Zack Streit is Vice President of George Smith Partners.
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.
*“Stretch senior” is a new type of capital provider. Generally, debt funds, originate at 0-80% LTC, including both a senior and mezzanine loan, into a single stretch senior loan. There are two advantages of this structure. First, working with a single provider of capital, as opposed to a senior lender and a mezzanine lender. The second advantage is eliminating the need for the often challenging and costly intercreditor agreement. The all-in pricing is generally competitive with a two lender solution.
*A 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.
Although the EB-5 market has experienced a considerable slowdown over the last year, efforts are underway to rebuild EB-5 fundraising channels for new issuance projects in markets outside of China, In the meantime, the three above solutions should help sponsors get their projects out of the ground while EB-5 market reinvents itself.
Zack Streit is Vice President of George Smith Partners, a national commercial real estate capital advisory firm that has arranged more than $52 billion in financing since its inception. Contact him at [email protected]. The views expressed here are the author's own and not that of ALM's Real Estate Media Group.
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