The purpose of the investor's due diligence is to understand and evaluate the potential investment in the hotel. It is the analytic review of the real and personal property, the business operations and potential of the specific hotel. This effort all seeks to validate the investor's reasons for buying the hotel and to avoid surprises after the purchase has closed.
EB-5 has been very popular in the last few years for hotel development because there is still very little traditional financing available, and the EB-5 financing market has provided a much needed source of new financing to hotel developers around the country. As one of the most experienced firms in the country on matters involving both hotels and the use of EB-5 financing, we receive frequent inquiries from hotel purchasers asking if they can use EB-5 financing for the acquisition of existing hotels, in addition to the construction of new hotels or new facilities at existing hotels (e.g. a new hotel tower, a spa, or a restaurant).
So I asked my partner Catherine Holmes to put together, in a Q & A format, the most frequently asked questions on this topic. And here it is.
Can I use the EB-5 Visa Program for financing hotel acquisition and renovation? - By Catherine DeBono Holmes | Hotel Lawyer
QUESTION: Can I use EB-5 financing to buy an existing, operating hotel?
ANSWER: Generally, NO. An EB-5 investment must create a minimum of 10 NEW jobs for each investor. Jobs that already exit at a hotel that is open and operating when a buyer purchases the hotel are not considered new jobs. Therefore, for most purchases of an existing and operating hotel, EB-5 financing is not available as a source of funds for the purchase. There are, however, a few exceptions to that general rule, which we will discuss below.
QUESTION: Under what circumstances can I use EB-5 financing for acquisition of an existing hotel?
ANSWER: There are basically three situations where a hotel buyer might be able to use EB-5 financing for the purchase of an existing hotel: (1) the purchase of a hotel that qualifies as a "troubled business", (2) the purchase of an existing hotel that has closed before the purchase date, or (3) the purchase of a hotel (or other building) that is going to be shut down for a substantial renovation that will result in additional rooms, additional restaurant business, or some other new source of business that was not there before the purchase.
QUESTION: How does a hotel qualify as a "troubled business" for EB-5 financing?
ANSWER: A troubled business is one that has been in existence for at least two years and has incurred a net loss during the past 12- or 24-month period at least 20 percent of the troubled business' net worth prior to the loss. For purposes of determining whether the troubled business has been in existence for two years, successors in interest to the troubled business are deemed to have been in existence for the same period of time as the business they succeed. Therefore, a hotel buyer that purchases a hotel with the required amount of net losses, based on the seller's net worth, could potentially qualify as a troubled business. If the hotel did qualify as a troubled business, then the jobs that are saved by the buyer purchasing the hotel and having a new business plan to improve the business will be counted for EB-5 financing purposes.
QUESTION: Can I buy the hotel and shut it down myself for renovations, and qualify for EB-5 financing that way?
ANSWER: No, the hotel would have to be closed before the buyer bought the hotel, such as in a bankruptcy or foreclosure where the prior owner or lender shut down the business, and the new buyer had the intention of re-opening it.
QUESTION: What if I intend to shut down the hotel for substantial renovations that include expanding the number of rooms, or expanding restaurant or meeting space, and I can show that it will result in more revenues as a result of the expansion?
ANSWER: In that situation, you will be able to count the additional employees that will be added as a result of the expansion, but you likely won't be able to count the existing number employees who are already working at the hotel when you buy.
QUESTION: What if I buy a building that isn't a hotel right now, such as an office building or a residential building, and I want to convert it into a hotel?
ANSWER: That would be considered the establishment of a new business, and you could count all of the employees whose jobs are created as a result of the new business (including direct and indirect employees) as new employees for EB-5 financing purposes.
QUESTION: Assuming I can qualify for an EB-5 financing when I buy a hotel, how long will it take me to get the money? Can I get it soon enough to use for the closing of the purchase?
ANSWER: EB-5 financing is often a process requiring several months of work before you receive the financing. A typical timeline for EB-5 financing is 9 to 12 months. Therefore, you may not have the EB-5 financing in hand in time to fund the closing of the purchase of the hotel. In that case, you can consider obtaining a bridge loan or bridge equity contribution to fund the closing, with proper documentation showing that you intend to repay the bridge loan or equity with EB-5 financing.
QUESTION: How can you help me get EB-5 financing if I qualify for it?
ANSWER: We work with many hotel owners and developers throughout the United States to obtain EB-5 financing to build new hotels, renovate and expand old hotels and repurpose other buildings as hotels. We help structure your project to qualify for EB-5 financing, locate and negotiate deal terms with an approved regional center in the area where the hotel is located, prepare EB-5 investment offering documents, and assist in finding qualified marketing agents for the project. We have relationships with regional centers in many areas of the country and experience with over 40 hotel projects using EB-5 financing. Our goal is to make the EB-5 financing fit the hotel owner's needs.
Catherine Holmes is a transaction and finance partner with JMBM's Global Hospitality Group® and Chinese Investment Group™ and specializes in hotel management and franchise agreements, resort and hotel purchase and sale transactions, resort and urban mixed-use financing and development and hospitality asset workouts. With her background in securities transactions, she also assists hotel developers with public and private offerings of securities. For more information, please contact Catherine Holmes at +1 310.201.3553 or email@example.com.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We've done more than $60 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who's your hotel lawyer?
Logos, product and company names mentioned are the property of their respective owners.