By
Jim
Butler of the Global Hospitality
Group®
Author of www.HotelLawBlog.com
March 15, 2012
New
hotel development is back! And there is something you should know about
how
hotel development is being financed. It
is not easy, but developers are getting new hotel developments
financed. One
important capital source is foreign investors using the EB-5
immigration visa
investment.
We
have advised clients on more than 40 EB-5 projects, and along the way
we have
written quite bit about EB-5 financing for hotel projects. We aren't
going to
repeat the ground covered earlier, but you will find references at the
end of
this article if you want to read our other materials on this subject.
Today's
focus is on unlocking EB-5 capital for hotel development with the right
"regional center" and then what you need to know about negotiating
the terms of your EB-5 financing deal. Catherine Holmes and Victor Shum
share
their thoughts.
How to find
the right regional
center
and negotiate the terms of an EB-5 financing for your hotel project
by
Catherine
Holmes and Victor Shum | Hotel Lawyers
Why EB-5 financing is important to
hotel
developers now
Financing
for new hotel development is still in short supply, even for
experienced hotel
developers. As a result, many hotel developers are exploring the EB-5
financing
program as an alternative to traditional financing sources. The EB-5
investor visa
program offers non-U.S. persons the opportunity to receive U.S. visas
in return
for an investment in a U.S. business that creates new jobs. In prior
articles,
we have discussed the basic requirements for EB-5 financing (See "How
to
use the EB-5 immigrant investor program for financing hotel
development";
"Why a "regional center" may be the key to financing your next
hotel development"; and "10 things you can do to win the
"race" for EB-5 capital for your hotel development project"). If
you want to know more about the basics of EB-5 financing, we encourage
you to
read those articles.
Beyond
the basics of EB-5 financing
Once
you understand the basics of EB-5 financing, you know that you will
need to
work with a United States Citizenship and Immigration Services
("USCIS") approved regional center in order to be able to count
indirect job creation that will result from your project. You know too
that you
will need to generate at least 10 new jobs per immigrant investor, and
that
almost all EB-5 investments are offered at the $500,000 investment
level, which
requires that your project be located in a Targeted Employment Area
("TEA"). You also know that you have two choices if you want to have
your hotel financing sponsored through a regional center: you can
establish
your own regional center, or you can find and negotiate with an
existing
regional center to sponsor your financing.
Forming
your own regional center can be the best option - if you have the time
In the
best of circumstances, every hotel developer would like to have their
own
regional center, so that they can raise money for their own projects.
However,
the time required to obtain USCIS approval of a new regional center is
now nine
to twelve months. Although the USCIS has said that it is working on an
expedited processing system for approving regional center applications,
there
is no indication that expedited processing will be approved any time
soon. So,
if you want to form your own regional center, you have to be willing to
accept
that you will not be able to market your EB-5 offering for a period of
nine to
twelve months while your regional center application is being processed.
If
you don't want to form your own regional center, you can find one that
is
already approved in the geographic area of your project
The
alternative to forming your own regional center is to find an existing
USCIS
approved regional center that is willing to sponsor your hotel project.
There
are over 194 approved regional centers throughout the United States,
including
49 in California, 22 in Florida, 10 in Texas and 9 in New York, and at
least
one in almost every other state. However, each regional center is
approved for
a specified geographic area and for one or more specific industry
designations.
You have to find a regional center that is approved for the geographic
area
where your project is located, and that includes the hospitality
industry as
one of its approved industry designations.
With
regional centers approved after the institution of the Form I-924
(Application
For Regional Center Under the Immigrant Investor Pilot Program), it is
important to review the approved North American Industry Classification
System
("NAICS") codes to ensure that they are correct and/or broad enough
to cover the proposed hotel project. In addition, the approved USCIS
business
plan of the regional center must contemplate the type of investment
model being
sought. For example, if the regional center is approved only for equity
investments, then it cannot enter into any debt arrangements with the
hotel
developer.
If you
find a regional center that you want to work with that isn't approved
for your
geographic area or industry designation, the regional center could file
an
amendment with the USCIS to include your area or industry designation.
However,
the processing time for a regional center amendment can be more than 6
months
which obviates the time benefits of immediate sponsorship.
Finding
the right regional center can be challenging
Even
in an area where there are several approved regional centers for hotel
development, it can sometimes be difficult to find a regional center
that is
willing to work with a hotel developer. Some regional center operators
only
want to sponsor their own projects, and they do not want to work with
third
party developers at all. Other regional center operators only recently
received
their USCIS approval, and have little or no experience marketing an
EB-5
offering. Some regional centers are already marketing another hotel
project and
not able to work on two hotel offerings at the same time, because
trying to
sell two EB-5 offerings for hotel development would dilute their
ability to
complete either offering.
During
the course of regional center due diligence, the developer may find
other
disqualifying factors such as a weak management team or poor
infrastructure
that could make the necessary administration, oversight and management
of the
regional center investment activities in accordance with USCIS rules
difficult.
In addition, the terms offered by those regional centers who are
willing to
sponsor EB-5 financing third party projects vary widely. So, you may
want to
talk to several regional centers to compare the terms offered by each
of them.
How
an EB-5 financing will be structured for your project
Once
you find a regional center that is willing and able to sponsor your
hotel
development, you should expect to negotiate a term sheet from the
regional
center that will describe the terms upon which the regional center will
sponsor
an offering to finance your project. The EB-5 offering will generally
be in the
form of an offering of limited partnership interests in a new limited
partnership established by the regional center and controlled by an
affiliate
of the regional center. The limited partnership will use the proceeds
of the
offering to make a loan to the hotel owning entity. The EB-5 financing
can also
be structured as an equity investment in the hotel owning entity but
such
structures are less common.
What
issues you need to cover in your agreement with the regional center
Before
you make any payments to the regional center, you will want to have a
binding
agreement with the regional center, describing all of the material
terms
between you and the regional center, including the following: (1) the
minimum
and maximum amount of the EB-5 offering; (2) the time period within
which the
EB-5 offering will be completed, (3) the fees that will be paid to the
regional
center as compensation for sponsoring the offering, (4) who is
responsible for
marketing the offering, including the engagement of overseas migration
agents
(this could be the regional center, or it could be the hotel developer
- more
on this later), (5) whether the offering proceeds will be invested as
debt or
equity in the project, (6) the conditions that will be required in
order for
the funds to be invested in the hotel development, (7) the procedure
for
funding the investment, including construction draw requirements, (8)
if the
investment will be debt, the interest rate, maturity, payment terms and
any
security pledged for the debt, (9) if the investment will be equity,
the class
of equity (common or preferred), the return to be paid to the
investors, and
any put/call rights that will apply to the investment, (10) the costs
that each
party will be responsible for, which will include legal fees, economist
fees,
translation fees, marketing fees and costs of offering materials,
seminars,
travel expenses, etc., (11) the identity of the economist and other
parties
responsible for preparing the offering documents, loan or equity
investment
documents, and USCIS filings (if any), (12) the rights of each party to
terminate the agreement, and the terms that will apply following the
termination, (13) who will own the offering documents, and (14) any
other
rights and obligations that each party will have in connection with the
offering.
Make
sure your regional center will be able to raise the money
The
terms of the written agreement with a regional center are essentially a
combination of an engagement to sell securities and a commitment to
make an
equity or debt investment in your hotel project with the proceeds of
the
offering. Unlike a bank that makes a loan commitment, a regional center
has
none of its own funds with which to make an investment - the regional
center
has to go to market and sell the investment in your hotel project to
individual
investors, one at a time, typically in China. The success of the EB-5
offering
will depend upon the ability of the regional center to sell the
investment.
What
will you do if your regional center cannot sell the offering?
One of
the risks of an EB-5 offering is that the regional center may not be
able to
sell the investment, in which case the hotel developer will not receive
the
investment. If the regional center is new and has never completed an
EB-5
offering, there is a real possibility that the regional center may not
be able
to successfully market the offering. There is currently a very
competitive
market for EB-5 offerings, particularly in China, and investors are
looking for
experienced operators with a proven record of investors who have
received
conditional and permanent visas for past projects in the form of I-526
(Immigrant Petition by Alien Entrepreneur) and I-829 (Petition by Alien
Entrepreneur to Remove Conditions) approvals.
Therefore,
you need to consider what happens if your regional center is not able
to sell
the EB-5 offering for your hotel project, and provide for alternative
ways to
complete the offering in that event. Ideally, you will want the ability
to
engage other marketing agents to complete the offering if necessary. In
some
cases, you may want to be in control of the marketing process, and have
the
authority to hire your own marketing agents. This can be provided for
in the
agreement with the regional center, if the regional center is willing
to allow
it.
"Renting"
a regional center may be another good option
In
some cases, you may be able to "rent" a regional center, which is a
euphemism meaning that you will control the entire offering process,
from
drafting the offering documents and preparing marketing materials to
hiring
marketing agents and marketing the offering. In this case, the regional
center
will be responsible only for supervising the offering, overseeing the
regional
center investment activities and making the required filings with the
USCIS.
You may prefer this option if the regional center you are working with
has
little or no experience, if you have already submitted a regional
center
application but cannot accept the long processing time, or if you
intend to
conduct multiple EB-5 offerings, and you want to establish your own
marketing
relationships and infrastructure to be used for future offerings. Not
every
regional center will accept this arrangement, so this is something you
have to
discuss early with the regional center owners.
But
what if you want the regional center to do the marketing?
On the
other hand, you may want to work with a regional center that will do
all of the
marketing for you. In that case, you will want to understand more about
what
experience the regional center has in marketing EB-5 offerings, what
marketing
agents they work with, and how they market their offerings. You will
want to
have a budget for marketing expenses, so that you know what your
potential
costs will be for the EB-5 offering.
Whatever
arrangements you make with your regional center, make sure you document
everything in writing. The EB-5 financing program, if used properly and
carefully, can be an important part of financing your new hotel
development.
How
we help hotel developers and owners with EB-5 financing
We
represent hotel and other commercial real property owners and
developers who
seek to obtain financing from foreign investors - particularly Chinese
investors - using the EB-5 immigrant investor visa program. We help
some of our
clients form their own "regional centers" to sponsor EB-5 offerings
for their own new developments. We help other clients find and
negotiate with
existing "regional centers" to sponsor their developments. We know
the players in the EB-5 world, including many of the regional center
operators
throughout the U.S. and marketing agents operating in China. We use our
expertise and relationships to make the right choices and guide our
clients
through the entire EB-5 financing process.
For
more information about EB-5 financing
Financing
new hotel development today: Finding the right "regional center" and
negotiating terms for your EB-5 financing
Chinese
investment in U.S. hotels: what the real estate professionals want to
know
Hotel
Development Lawyers: 10 things you can do to win the "race" for EB-5
capital for your hotel development project
Hotel
Investment: Why Asian investors are targeting U.S. hotels for purchase
and
investment, and what could it mean for you?
Hotel
Developers: Why a "regional center" may be the key to financing your
next hotel development or expansion. And what you need to know . . .
How
to use
the EB-5 Immigrant Investor Visa Program for financing
________________________
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?
________________________
Victor
Shum is a corporate and securities partner in JMBM's Global
Hospitality Group®
and Chinese Investment Group™. He has advised clients on EB-5 matters
since
1999 and assists hotel developers on EB-5 financing as well as public
and
private securities, mergers and acquisitions, cross-border issues, and
other
strategic business transactions, including real estate transactions and
intellectual property and technology licensing matters. For more
information,
please contact Victor Shum at +1 415.984.9611 or [email protected].
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].
________________________
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 1,300 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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