In a previous posting, 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 posting, 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 include 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 – 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. That information can be found on many websites. But not all regional centers are alike, and 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 if the USCIS adopts its proposed “premium processing” for regional centers, as proposed 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, and we will provide more information about this program in future installments.
Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.