E is for EB-5
One of the more compelling ideas of the past few years is that of EB-5, the so-called visas-for-dollars loan program. Hotel projects are good candidates for EB-5 because they can easily demonstrate meeting the job-creation requirements (housekeepers, managers, etc.).
In a nutshell, a foreign investor puts $500,000 into the project in a targeted employment area (TEA), out of which 10 jobs are created and the foreign investor earns a green card. These investors are willing to exchange a lower rate of return for permanent visas for themselves and their families. And the TEA may include rural areas or places with considerable unemployment.
“EB-5 isn’t for everybody,” says John Tishler, partner with SheppardMullin. “But if you can manage the upfront costs and the significant delay with receiving funds, you can end up with a significantly lower cost of capital, comparable to senior debt rate, without loan covenants.”
The trick is timing. “There are different ways to deal with the delay in EB-5 funding,” he says. “You can get a bridge loan and use that money toward initial project costs while you wait for the remaining funds from the EB-5 deal, or the sponsor or other sources in your capital stack can be used for construction costs while you wait for the EB-5 loan to flow in. If you time it right, it can really be an attractive option. You just have to know the market and realize you’re in competition with other projects. You have to satisfy legal requirements and satisfy the market.”
One massive EB-5-funded project is the $168 million dual Marriott project located in the burgeoning L.A. Live district of Los Angeles. The new 175-room Marriott Courtyard and 218-room Residence Inn project received $118 million in EB-5 money from foreign investors and broke ground in early 2012. Doing the math, roughly 236 investors lent $500,000 each, and the project, when completed, would be on the hook for 2,360 permanent jobs. And there’s some debate over how much of a TEA this popular downtown L.A. area is.
“Suffice it to say, with EB-5, you need to know the technical requirements, the legal requirements, and the immigration requirements,” Tishler says. “It’d be very difficult to get 100 percent financing solely using EB-5.”
F is for Funding From the Crowd
Crowdfunding is here. Or is it? At least in the parlance of hotel funding, the phrase has become one of those fast-evolving, trending marketing terms to quickly encapsulate what is essentially general solicitation of accredited investors (those with more than $1 million net worth) in 506c offerings as defined by the JOBS Act. Yet crowdfunding (the term) is being used in some new ventures, employing Kickstarter-esque websites to solicit investors to a variety of real estate projects in the United States and around the world. This is not an independent film seeking financing; these are multimillion-dollar, high-profile properties.
Prodigy Network is looking to fund the conversion of a Wall Street district apartment building into a hotel, and unlike at Kickstarter, its investors are seeking to eventually make a profit. Prodigy’s investment model holds the investor’s money in escrow in an offshore account (thereby making the investor a “foreign investor” and subject to certain tax incentives). After all capital is raised, the money is released for construction.
Once construction is completed, “a preselected and approved operator opens the property and rents start coming in,” and profits are distributed semi-annually to the investors.
At the 2014 Angel Capital Association Summit, SEC Chairman Keith F. Higgins recently touted the positive effect that angel investors have on startups and more or less wondered why more of this sort of thing isn’t being done.
The 506c exemption allowing promotion of such investments has been around only since September 2013, so we might expect some uneasiness as all interests warm up to the idea. “It’s certainly something to watch closely,” Tishler says. “This example is not the crowdfunding provision of the statute, which is Title III.”
What’s perhaps notable is that a company that’s doing it is calling it crowdfunding in big letters to draw attention, and then in the small print, it’s saying it’s not crowdfunding but 506c. And there appears to be a relaxing ideology on what is defined as “general solicitation” and “accredited investors.”
The SEC is haggling over Title III of the JOBS Act, the provision of actual crowdfunding in which non-accredited investors can participate in offerings with small investment increments. Once Title III is completely approved, the floodgates could burst open. “I expect this sort of thing to keep developing and more of it to happen,” Tishler says.
G is for Green
Changes to the SBA 504 program mean there are more advantages than ever to loan seekers if you’re planning on incorporating sustainability solutions into your project. You can use SBA 504 toward purchasing, constructing, renovating, remodeling, or refinancing. The loan structure consists of a first mortgage from a lender and a second mortgage from a non-profit certified development company, whose intent is to boost the local economy by issuing the loan.
The SBA green loan increases the loan amount from the second mortgage lender to $5.5 million for each green project, and a modest 10 to 15 percent injection is required. The significance with an SBA green loan over traditional SBA loans is not only the extra $500,000 available but that you can borrow up to $5.5 million on a per project basis. You can have more than one loan and can lock in a long-term, fixed, below-market rate and close in about four weeks. With the unpredictable scrutiny of conventional lenders shifting in the economic winds, SBA becomes a solid option.
“The SBA 504 is a great product,” deRoos notes. “And it makes sense for smaller hotel projects. But you’re limited because they are generally smaller loans provided only through licensed SBA lenders which serve specific geographic areas.”
To qualify, you also have to reduce energy consumption by 10 percent or create an additional 10 percent of green energy on-site. Any lenders, SBA licensed or otherwise, would look more favorably toward a loan application that incorporates sustainable products and practices.
“A strategy toward LEED certification is like credit enhancement,” deRoos says. “If you’re not leaning green in your planning, then you’re bucking the trend in the industry, and it may send a signal to banks that you’re doing substandard execution. Banks see green thinking as you being a less risky client. You’re seen as a better person because you’re forward thinking.”
