Big developments tap overseas investment programme as banks step back, writes Al Barbarino
A US post-recession environment marked by tightened lending standards at home and increased wealth overseas has led to the “meteoric rise” of EB-5 financing.
A new CBRE report shows the fast-growing investment vehicle contributed more than $4bn to construction projects in the 2010-13 period. While ‘mom-and-pop’ investors were initially drawn to the programme, traditional lenders’ tightened post-recession lending standards drew the interest of larger investors and developers.
Established in 1980, EB-5 provides permanent residency to foreign nationals who invest at least $1m in a business that creates or preserves at least 10 full-time jobs.
In 2013, 82% of EB-5 capital was applied to commercial, healthcare and multi-family housing construction projects. CBRE research manager Wei Xie says foreign investors often prefer “projects backed by tangible assets”, while “construction is a straightforward way to meet the job creation requirement”.
After the financial crisis, “conventional lending practices tightened and developers had to seek non-traditional funding sources”, she says. “Meanwhile, the number of wealthy households overseas has risen noticeably, with many high-net-worth foreign nationals increasingly interested in both immigration and offshore investment options.”
EB-5 contributions can range from $1m to $100m or far higher, as top developers in major cities use the financing to back mega-projects. The financing is seen as a type of crowdfunding because developers that use EB-5 engage intermediaries to pitch the project and raise funds through conventions, roadshows and marketing efforts.
For example, Related Companies’ and Oxford Properties’ Hudson Yards project
in Manhattan, one of the largest ever US developments, has attracted $600m in EB-5 financing.
It is now “very hard to syndicate construction loans” with banks, Related founder Stephen Ross told the CRE Finance Council’s annual conference in June, in a discussion on developers’ financing options.
“With non-traditional lenders getting involved… demand is great, as are the fees,” he said, noting that EB-5 was a cost-efficient alternative. “It is a cheap capital source, costing around 4%, and the sponsor can use the money as it sees fit.”
CBRE’s report says projects using EB-5 financing include: Greenland Forest City Partners’ mixed-use, Pacific Park development in Brooklyn; sbe’s and Stockbridge Capital’s SLS Las Vegas hotel and casino redevelopment; an Embassy Suites hotel being developed by American Life in Seattle; and The San Francisco Shipyard, Lennar Corporation’s 10,000-home redevelopment.
“Larger projects tend to be in primary markets such as New York and California, which not only represent some of the largest US economies, but also a diverse, immigrant-friendly demographic and sociocultural makeup,” Xie says.
But, she adds: “EB-5 investors will look beyond gateway cities and venture into secondary and tertiary markets,” noting that South Dakota and Vermont attracted about $300m and $200m in EB-5 financing between 2010 and 2013, respectively.
Eb-5 does have drawbacks, however. For developers, gleaning capital from hundreds, or sometimes over a thousand, individual investors from overseas, who often speak a different language, can be a complicated process. Meanwhile, potential tenants may consider EB-5-funded projects risky and prefer ones financed by conventional means.
The Government Accountability Office recently reported 35 investigations of EB-5 projects involving securities fraud issues.
The programme could be cancelled in December, but Xie says this is an “unlikely scenario” and it is more likely to be extended in the face of several congressional bills on the table. “Many studies have supported EB-5’s noteworthy role in funding development, creating jobs and stimulating economic growth,” Xie concludes.