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Some believe the recent Behring v. Wolf case revitalizes EB-5 financing for developers because it rolls back the EB‑5 minimum investment to $500,000
On June 22, 2021, in the case of Behring Regional Center LLC v Chad Wolf, a federal court in the Northern District of California effectively invalidated the final rules for EB-5 which became effective in 2019. These rules raised the minimum foreign immigrant investment from $500,000 to $900,000 and imposed other restrictions.
Many commercial real estate developers are hoping this development will launch a new surge of EB-5 financing that could fuel their projects, as was the case for years (until a few years ago when the music stopped).
Don’t get too excited about reliable EB-5 financing coming back – but there may be a better alternative . .
For many years, we helped developers source and close EB-5 financing for new construction and development projects. We had a 100% success rate in closing all our EB-5 deals totaling more than $1.5 billion. But we have not felt comfortable using this source of capital for several years, because none of the reliable sources we worked with were able to commit to a deal. They couldn’t raise the immigrant investor funds.
What happened? More than 85% of the funding came from Chinese immigrant investors, and the USCIS processing times for immigrant visas grew to more than 15 years! No investor wants to wait 15 years to get the immigration visa he is paying for today.
These processing backlogs effectively killed EB-5 as a reliable and robust source of financing for commercial real estate development. The court decision invalidating the final rules on EB-5 will not fix this or any other issues with the program.
But a better alternative to EB-5 financing has come mainstream and should be considered. Many are not aware of this alternative – Commercial PACE (or C-PACE).
Is C-PACE the “new EB-5” financing for commercial real estate developments? YES and NO . . .
C-PACE is the “new EB-5” financing for commercial real estate developers, but only in one notable sense: virtually every commercial real estate developer will at least seriously consider C-PACE for projects in the 2020s, just as they did with EB-5 in the 2010s.
Other than the skyrocketing popularity and even more favorable terms, the C-PACE solution has nothing at all to do with the EB-5 program
Here are a few of the key differences between C-PACE and EB‑5:
C-PACE does NOT have any of the negative features of EB-5 financing. Specifically, with C-PACE financing there is:
C-PACE is one of the hottest financing opportunities going for commercial real estate development, construction, improvements, and repairs and has burst onto the financing scene. In one sense it is the “alternative” financing developers are looking at now.
C-PACE is a low-cost, nonrecourse financing that creates a lien on the real property and it is repaid through property taxes. There is no balance sheet or personal liability of the owner or developer.
PACE is an acronym that stands for “Property Assessed Clean Energy.” And the term C-PACE or Commercial PACE is just PACE financing for any class of commercial real estate.
There is also a residential PACE program for consumers, but this article does not address that topic. We are dealing only with PACE financing for commercial real estate – office, multi-family, retail, hotels, industrial and the like.
PACE financing is an extension of local assessment district concept such as those used for school improvement, fire or flood districts, except the assessment district is only the property being financed with C-PACE – not all the properties in the district.
The only government involvement is the initial enabling statutes and regulations of state and local governments. There is no government involvement or approval in individual financings. There are no investment bankers or marketing agents.
Although the original concept behind all PACE financing was energy and water efficiency, and things that enhance a cleaner environment, the eligible expenditures for PACE financing are quite expansive. In several recent new construction projects, up to 80% of the hard and soft costs of the project were PACE eligible.
C-PACE financing is a great way to help finance a “green” project, but there is no LEED certification or other regulatory approval. The eligible expenditures include broad categories of air sealing, ventilation, insulation, HVAC, lighting, roofing, water heating, refrigeration, compressed air, charging stations, elevator modernization, renewable energy, water fixtures and irrigation, landscaping and much more.
Why does it seem like everyone is talking about Commercial PACE now?
PACE financing has been quietly gaining momentum for more than 10 years. With steady and increasing local, state and federal support, it has matured and improved. In the last 3 to 5 years, C-PACE financing has gone mainstream and is now a welcome and accepted tool for commercial real estate financing.
C-PACE financing takes the form of a voluntary tax assessment on real property, having the same features and priority as an ad valorem real property tax (typically paid only twice per year, when real property taxes are paid). Here are some of the features that may be negotiated which can make it attractive financing:
Retroactive C-PACE financing may be available for completed properties
Commercial PACE financing has generally been thought of as a type of construction financing, but it can also be available for certain completed or operating properties. This is called “retroactive financing” which can provide the ability to refinance qualified improvements such as the costs of HVAC, electrical and water efficiency systems, building envelopes, seismic foundations and upgrades, and related soft costs. The retroactive financing calculation can include costs relating to improvements completed as much as 36 months earlier than the closing, in certain jurisdictions.
The C-PACE proceeds from such retroactive financing can be used for working capital, paydown or payoff of existing loan obligations, or payment for PIPs or improvement.
C-PACE lending has become an important and fast-growing sub-specialty in our hotel finance capabilities. We work with C-PACE providers/lenders and borrowers. In fact, we have been fortunate enough to work with one of the leading providers of C-PACE financing as they expand their national platform.
We welcome inquires to see if we can help you evaluate potential PACE financing opportunities.
To learn more about C-PACE, check out our free recorded webinar, “Why so many are looking at Commercial PACE (C‑PACE) financing now.”
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JMBM Global Hospitality Group
1900 Avenue of the Stars, Seventh Floor
Los Angeles, CA 90067
Phone: (310) 203-8080
Jim Butler is a founding partner of JMBM and one of the top hotel lawyers in the world. Devoting 100% of his practice to hospitality, Jim is author of www.HotelLawBlog.com and chairman of the Global Hospitality Group® which focuses on representing hotel owners, developers, and lenders. Jim and his team have helped clients as business and legal advisors on more than $87 billion of hotel purchase, sale, financing, and other transactions, involving more than 3,900 properties all over the world. In the last 18 months, they have closed more than $1.5 billion of EB-5 financing and sourced more than half of that for our clients. In addition to acquisitions, dispositions and financing, the Group handles ADA compliance and defense, hotel mixed-use development, labor and employment, management, branding and franchise agreements and litigation. With experience gained from more than 1,000 bankruptcies, receiverships and workouts, they use innovative solutions to unlock and create value for lenders and opportunistic investors for distressed assets. Jim also serves as an expert witness in hospitality matters.
Phone: +1 310 201 3526