Given forecasts that China will produce 100 million outbound tourists a year by the end of the decade, there’s no shortage of U.S. hotels eager to cater to their short-term needs.
But a few ambitious hotel developers are turning to Chinese citizens to fund new projects in return for making their visits more permanent.
The carrot these developers are dangling is provided courtesy of the federal government.
The U.S. Citizenship and Immigration Services’ (USCIS) Immigrant Investor Program — commonly known as EB-5 — was launched in 1992. It offers overseas investors the chance to speed up their green card application process by investing at least $500,000 in new commercial enterprises that the USCIS believes will create jobs in areas that need them.
American Life Inc., which has offices in Seattle and Tokyo, specializes in using EB-5 to secure equity funding from wealthy over-seas investors, about half from China, who are looking for a quicker route to U.S. residency.
American Life requires that the foreign investors provide the funds up front and deploys the money as soon as the development process starts.
The firm was founded in 1996 but until a few years ago had developed primarily industrial and office buildings. Then, in March, American Life announced its highest-profile project to date: a $168 million newbuild, to be located across the street from downtown Los Angeles’ L.A. Live entertainment district.
The project will house Marriott International’s Courtyard and Residence Inn hotels, with a combined 377 rooms.
That project is scheduled to open in the summer of 2014. It will follow close on the heels of American Life’s $18 million, 122-room Homewood Suites by Hilton, slated to open next to Atlanta’s Hartsfield-Jackson Airport next year.
Those two projects plus a planned Courtyard by Marriott in Lancaster, Calif., will join the Marriott Seattle Downtown/Pioneer Square as the only hotels among American Life’s inventory of about two-dozen properties. The Seattle property opened in 2010.
In all, American Life has raised about $900 million, about a third of it earmarked for hotels, during the past 16 years. In doing so, it has facilitated approximately 1,000 conditional visas and 300 permanent green cards, according to American Life’s co-founder, Ray Klein.
Klein, who traveled from Tokyo to speak at the Americas Lodging Investment Summit in Dallas earlier this month, appeared on a panel that delved into some of the more unusual steps developers are taking to get projects financed.
Fellow panelist Billy Brown, president of the Benchmark Development Co., spoke of complex financing structures requiring multiple levels of debt, interest rates and pay-off periods, while another panelist, Concord Hospitality CEO Mark Laport, talked about the necessity of getting non-cash concessions, such as discounted land and access to adjoining parking structures, as ways to get hotel projects to pencil out.
Klein used the opportunity to poke fun at the challenges of selling EB-5 deals.
“How many of you are native English speakers?” he asked an audience of about 120. When almost all of them raised their hands, he quipped, “This is unusual for me.”
These more exotic ways of financing projects are necessary because financial institutions and other potential lenders remain wary of hotel development, especially newbuilds, in the wake of the collapse of the housing market and tightened lending practices resulting from the subsequent bank bailouts.
Smith Travel Research forecasts that U.S. hotel-room supply will increase by just 0.5% this year, while June’s hotel-development pipeline for the U.S. actually narrowed by 6.7% from a year earlier, to about 296,000 rooms.
Still, raising financing through EB-5 isn’t commonplace. According to a 2010 USCIS report, the U.S., on average, issued about 500 EB-5 visas a year between 2005 and 2008. Including dependents of the EB-5 investors, about 1,500 visas were issued in 2008. At that time, about 44% of the investors were from South Korea, and 14% were from China.
Either way, EB-5 investors represent a tiny fraction of foreigners seeking permanent residence in the U.S.
Turning to EB-5 financing can be extremely challenging, though that hasn’t stopped prospective developers from trying. For example, the developer of the proposed Margaritaville Hollywood Beach Resort in Florida attempted to raise all of the estimated $126 million cost of a 349-room project through EB-5 investors, according to reports in the Orlando Sun-Sentinel.
As of May, the developer, Lojeta Group, had attracted just 26 investors, who committed $13 million to the project. Lojeta is now looking for other financing sources, the newspaper reported.
Meanwhile, a Chicago developer is pitching a hotel-convention center project near O’Hare Airport that would be partially financed by EB-5 funds. The developer, Anshoo Sethi, said in a statement that the project would employ sustainable design, though no details about the size and timing of the effort were disclosed.
Sethi, whose family owns an economy hotel on the proposed site, has set a goal of raising about a third of the project’s necessary funds, $250 million, from Chinese citizens looking to gain U.S. residency, according to the Chicago Tribune.
Lojeta Group President Lon Tabatchnick didn’t respond to a request for comment. A representative for Sethi said last week that he was out of the country and couldn’t be reached for comment or further information on the project.
Still, Klein insists that EB-5 financing remains a viable option for companies with a track record of developing properties funded by immigrant investors, as long as they pitch projects that combine a popular location with a brand name.
“The EB-5 investor wants to buy a green card,” Klein said. “We structure the most conservative investments possible. That’s what sells.”
Follow Danny King on Twitter @dktravelweekly.