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Hotel Development Lawyers: 10 Things You Can Do to Win the "Race"
for EB-5 Capital for Your Hotel Development Project
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News for the Hospitality Executive |
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Hotel Development Lawyers: 10 Things You Can Do to Win the "Race"
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By
Jim
Butler, Global Hospitality
Group®,
Author of www.HotelLawBlog.com August 23, 2011 Hotel
Lawyer with more information on how to take advantage of EB-5
investment
capital The EB-5 Immigrant Investment Visa program offers an alternative means of raising capital for hotel development projects in the U.S., and JMBM's Chinese Investment Group™ is available to help hotel developers access this source of financing. As explained in an earlier article on how to use the EB-5 Immigrant Investor Visa Program for hotel financing, the EB-5 program is an immigrant investor visa category created in 1990 for foreign nationals who invest in a new commercial enterprise that will benefit the U.S. economy and create at least 10 full-time jobs. In another article on the topic, Cathy Holmes detailed 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. If
you want to tap into this EB-5 capital source, today's blog will
suggest that
you do two things First,
understand what EB-5 investors are looking for
Then
consider our 10 tips on how to make your hotel development project a
winner in
the competition for EB-5 investment In the article below, hotel lawyers Victor Shum and Catherine Holmes, members of JMBM's Global Hospitality Group® and Chinese Investment Group,™ offer 10 tips on winning the race for EB-5 capital for hotel development. 10 tips for winning the race for EB-5 capital for your hotel development project (How to make your hotel
development project a winner in the
EB-5 marketplace) by Victor Shum and Catherine
Holmes | Hotel Lawyers No immigrant wants to move to the U.S. under a conditional green card (that requires them to generate jobs in the U.S.), buy a house, enroll children in school, and then be put in the untenable position of losing their entire investment and their green card two years later if the project fails both as an investment and as a jobs generator. Immigrant investors are understandably choosy about the investments they make under the EB-5 Immigrant Investor Visa program. There are 150 existing regional centers in the U.S. and 83 new regional center applications pending approval, all with projects trying to receive EB-5 funding. How do developers make their projects stand out from the rest? How can you differentiate your project and make it more attractive than other EB-5 projects vying for the same money? A strong project will always trump a weaker one, but what does that mean for EB-5 projects? Here are 10 things our EB-5 experts suggest you can do to make your project stand out to immigrant investors in the competitive EB-5 marketplace:
To be
competitive in the marketplace, a project must be
located in a Targeted Employment Area (TEA). A TEA is a high
unemployment area
(150% of national average) or a rural area. Having a TEA designation
permits
the minimum qualifying investment to be reduced from $1 million to
$500,000.
There are too many $500,000/investor projects in the marketplace for a
$1
million/investor project to be competitive. Work with your state agency
to
determine if your project location qualifies for TEA designation.
We've
heard it a million times before -- location matters.
From an Asian perspective, projects in major metropolitan cities are
the most
appealing. Choosing an area where property prices have historically
risen
lessens the risk of loss. Investors also want to be able to easily
visit and
see where their money is going. If they recognize the location of the
project
and know it is a hotspot for commerce, they are more likely to believe
that the
project will be successful.
There
are many examples of successful non-real estate based
EB-5 projects. However, there is a clear bias among Asian investors
towards
real estate projects. Real estate is tangible and Asian investors
understand
it, particularly with businesses such as hotels, hospitals, assisted
care
facilities and commercial buildings.
A
project
that is associated with a brand name recognizable in the investor's
home
country provides familiarity and credibility. If your project is
affiliated
with a successful brand, investors will feel more at ease that their
investment
will be successful. In the hotel context, recognizable brands such as
Sheraton,
Marriott, and Hilton, together with their affiliated brands, are
prestigious
and popular in China. It should be noted that many hotel brand owners
position
their brands differently in the U.S. than overseas. A brand that may be
considered a tier 2 brand in the U.S. could be a tier 1 brand overseas.
Brands
can also come in the form of affiliations with universities or
governmental
entities (see #7 below).
An
experienced developer with a good reputation and a strong balance sheet
is
favored. This is no surprise for an investor in any project. However,
the
consequences for EB-5 investors can be dire if a developer fails to
start and
complete the project according to its business plan. If there are
material
changes to the business plan, investors may be denied permanent green
card
status when they petition the U.S. Citizenship and Immigration Services
(USCIS)
to remove their "conditional" status (the I-829 petition). Investors
must trust the developer to have a good business sense, to protect the
investment, and to complete the project according to the business plan.
Providing information regarding your past successes is critical to
gaining
trust.
The
bigger the job creation "buffer," the better
the project. The EB-5 program is predicated on job creation, and each
investor
(regardless of investment amount) is required to create full-time
employment
for a minimum of 10 U.S. citizens or aliens legally authorized to work
in the
U.S. If the project creates only 9 jobs per investor, then the removal
of
conditions for the investor's green card will be denied. Work closely
with your
economist to determine the projected job creation and then determine
how much
EB-5 funding to raise for your project. If a project is anticipated to
create
100 jobs, raising $4 million with 8 investors (12.5 jobs/investor)
results in a
2.5 jobs/investor buffer, which is more favorable to the investor than
raising
$5 million with 10 investors (10 jobs/investor) and no job buffer.
Investors
like to see government support for a project.
City, state, or federal support lends credibility to a project. (There
is also
a mistaken but widely held belief that governmental support for a
project can
facilitate the immigration process.) Support can come in the form of
tax
credits, redevelopment funds, affiliations with state universities,
letters of
support from government officials, or more direct participation such as
officials participating in overseas trips and seminars.
From
a financing perspective, developers with a significant
equity position in a project are favored. This is no surprise. A 70%
LTV is
often quoted by immigration consultants but can be negotiated up or
down
depending on the project, risk, and amount being raised. Similarly,
projects
that consist of too much EB-5 financing are disfavored because of the
perceived
risk that the project will fail if the developer is unable to raise all
of the
EB-5 funds. Of course, these rules of thumb should just be considered
that. The
financing model should be reviewed closely -- particularly if there are
senior
lenders on a project.
It is
important that the EB-5 investor have adequate
protection for their investment. Under the debt model, security in the
form of
mortgages, deeds of trust, assignments of rents, and security
agreements are
common. For mezzanine debt, a security interest in the borrowing entity
is also
common. Care should be taken to protect the interests of the EB-5
investor when
negotiating the inter-creditor agreements with senior or junior
lenders. For
commercial buildings, a build-to-suit project with a well-recognized,
credit-worthy tenant provides an investor with additional security that
the
project will succeed.
Other
articles on EB-5 financing for hotel development and foreign investment How to
use the
EB-5 Immigrant Investor Visa Program for financing Chinese
Investment Group™ -- Hotels, Real Estate, EB-5 Immigrant Investor Visas
_______________ Catherine Holmes is a transaction and finance partner with JMBM's Global Hospitality Group® and Chinese Investment 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 +1 310.201.3553 or [email protected]. ________________________ ________________________ 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. |
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Jim Butler
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