Recap from EB-5 Conference – Three Solutions for When Your EB-5 Raise Has Come Up Short

George Smith Partners attended the Los Angeles EB-5 Conference on June 23rd and 24th at the Westin Bonaventure in Downtown Los Angeles. Zachary Streit, Vice President at GSP, spoke on a panel entitled “Capital Stack Completion: Where to go for non-EB-5 funds”. The panel was moderated by David Sudeck of Jeffer Mangeles Butler & Mitchell LLP and the panelists included: Douglas Monticciolo of Brevet Capital Management, Naima Sultana of Customers Bank, Brad Stedem of EB-5 United, and Scott M. Barrack of Colony Capital.

There has been a considerable slowdown in the EB-5 market over the last two years. What was once a fertile and cheap source of financing for multifamily and hotel developers is largely absent. The two primary reasons for the slowdown are retrogression (over-allocation of visas to Chinese investors) and Chinese government capital controls. The wait time for EB-5 investors to obtain visas in the U.S. has doubled from a 3-5 year timeframe to 7-10 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 5 years or longer and generally exceeds 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?
• 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 subordinate 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.
• Another option is “stretch senior” capital providers. This newer crop of lender, generally debt funds, will originate at 0-80% LTC, including both a senior and mezzanine loan, into a single stretch senior loan. The big advantages of this structure are working with a single provider of capital, as opposed to a senior lender and a mezzanine lender, and also eliminating the need for the often challenging and costly intercreditor agreement. The all-in pricing is generally competitive with a two lender solution.
• A third interesting but fairly new avenue being explored 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.

The consistent theme at the conference was that the EB-5 market is likely to regroup as infrastructure is built out in new emerging markets (Vietnam, South Korea, India, Brazil, Argentina, etc.) but that could take several years.

George Smith Partners is working with a capital provider offering mezzanine financing for experienced affordable multifamily housing borrowers who are committed to preserving affordable housing. The mezzanine loan will allow borrowers to increase their leverage up to 90% loan to purchase price (plus an additional 2.5% for costs, if supported) with a minimum term of 10 years from the date of funding an acquisition or refinancing loan. Rates range from 7.15% to 7.85%.

As discussed in a previous column, US economic growth and inflation data combined with record supply (due to record budget deficits and Fed balance sheet trimming) should push 10 year yields above 3.00%. However, treasuries were rallying and keeping yields relatively low due to trade war worries and US Treasury Bonds’ relative value compared to low yielding German bonds and ultra low yielding Japanese bonds. However, Monday’s news that the Bank of Japan is holding early discussions on changes to their rate targets and purchases sent leading government bond yields upward. The BOJ is the last of the world’s major central banks still implementing “full on” accommodative stimulus. So, markets are reacting to another “punchbowl being taken away” and need to prepare for that day (sometime soon?) when the world economy will be standing on its own (aka back to the “old normal”). The joint announcement between the US and the EU regarding a deal to work towards “zero” tariffs seems to remove another impediment to market confidence in future growth and inflation. Obviously if a similar announcement came from the US and China, markets would have less concerns about the future and bond yields could move quickly. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

If you have an inquiry regarding George Smith Partners’ commercial real estate financing, please contact your GSP representative or Todd August, Chief Operating Officer (310) 867-2995 or TAugust@GSPartners.com