Mr. Nysse

Architecture & Design

The EB-5 Program: Alternative Financing for Hotel Development

By Douglas Nysse, Principal, Kahler Slater

There is no doubt that the dire state of our credit markets has had a devastating effect on hotel financing and development. Even as the fundamentals of rate and occupancy continue to improve it may be some time before access to equity and debt eases. One funding mechanism that is helping to close the gap is the Fifth Preference Employment-Based Immigrant Investor Visa program, or the EB-5, which is overseen by the Department of Homeland Security.

How the EB-5 Program Works

The EB-5 program allows foreign individuals who make an investment of $500,000 to $1 million to receive a conditional immigration visa for themselves, spouses and unmarried children under 21. After two years, if the immigrant has maintained the investment and it has created at least 10 jobs, the conditional status is removed and the applicant and his or her family become “permanent” green card holders, eligible for United States citizenship.

Although immigrants are allowed to establish independent businesses under the program, most prefer to invest in regional centers-- public or private enterprises that are certified by the government to receive funds from EB-5 investors. There are two distinct advantages in investing in a regional center. One, the typical minimum EB-5 outlay is $1 million, but it is reduced to $500,000 when immigrants invest in a regional center or in an economically disadvantaged area. Two, with regional center investments, the creation of both direct and indirect jobs are counted toward the 10-job minimum required. This means, for example, an EB-5 investment in an aging ski resort could count not only direct hires like all the new ski instructor and grooming positions, but also any indirect new positions created by related businesses--shuttle services, outfitters, restaurants, hotels, etc. The number of indirect jobs created in relation to the number of direct jobs is calculated by using job creation multipliers. The multipliers are established by using econometric models targeted to specific regions or business types.

Those seeking to participate in the EB-5 visa program must apply to the United States Citizenship and Immigration Services (USCIS). Often immigrants are assisted by brokers in their country of residence and immigration attorneys there and in the United States. The process takes several months to complete and involves the initial application time then a period of verification of the legitimacy of the investment money. Once the visa is approved, the investment monies are released to the specific fund in the United States where they may be used as either debt or equity in a project.

Program History

The EB-5 program was established in 1990, but potential investors and businesses were often dissuaded by the U.S. government's slow and inconsistent administration of the complex rules. In the past year, however, a number of factors made the program more appealing. One, a gradual streamlining of procedures coincided with the recession and credit crunch, dramatically boosting interest in the program as investors and developers sought funding from other than mainstream debt and equity sources. Two, the EB-5 program is a considerably faster way to gain legal access to the United States. Nearly 70 percent of immigrants granted investor visas in fiscal 2009 were from China or South Korea, countries whose nationals face decade-long waits for family-reunification visas because of quotas on the annual number allowed in from any one country. Another factor has been that the Canadian EB-5-like program recently increased the minimum investment from $400,000 Canadian to $800,000. With this change, the US EB-5 program has become much more desirable.

With all this, it is no wonder that number of EB-5s issued nationally jumped from 1,443 in fiscal 2008 to 4,218 in fiscal 2009. Several scholars say they expect the number to double again in 2011. This is all very, very good.

Not All Projects Are Created Equal

Although the investment pool is deep, a developer still needs to make the case that his project is more deserving than others. Because immigrants do not have to reside where their money is invested, they have quite a bit of freedom to place their money where they choose. This means that it may be more desirable to have a project that is associated with a well-known brand or located in a recognizable market not only for the possibility of higher returns, but also for an increased chance success all around, including the all-important measure of permanent job creation.

Kahler Slater is currently working on the design of a new 200-key full-service high-rise hotel in downtown Milwaukee. The hotel will carry the Marriott flag, a decision not only based on the brand’s strength in driving business, but also because Marriott is a legitimate and recognizable name known world-wide. The fact that Marriott is likely known to prospective EB-5 investors overseas differentiates the project from, for example, an independent unflagged hotel development also seeking investment. Additionally, this project is attractive to investors because the developers are sophisticated hotel owners with many other properties and also have past experience with the EB-5 program.

In addition to the guestrooms the Marriott Milwaukee will include significant ballroom and meeting room area, a restaurant and retail tenant space. Because of the job creation multiplier, the number of total jobs created by the project exceeds the quantity of direct hotel employees. For this reason a large portion of the $50 million total project cost can be funded by the EB-5 program. While the EB-5 program provides an alternative source for investment, the project must still be financially viable with the same budget constraints and revenue targets required for a conventionally funded hotel. Which, thankfully, this project is. The Marriott Milwaukee will also take advantage of New Market Tax Credits. No municipal subsidies will be used on the project. The EB-5 program will make this project possible and will serve as a catalyst for surrounding development and improvements.

Critics of the program argue that immigrant investors are more focused on obtaining visas than maximizing profits. Others cite that as a benefit of the program by pointing out that many EB-5 investors are willing to accept relatively modest returns because of the residency privileges—especially the opportunity for their children to attend school and college in the United States. This means that projects that look to deliver only modest returns, many of which are in under-served areas, have a fighting chance to receive funding through the EB-5 program.

In sum, the EB-5 program is saving hotel development and financing in the United States, at least for now. While receiving money through the federal government can be slow and often at odds with the pace of most business deals, for many of us in the industry, the alternative would be doing nothing. I’m not arguing that something is better than nothing. I’m saying that the EB-5 program is a clever and creative way to reward investors for their risk-taking and that all involved benefit.

Douglas Nysse is a Principal at Kahler Slater, an interdisciplinary enterprise offering experiences within cultural communications, planning, research, architecture, interior design, and graphic design. His experience design projects include the restoration of historic hotels, large urban mixed-use projects, and premier destination resorts. Mr. Nysse’s interest in real estate development and planning has led Kahler Slater to become a key partner in the development of fine hotels and resorts throughout the United States, and internationally. Mr. Nysse can be contacted at 414-290-3794 or dnysse@kahlerslater.com Extended Bio...

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