The federal program known as EB-5, which encourages foreign residents to invest in U.S. projects, can create distortions in the hotel development cycle, according to a study published by the Center for Hospitality Research (CHR) at Cornell University.
EB-5 offers a green card to foreign residents who invest at least $500,000 in a job-producing project in the U.S.
Hotel developers have taken advantage of the EB-5 program's relatively inexpensive capital, as detailed in the study, "Creative Capital: Financing Hotels via EB-5," by Arian Mahmoodi and Jan A. deRoos. The report, which is published in association with the Center for Real Estate and Finance.
Based on Mahmoodi's thesis research, the report explains how EB-5 allows foreign nationals to invest as little as $500,000 in a U.S. enterprise, in consideration of potentially receiving permanent residency in the United States—provided the investment creates a specified number of jobs. The report includes a simulation of a hotel development, illustrating how EB-5 financing can more than double the developer's profit.
"This program has attracted considerable attention from foreign nationals, particularly those residing in China, and we've seen considerable recent growth in investment volume," Mahmoodi explained. "But the market for this financing is opaque and inefficient. Without proper checks and balances, we believe that the availability of EB-5 financing may encourage development of speculative hotel investments." A graduate of the Cornell University School of Hotel Administration, Mahmoodi is now a financial analyst at Wells Fargo's Hospitality Finance Group in Los Angeles. He is also a CHR Fellow.
"Renewal of the EB-5 program is currently being discussed in Congress," added deRoos, who is the HVS Professor of Hotel Finance and Real Estate at the School of Hotel Administration and supervising faculty member for Mahmoodi's thesis. "Although it certainly has attracted foreign investment, the program has considerable potential for fraud. As we demonstrate in the report, it also could encourage marginal hotel projects."
The entirety of the study can be found here.