There’s been considerable slowdown in the EB- 5 market over the
past two years. What was once a fertile and cheap source of financing for multifamily and hotel developers is now largely absent.
The reasons? Retrogression, or over-allocation of visas to Chinese investors, and
Chinese government capital controls, both
of which have
caused the wait
time for EB- 5
investors to
obtain visas in the US to double from a
three- to five-year timeframe to seven to 10
years. This has put a damper on sponsors’
ability to raise EB- 5 project funding; what
once was a 12- to 18-month process can
now take five years or longer, generally exceeding the lifecycle of
most development projects. Today it seems like the only platforms
successfully raising EB- 5 funds are large institutional sponsors (such
as Related or Greystone) with in-house regional centers.
So, what options are left for middle-market sponsors looking to
fill gaps in their development project’s capital stack that were
previously filled by EB- 5? Here are three.
Traditional mezzanine and preferred equity providers presently
offer the highest certainty of execution and are the most natural fit
to replace EB- 5’s role in a capital stack. Weighted average pricing is
probably 250 to 350 basis points higher than a stack with EB- 5. The
good news is that a fair amount of competition exists among subor-
dinate debt providers for quality projects, and new providers are
surfacing with regularity. Pricing is typically low- to mid-double
digits and leverage can reach 80% loan to cost or higher.
“Stretch senior” is a new type of capital provider. Generally debt
funds originate at a loan to cost of zero to 80%, including both a
senior and mezzanine loan, into a single stretch senior loan. There
are two advantages of this structure. The first is working with a sin-
gle provider of capital, as opposed to a senior lender and a mezza-
nine lender. The second advantage is that it eliminates the need for
the often-challenging and costly intercreditor agreement. The all-
in pricing is generally competitive with a two-lender solution.
The third option is a fairly new avenue being explored, which is
rolling EB- 5 over from one project to another to ensure the EB- 5
capital is “at risk” for its statutorily required period of time. This
could be an interesting exit strategy for projects that close with
pricier subordinate debt to get out of the ground. But, this is a
fairly new avenue being explored with a limited track record, so
sponsors should spend time researching the viability of this option.
Zachary D. Streit is a vice president with George Smith Partners in
Los Angeles. He may be contacted at zstreit@gspartners.com. The views
expressed here are the author’s own and not those of the ALM Real
Estate Media Group.
Three Solutions for When Your EB- 5 Raise Has Come Up Short
CAPITAL VIEWS
By Zachary D. Streit
outlook now is either more positive or the same compared to
what it was at the beginning of the year. This confidence remains,
despite most respondents (70%) saying that rising interest rates
have somewhat or definitely impacted commercial real estate
lending and investment sales activity this year.
The proprietary survey, which the firm calls its Mid-Year
Powerhouse Poll, was conducted in July and obtained insights from
150 Berkadia investment sales brokers and mortgage bankers
across 60 offices to assess opportunities in the multifamily space for
the second half of the year. —Erika Morphy
LOCAL SPOTLIGHT
Detroit Breaks Into Nation’s Tech Elite
Detroit’s Downtown has been on the rise for a number of years,
and high-tech firms and workers have played a key role. In its
most recent Tech Talent Scorecard, part of its sixth-annual
Scoring Tech Talent Report, CBRE placed the city at #20 among
the top 50 US and Canadian markets, marking the first time
Detroit broke into the elite group.
“It’s finally a recognition of what’s happening in Downtown
Detroit,” says CBRE executive vice president Mark Collins. The
investment taking place Downtown is not merely in the office
arena. All commercial real estate sectors in the CBD, including
retail and multifamily, are showing increased momentum, with
rising rents and values, along with steep falls in vacancy rates.
“I don’t think Detroit is unusual in this respect,” Collins
adds, as many Midwest CBDs have undergone similar transfor-
mations. But Detroit, which had become the poster child of
urban dysfunction, had a much longer road to travel back than
most other US cities.
Tech workers increased steadily in Detroit from 2012 to 2017,
experiencing a 24.6% expansion and now totaling 84,910,
reports CBRE. “A key contributor to Detroit’s increase in tech
workers and rise in the rankings was the growth of its millennial
population,” the report said, noting that “the population of mil-
lennials in their 20s grew by 14,119 ( 10.4%) since 2011. Detroit
is the fourth-fastest growing large market for millennials.”
That recruitment will be made easier by the many top univer-
sities in the state, Collins adds. The University of Michigan at
Ann Arbor, along with Michigan Technological University in
Houghton, MI, in the Upper Peninsula, are both considered top
performers. And today’s tech graduates are less likely to move to
Chicago, New York or the West Coast after graduation. “They’re
beginning to stay home, and the ones that left are beginning to
come back.”
Between 2011 and 2016, Detroit each year added an average
of 5,241 new tech graduates, according to CBRE. “This makes
Detroit a top 10 market in the nation int terms of tech degree
completions.” —Brian J. Rogal ◆
