Hotelier Roadmap to EB-5 Financing for New Hotel Construction, Expansion or Renovation: Ten Steps to a Successful EB-5 Offering
This article was first published in EB5 Investors Magazine.
The EB-5 investor visa program allows non-U.S. persons to invest $500,000 (or $1,000,000) in a business that is expected to create at least 10 new permanent jobs per investor, and to obtain a conditional visa upon review and approval by the United States Citizenship and Immigration Service (“USCIS”). Hotel projects are one of the best investment categories for EB-5 investors, because they tend to create more operating jobs than many other businesses, they are investments in real estate, which tend to be more stable in value than some other forms of investment that qualify for EB-5 financing, their business model is easy for investors to understand, and they are often operated by or under franchise licenses with hotel brands such as Hilton, Hyatt, Intercontinental, Starwood and Wyndham that are known around the world by potential EB-5 investors.
For those hotel developers seeking to access EB-5 financing, here are our recommended steps on the road to a successful EB-5 financing:
1. Determine if the project has the necessary characteristics to successfully raise financing through the EB-5 program. The sponsors of EB-5 investment offerings are always looking for good new projects, but the market is competitive, and to be successful, a project will need to have some key markers that demonstrate the project will be attractive to EB-5 investors. It is not necessary that all of these elements exist immediately, but the more of them that do exist when a developer first approaches potential EB-5 sponsors, the better the developer’s chances will be of attracting the most experienced and successful EB-5 sponsors:
- Project preliminary work — The developer should have completed a significant amount of the preliminary project work, such as obtaining a hotel market feasibility study, preparing preliminary plans and budgets for the project, obtaining franchise approval or a hotel management agreement or letter of intent, acquiring the property and determining zoning and permit requirements.
- Developer with Financial Strength and Track Record – The most successful EB-5 projects are those with experienced and financially strong developers. EB-5 sponsors and investors alike want projects run by strong companies with a history of success in developing similar projects.
- Developer Equity Commitment – EB-5 sponsors and investors favor projects where the developer has a financial commitment of its own equity invested in the project – 20% equity or more is expected. There are some EB-5 projects where the developer has less than 20% equity in a project, but these are often more difficult to sell to investors unless there are other counterbalancing factors.
- Commitments to Fund Entire Project Cost– EB-5 investors know that the success of a development will often depend on the developer’s ability to obtain a senior loan or other financing in addition to EB-5 capital, and having a committed senior loan or other financing shows that other lenders or investors have underwritten the project and determined that it has the potential to succeed. If a developer does not have committed capital, it may help to show that the developer is actively seeking this financing and has obtained some indications of interest.