of securities. For more information,
please
contact Catherine Holmes at 310.201.3553 or [email protected]. ________________________ About
JMBM's Chinese Investment Group The Chinese Investment Group™ is a dedicated team of hotel and real
estate lawyers in
JMBM's Global Hospitality Group® that provides a gateway for
Chinese investment
in the United States. Using experience gained from more than $60
billion in
hotel transactions, involving more than 1,300 properties worldwide,
together
with substantial experience in general real estate transactions, the
Group
provides Chinese investors with legal and business advice to make
prudent and
economically successful hotel and real estate investments in the United
States.
The
Group and its network of reliable professional resources help Chinese
investors
identify, analyze, evaluate, validate, acquire, finance and manage
hotel and
real estate opportunities. The Group does not receive any finder's
fees,
incentive fees, commissions or payments from any promoters, and
provides
independent advice to Chinese investors regarding all hotel and real
estate
opportunities. The Group also represents selected hotel, restaurant and
other
real property owners and developers in structuring investments for
foreign
investors -- particularly Chinese investors -- using the EB 5 immigrant
investor visa program. ________________________ This
is Jim Butler, author of www.HotelLawBlog.com
and hotel lawyer, signing off. We've done more than $60 billion of
hotel
transactions and have developed innovative solutions to unlock value
from
hotels. Who's your hotel lawyer? ________________________
Our
Perspective. We
represent hotel lenders,
owners and investors. We have helped our clients find business and
legal
solutions for more than $60 billion of hotel transactions, involving
more than
1,300 properties all over the world. For more information, please
contact Jim
Butler at [email protected]
or +1
(310) 201-3526. Jim
Butler is a founding partner of JMBM, and Chairman of its Global
Hospitality
Group® and Chinese Investment Group™. Jim is one of the top
hospitality
attorneys in the world. GOOGLE "hotel lawyer" and you will see why. Jim
and his team are more than "just" great hotel lawyers. They are also
hospitality consultants and business advisors. They are deal makers.
They can
help find the right operator or capital provider. They know who to call
and how
to reach them. JMBM’s Global Hospitality Group® The hotel lawyers in the Global Hospitality Group® of Jeffer Mangels Butler & Mitchell (JMBM) comprise the premier hospitality practice in a full-service law firm and are the authors of the Hotel Law Blog. We represent hotel owners, developers, investors and lenders and have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties worldwide. For more information about the Global Hospitality Group®, go to www.HotelLawBlog.com. For more information about full range of legal services provided by JMBM, go to www.JMBM.com. |
Contact:
Jim Butler
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