COSTA MESA, CA—Bridge lending has becomenecessary to developers of EB-5 projects, which are also intriguing othersegments of the lending landscape, Adam Salis,part of the real estate and land use practice group atManatt, Phelps & Phillips, tells GlobeSt.comexclusively. As EB-5 becomes more popular for foreign investorsinterested in US real estate, finding time-effective ways to bringthe money to developers of these projects has become necessary. Wespoke with Salis about what he's seeing in the EB-5 landscape andwhy bridge lending has become such a crucial piece.

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

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

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

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GlobeSt.com: What are hedge funds and private-equityprofessionals getting more and more interested in EB-5? Is it justbecause it's viewed as a cheap source of capital compared to otheroptions?

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

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

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There's a danger, though, that often EB-5 monies are solicitedfor projects that are marginal, that might not have found financingin the capital markets, and that's the challenge. As an industry,we have to be careful that these projects work. The lendingcommunity is doing a good job of that, and I'm seeing it on thebridge side: lenders underwrite these projects like they do everyproject and put a degree of thoughtfulness and care into theunderwriting to make sure the projects actually pencil.

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

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Salis: First, they need to beorganized. There's a lot of documentation that goes into abridge-loan facility for these projects. They need to hire a goodlawyer who has done studies and can present a comprehensivepackage. Second, they need to be prepared for the banks to ask themquestions and treat them as they would any bridge loan. Even thoughit's secured by money in escrow, some are secured by real propertylike a junior lien. Developers need to do the underwriting on anEB-5 bridge loan that they would need to do on any project, whichis often a surprise for the development community.

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

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

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There is also the involvement of regionalcenters, which plays a very important role in theseprojects. They enable developers to create a much larger jobestimate from these projects. Affiliating with a regional centerallows them to create direct W2 jobs and indirect jobs such as anoutside caterer. Construction jobs to build afacility count as indirect jobs, too. It's the multipliereffect—with more job creation, you can raise more money because youhave to be able to create 10 jobs per investor. If a developer iscoming out with a multifamily project, he's notgoing to be able to attract EB-5 capital with that because hewouldn't have the job creation he would with the other sectors. Thesame is true for conventional shoppingcenters—it's not as well EB-5 qualified as a hotel orassisted living or skilled-nursing facility.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.