COSTA MESA, CA—Bridge lending has become necessary to developers of EB-5 projects, which are also intriguing other segments of the lending landscape, Adam Salis, part of the real estate and land use practice group at Manatt, Phelps & Phillips, tells GlobeSt.com exclusively. As EB-5 becomes more popular for foreign investors interested in US real estate, finding time-effective ways to bring the money to developers of these projects has become necessary. We spoke with Salis about what he's seeing in the EB-5 landscape and why bridge lending has become such a crucial piece.

GlobeSt.com: Regarding the current EB-5 landscape, what are you seeing?

Salis: I've been most active in the piece of EB-5 that deals with bridge lending. That has come about as a result of delays in getting United States Citizenship and Immigration Services approval for the initial petitions filed by these immigrant investors. The first step is they file a petition with the government called a Form I-526. The government is currently taking about 12 to 15 months to process these petitions. Under the terms of the project documents, typically those monies the immigrants come into the country with are held in escrow with a bank until all the petitions are approved and then given to the developer for project costs. But they need money to pay for their construction drawings, and they need to get going on their projects, so having the money in escrow doesn't help.

There was a growing interest level from the banks to find a way to bridge that gap and create bridge-loan programs that make short-term loans to developers pending approval of those I-526 petitions, and the USCIS came out with guidelines that said they would approve bridge lending. First, you saw hard-money lenders and hedge funds trying to get into this space and make a fortune; now the banks are getting in at a lower cost and causing velocity, and the developers love it.

GlobeSt.com: What are hedge funds and private-equity professionals getting more and more interested in EB-5? Is it just because it's viewed as a cheap source of capital compared to other options?

Salis: There are several funds out there that have identified this as a good niche opportunity to make their yield requirement. We haven't seen as much hedge-fund and private-equity activity on the bridge side because there's a lack of deals out there that are teed up and ready to go with all the pieces in place. At all the stages of their fundraising efforts, documents tend to be lacking, so it's difficult for the hedge or equity player to get involved in those projects. We look them over and see if it makes sense from a bridge-loan perspective.

There are two different sides to that. More and more institutional players, from opportunity funds to private-equity groups to large institutional developers see that the EB-5 program is a way to get to very, very cheap equity, even though it comes in as debt for the most part—often subordinated debt, and it has most of the elements of equity. It's treated in the capital stack more as equity than debt. It becomes part of the capital stack before the institutional investor does—rather than paying another equity source 15% to 20% on their money, they're paying EB-5 1% to 2%, which is a huge savings, and it gives much better leverage returns on these projects.

There's a danger, though, that often EB-5 monies are solicited for projects that are marginal, that might not have found financing in the capital markets, and that's the challenge. As an industry, we have to be careful that these projects work. The lending community is doing a good job of that, and I'm seeing it on the bridge side: lenders underwrite these projects like they do every project and put a degree of thoughtfulness and care into the underwriting to make sure the projects actually pencil.

GlobeSt.com: What should developers know about working with lenders for these bridge loans?

Salis: First, they need to be organized. There's a lot of documentation that goes into a bridge-loan facility for these projects. They need to hire a good lawyer who has done studies and can present a comprehensive package. Second, they need to be prepared for the banks to ask them questions and treat them as they would any bridge loan. Even though it's secured by money in escrow, some are secured by real property like a junior lien. Developers need to do the underwriting on an EB-5 bridge loan that they would need to do on any project, which is often a surprise for the development community.

GlobeSt.com: What's unique about the hotel and assisted-living environment for these loans?

Salis: It's more a function of what the industry is doing. EB-5 is focused on job creation, and that happens most often in the hotel and health sectors. These are quasi-business-operating entities, ongoing operations that create jobs, which is why it attracts a majority of that EB-5 capital.

There is also the involvement of regional centers, which plays a very important role in these projects. They enable developers to create a much larger job estimate from these projects. Affiliating with a regional center allows them to create direct W2 jobs and indirect jobs such as an outside caterer. Construction jobs to build a facility count as indirect jobs, too. It's the multiplier effect—with more job creation, you can raise more money because you have to be able to create 10 jobs per investor. If a developer is coming out with a multifamily project, he's not going to be able to attract EB-5 capital with that because he wouldn't have the job creation he would with the other sectors. The same is true for conventional shopping centers—it's not as well EB-5 qualified as a hotel or assisted living or skilled-nursing facility.