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Breaking ground: Alternative financing in real estate

Real estate projects that usually have trouble attracting the interest of banks are gaining momentum with alternative financing tools such as the EB-5 program, the JOBS Act and smaller, specialty lenders. These tools were discussed during a panel presentation entitled “Emerging Alternative Financing Opportunities,” part of a series presented by the W. P. Carey School of Business and the ASU Real Estate Council, an advisory and support group for the division of real estate in the W. P. Carey School’s finance department.

2014-01-30

Real estate projects that banks have traditionally shied away from are gaining momentum with alternative financing tools such as the EB-5 program, the JOBS Act and smaller, specialty lenders. These tools were discussed during a panel presentation entitled “Emerging Alternative Financing Opportunities.” The discussion is part of a series presented by the W. P. Carey School of Business and the ASU Real Estate Council, an advisory and support group for the division of real estate in the W. P. Carey School’s finance department. EB-5 The EB-5 visa program offers foreign investors a green card in exchange for a $1 million investment in a new United States company or project. If the company or project is in a Targeted Employment Area, defined as a high unemployment or rural area, investors can contribute $500,000. The United States Citizenship and Immigration Services department administers the program, officially known as the Immigrant Investor Program, Employment-Based Immigration: Fifth Preference. The program was created by Congress in 1990 as a way to stimulate the economy and create jobs. A requirement of the investment is that the enterprise must create at least 10 jobs. “A lot of us have heard about EB-5 financing — it’s a romantic notion I think,” said Mark Stapp, director of the W. P. Carey Master of Real Estate Development program and moderator of the discussion. Tim Sprague, of Habitat Metro, LLC and a panelist, knows the ins and outs of EB-5 financing: His company is currently working on a $24 million hotel project that includes $14.5 million of EB-5 funding. “My first word of caution is that it’s not for the weak of heart,” he said. “It’s something that is highly technical from a bureaucratic standpoint.” The hotel project includes 29 individual investors who each contributed $500,000. Most of the investors are from China. “China’s the place where the money is today,” Sprague said. One of the investors is a Chinese man whose son attends UCLA. The program provides that if all the requirements are met, not only will the investor get a green card, but so also will all members of the investor’s family who are under the age of 21, Sprague said — a motivating factor for that particular investor. The process in China has become sophisticated and brokers there facilitate the process by finding the investors and advertising the project, according to Sprague. Those interested in EB-5 financing need a good, pedigreed lawyer, he explained, a solid economic study and a project with sizzle. Many of the hotels and casinos in Las Vegas have an EB-5 component, he said. “The best part about the program for us as citizens of the United States is it’s a repatriation of capital,” Sprague said. The EB-5 program has grown in use. In 2013 about a billion dollars in investment was raised through EB-5. JOBS Act Another financing option that is attracting real estate developers is the Jumpstart Our Business Startups Act or JOBS Act. The act encourages the funding of U.S. small businesses and startups by easing certain securities regulations. In particular, it loosens Rule 506 to allow general solicitation of investors for private offerings. In the past, private offerings could not be advertised publicly. “Now you can cast your net far and wide to get potential prospects for your project,” said David Thompson, an attorney with Dickinson Wright and a panelist at the discussion. He said private offerings now may be advertised in the newspaper, on the radio and even on Twitter. In securities, private offerings are the bread and butter, Thompson said — not public offerings. Thompson stated there were 18,000 private offerings in securities of one kind or another nationwide last year, totaling $900 billion. “It’s a huge business. The total dollars raised in private placements regularly exceed the dollars raised in public offerings, even though they generally operate under the radar screen,” he said. Another change brought on by the JOBS Act and affecting the way capital can be raised is crowd funding — the collective effort of a group of investors to contribute money to support a particular project or venture. The act implements crowd funding for the first time in the securities arena, Thompson said. The projects can raise up to $1 million through crowd source methods but must be sold through a funding portal, an electronic gatekeeper registered with the SEC, he explained. Both of these changes are opening the doors for real estate development, Thompson said, and are especially attractive to small investors in small projects such as urban infill development. Stapp agreed saying he didn’t think these changes were initially intended for the real estate industry but are presenting interesting opportunities. Smaller, community projects are benefitting from this type of financing, he said. “Get local real estate in the hands of local merchants and keep profits local,” Stapp said. Andrew Gordon, president and CEO of Arizona MultiBank and a panelist, said he is committed to just that with the financing his bank offers. His father and grandfather opened a grocery store in downtown Phoenix, Gordon’s Food Market, in 1946. The store went out of business in 1985 when the building’s owners raised the rent excessively. “I’m personally committed to owner-occupied real estate particularly for merchants,” he said. Gordon’s bank offers funding for smaller projects, $500 to $1 million, that enhance the character of a neighborhood. Gordon references a project he funded on Roosevelt, Grand and 15th avenues — the Oasis on Grand, an affordable live/work project for artists. Arizona MultiBank funded the project and Habitat Metro, LLC, Sprague’s company, developed the project. “The place is up and running and has a waiting list,” Sprague said. “It’s a really cool complex.” Gordon’s bank offers creative financing that might allow a parent or loved one to invest in an artist’s studio, for example. This gives local folks the opportunity to invest locally, he said. “It’s a challenge but we want to help the smaller businesses and enterprises in the neighborhoods acquire real estate,” Gordon said. Projects like these create a vibe and can turn a neighborhood around, Stapp said.

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