24 Aug DOUBLE FEATURE! DEVELOPERS CONSIDERING & STARTING EB-5
EB-5 Investment Voice,
(Mona Shah & Associates Podcast Series)
Reported by Hermione Krumm, Esq.
EB-5 Investment Voice is the only Podcast series that focuses on and the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah, welcomes guests from the industry including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.
In this podcast, Mona Shah interviews Mordechai Lipkis and Rob Donnelly – two experienced real estate developers in different stages of the EB-5 process.
Mordechai Lipkis is considering EB-5 to raise capital for his new Hudson Yards project, but does not wish to establish his own regional center. Having been in the real estate business for 32 years, Mordy was one of the first developers to convert industrial buildings into residences in the Tribeca and Soho neighborhoods of Manhattan.
Rob Donnelly is at the early stage of EB-5. He is an investor and entrepreneur with 18 years of investment management, private equity and corporate board experience. Active in a variety of commercial and residential real estate ventures, he formed the Texas Regional Investment Center in 2014 to employ EB-5 for a boutique hotel development.
In this episode, Mordy and Rob share the particular challenges each has faced in attracting foreign investors, competing with the establishment, and how they approach global marketing to raise capital.
Mordy’s Introduction to EB-5 and Developer’s Concerns over Getting into EB-5
- As an experienced investor and real estate developer in New York, Mordy first learned about EB-5 in industry publications. After doing some research into the program, he reached out to Mona as an expert and was educated by her tremendously.
- Local developers are often reluctant to use EB-5, thinking the program is too complex to make it worth the effort. With the complications in mind, it took Mordy a year to convince his partners that EB-5 was a viable way to raise capital.
Mordy’s Hudson Yards Hotel Project
- Hudson Yards is a new city within Manhattan. The development’s 20 million square feet will consist of offices, apartments, a school, two shopping centers, and a subway. A number of large companies are migrating to Hudson Yards from Park Avenue and other more traditional office locations.
- Mordy and his partners are developing a 220-room Marriot Autograph hotel at the center of Hudson Yards. This opportunity is a good fit for EB-5 investors, as they seek to not only receive a green card, but also get their money back.
Mordy’s Frustrations with EB-5
- Mordy has encountered a few ‘unsavory characters’ in the industry who offer the impression that money will flow easily and quickly. He cautions us to be wary of bad actors in the business who ‘promise the world’.
- EB-5 requires much industry around marketing your project. Mordy has just returned from a trip to China, and he finds it extremely useful for a developer to go to different markets to promote their projects as nobody knows the project better than the developer himself. He argues that face-to-face contact with the agents makes a big difference. ‘Relationships are essential to marketing the project.’
- Doing his very first EB-5 project, Mordy found it difficult to gain the attention of larger immigration agents who only want to work for the biggest developers or on the largest projects. This forced him to work with a great number of smaller agents to achieve the number of investors necessary to fund his project.
- In regard to direct investors, it can be challenging to convince foreign investors to work with someone they don’t know, investing in a country they are unfamiliar with. Mordy has had success with one-on-one investors by sharing how much he has invested personally in the project, and assuring EB-5 investors that he won’t see a penny until after all the EB-5 investors have been paid back.
The Benefits of EB-5
- As an owner-developer, Mordy likes EB-5 because it allows him to retain a larger portion of ownership the project and enjoy more appreciation long-term, in comparison with using other means of financing where he would own less of the project and would enjoy less of the long-term appreciation. While many developers make their money on fees and may be apathetic about the enduring success of a project, Mordy has a vested interest in the property’s long-term success.
- Mona further contends that it is very important to understand this, because some of the criticism which has been leveled against EB-5 and big developers is due to the impression, albeit not entirely true, that most EB-5 money goes to big developers. What lobbyists and legislators don’t understand is that EB-5 also helps the ‘ordinary person,’ backing projects that would not get funding otherwise. Though the process takes time, which may not work with real estate developers on a deadline, the overall cost of EB-5 capital is quite low.
Rob’s Introduction into EB-5
- Rob’s team established a new regional center for their project, a boutique hotel in Austin, Texas, operated by Auberge Resorts. He was introduced to EB-5 three years ago, and found that it makes a lot of economic sense to proceed with this endeavor.
- Rob sees EB-5 as a unique tool that plays a niche role in the capital structure and financing of real estate projects. Unlike the traditional tools (bank, equity, and private mezzanine debt financing), EB-5 is more developer friendly, and it offers a lower cost of capital to the project – which enhances equity returns.
Rob’s Struggle to Raise Capital Via EB-5
- Though Rob has extensive experience raising capital domestically, he found that putting together an EB-5 package require additional work. He was also surprised by how slowly things move in the EB-5 process and how much detail and additional work you are obligated to put in the EB-5 package.
- Rob also faced challenges in putting together the appropriate teams. He suggests assembling specialized legal and professional services teams that can accommodate EB-5.
- Rob found it more difficult than what he anticipated to fight against larger, well-known regional centers with distribution, agent relationships, and economics in place. These large centers can leverage exemplar projects or I-526 filing/response to market projects, while Rob’s regional center fights the battle of being new and unproven. Although they have individual track records, real estate and private equity, investors are more prone to regional centers and regional center teams with a track record. Rob’s team has made a concerted effort to focus on emerging, alternative markets, despite the high expense associated with global marketing.
Is EB-5 a challenge that can be overcome?
- Mona argues that EB-5 has many components. First you are looking at business and corporate experience required. There is only a small amount of immigration but a large chunk of everything else. Other than a good developer and a good project, you have to know how to market and marketing is an entire world of itself.
- In terms of EB-5 marketing, Rob suggests that developers should be much more patient with EB-5 investors. The EB-5 investor is making both an investment and an immigration decision, considering return on investment as well as personal and emotional factors. Many of them are not making a quick decision. Developers should give the potential investor time to make the right decision for himself and his family.
- A project located in Auston, compared with projects based in larger, more well-known cities like New York City and Washington D.C., can face additional hurdles. A developer with a project like Rob’s should educate investors about the city in which the project is located, explain why it is an interesting/up and coming market with a favorable risk-return profile. Because of its location in a smaller market, a project such as Rob’s will have lower construction costs, less competition for the product type, and often, less operating cost. The overall risk profile can be better.
- In terms of getting the information on the benefits to the investors, Rob agrees with Mona that communication is a challenge. Leveraging off his private equity background, Rob focuses on key elements, like going through the entire matrix of risk management. He looks at both investment goals and immigration goals and go line by line on how to minimize risk for investors by comparing his project in Austin with Manhattan projects, and demonstrating how risk has been minimized. Rob also goes through a checklist and convinces investors that he has reduced the opportunities for failure.
Please see the link below for access to the podcast episode: http://mshahlaw.com/double-feature-developers-considering-starting-eb-5/.
About the Author:
Hermione Krumm, Esq. is an associate attorney with Mona Shah & Associates. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.
Podcast is a digital radio which the audience can easily stream and download to their computers and mobile devices. The audience can also subscribe to their favorite channels to automatically receive new episodes of their favorite shows. EB-5 Investment Voice is Mona Shah and Associates’ series of podcasts devoted to providing insights into the Immigrant Investor Program for foreign investors, domestic fundraisers and enterprising entrepreneurs. Tune in to our latest episodes at http://mshahlaw.com/podcast/!