Los Angeles is becoming a leading destination for mainland Chinese looking to invest in U.S. commercial real estate through a controversial program.
Four real estate developments, including two proposed Marriott hotels near L.A. Live, are receiving $175 million from foreign investors. Two others are seeking $52 million.
Under the program, each foreigner and immediate family members get green cards, so long as the investor lends $500,000 to a commercial enterprise that creates at least 10 domestic jobs.
The money is flowing through the U.S. government program known as the EB-5 visa. Almost 80 percent of the investors in the L.A.-area projects are Chinese; others include South Koreans, Europeans and Russians.
“L.A. has a lot of appeal to foreign investors,” said Joseph McCarthy, principal of the American Dream Fund, an L.A. entity that facilitated EB-5 financing for a restaurant and bar addition to the W Hollywood Hotel last year. “Everybody knows Kobe Bryant and Disneyland. There’s strong international presence here.”
Developers are increasingly looking to the program as banks and other traditional sources of financing keep a tight grip on their lending. Although the program has only provided some $2.1 billion in financing nationwide since its 1990 creation, which averages only $100 million annually, the pace has picked up dramatically. In the last three years, some $180 million has been tapped for projects in Los Angeles alone, according to local developers and others involved in the program.
Among them are the creative office project named Hercules Campus being built by the Ratkovich Co. in Playa Vista, and the One Green West hotel and office property in Pasadena and Plaza Mexico mall in Lynwood by M&D Properties.
Now, local businesses are positioning themselves to take greater advantage of the program. The investments typically are funneled through an entity known as a regional center, a public or private entity, or an individual approved by the U.S. Citizenship and Immigration Services. At least two additional regional centers were created to cover Los Angeles this year. That gives Los Angeles County a total of 12 out of the 40 regional centers statewide and 204 in the country.
Still, the program is far from a panacea for developers having difficulty finding traditional financing. The government caps the EB-5 green cards nationally each year, which means there is only limited funds available for investment nationwide each year. The program has only issued 4,194 permanent visas since its inception 21 years ago.
The problem for businesses is finding enough green card seekers to participate. While the program offers a short cut for wealthy green card seekers to cut to the head of the line, under EB-5 rules, should the business venture fail or if it fails to produce the 10 permanent full-time jobs, the green card is revoked and the investor must return to his or her home country. Some one-third of foreign investors see their investments fail.
“They are making an investment, which they could lose,” said Michael Homeier, an attorney at Homeier & Law in Sherman Oaks who has worked on EB-5 project offerings locally. “You don’t just put in $500,000 and get a green card. Your green card goes away if you don’t show 10 jobs attributed to it.”
Among the high-profile developments breaking ground locally with EB-5 funding is the proposed Marriott International Inc. hotel project on Olympic Boulevard near L.A. Live. The $168 million project, which looks to draw $118 million from EB-5 investors, will feature a Courtyard by Marriott with 180 rooms and a Residence Inn by Marriott with 197 extended-stay rooms. There will be a restaurant and bar, as well as a conference room, shops, pool and fitness center.
The limited partnership that is financing and building the project includes American Life Inc. in Seattle, a top EB-5 investment financing company that has used the program for the last 15 years in the Northwest. This will be its first L.A. project.
American Life President Henry Liebman said that the buzz around downtown, L.A. Live and a potential pro football stadium made him believe that it was the right time to build in this city. He knew right away that EB-5 would be the way to raise the money in a tight financing environment.
“We didn’t try to seek other financing,” Liebman said. “It would be a waste.”
However, raising EB-5 funds is not a simple process. The big challenge is securing foreign investors, the vast majority of whom are very discerning and from high-income families that have been doing business deals their whole lives. They expect that the developer has also invested a significant amount of equity and that it’s already received all discretionary approvals.
American Life works with several immigration companies in China and sends a representative at least once a month to the country to pitch projects to investors. The company has been securing financing for the Marriott hotels from Chinese and Korean investors for the last five months and anticipates to have secured $118 million, or about 236 investors lending $500,000 each, by January. That’s just $50 million less than the project’s estimated $168 million cost. Construction is expected to begin in March and be completed two years later.
Within two years from completing its EB-5 fundraising, the project will be required to create at least 2,360 full-time equivalent jobs.
“It’s not easy money because you have to hand-sell every unit,” Liebman said. “But it’s doing very well, and we are coming closer to the end.”
The money also is far cheaper than traditional bank or private-equity financing, though it’s not free. Some firms offer investors a half-point or point on their $500,000 investment upon return of the principal. And Liebman said it costs about $100,000 to $200,000 per project to round up the financing, including travel costs and paying foreign immigration companies to help find the investors. However, assuming the higher $200,000 cost on $50 million financing, that only works out to four-tenths of a percent of a project’s cost.
While American Life’s project nears ground-breaking, the W Hollywood Hotel completed a high-profile expansion in February using the program. Coming in as equity partners were McCarthy’s American Dream Fund and California Golden Fund, an entity of economic development consultant Larry Kosmont’s Kosmont Cos.
“There was an interest in the injection of additional capital into the W hotel to get the project moving forward,” said McCarthy. “EB-5 was an attractive solution in the absence of other alternatives.”
The companies raised $17 million from 33 EB-5 investors to build the $20 million, 11,000-square-foot rooftop nightclub and dining space called Drai’s, as well as a 7,000-square-foot ground-floor restaurant. As part of the EB-5 program, it was required to create at least 330 full-time equivalent jobs.
It took about six months for the developers to secure investors, most of whom were from China. They worked with immigration agencies and traveled to the country several times over the course of the fundraising. While American Dream has partnered with other developers, the W was the first project it worked on from start to finish. It now wants to do more.
“Interest is growing in L.A. We are now looking at other projects in the greater L.A. area,” McCarthy said.
American Dream is evaluating an assisted-living home, a hospital and another hotel. Indeed, while many types of businesses can access the program, such as a manufacturer that wants to expand, the bulk of those taking advantage of the EB-5 today are real estate development.
“What’s happened is that all the real estate developers that can’t get equity or debt easily have latched on to the program as a real estate investment program,” said Kosmont, whose Golden California Fund is negotiating with developers to build an office building and two hotels in the county.
Hotels have been particularly popular with Chinese and other overseas EB-5 investors.
“They are real estate based, employ a lot of people and it’s an industry that foreigners understand,” McCarthy noted.
That focus on hotel development leads Richard Green, director of USC’s Lusk Center for Real Estate, to question the program’s effectiveness. He said that hotels mostly employ service workers who are paid low wages.
“Nothing against hotels, but as a generator of big-time economic returns, it’s not like having an auto dealership or Google,” he said.
Another issue is critics who say the program is unfair because it essentially sells American citizenship to wealthy foreigners. They are pushing for the program not to be renewed when it is set to expire in October. Green said he thinks it’s prudent to consider the message it sends.
“You ask the philosophical question, which I’m trying to work through in my own mind, is selling access to permanent residency a good idea anyway?” he said.
But don’t question the program to developer Richard Heyman, whose Five Chairs Development in Hollywood has sought funding for a nine-story, 148-room hotel for years.
“We’d been trying to finance it conventionally and thought, ‘Forget it,’ ” Heyman said. “I learned about the program, got up to speed with the process and figured this is my only shot.”
So Heyman and his partner, Grant King, filed a 1,500-page application to form his own EB-5 regional center a year and half ago. It was approved in October. The center will allow him to seek $34 million from foreign investors to finally build his long-stalled $45 million hotel on Cahuenga Boulevard and Selma Avenue.
This year, he partnered with developer Wyndham Hotels & Resorts to build a Hampshire Hotels & Resorts brand Dream Hotel, similar in quality to the W.
Heyman has partnered with a Chinese immigration agency and is traveling to Shanghai this week to find 68 foreign investors who want to part with $500,000 to get a green card.
If his first project goes well, Heyman already has his eye on five other Hollywood properties that he would like to develop with EB-5 funding, including a few mixed-use office and hotel projects.