NEW YORK CITY — For hoteliers looking to make deals, the capital is there, but it’s possible the best options available to them look different than what they’ve used before.
Traditional lending sources for hotel owners and developers are still around, but may be fewer in number or have restrictions on how much exposure they’re allowed to hospitality businesses at any one time. A group of executives at the NYU International Hospitality Investment Forum outlined the alternative sources of capital that have taken up a larger share of the market as a result.
EB-5 capital
The EB-5 Immigrant Investor Program allows foreign investors to put capital toward a fund that lends out money to development projects that create at least 10 jobs in local markets. In return for investing a required amount of money, investors will qualify for lawful permanent resident status.
Jared Schlosser, head of originations and CPACE, credit, at investment management firm Peachtree Group, said in these cases, his company uses EB-5 as tax leverage to make a loan, if the project is in a rural area. That means Peachtree takes on the raise-risk itself.
“That allows us to provide a cheaper loan option to a borrower,” he said.
For example, if a traditional construction loan carried a rate of SOFR 600, the EB-5 option would allow Peachtree to come in with a SOFR 400 option, he said.
If there’s a project in a rural targeted employment area, the foreign investor has a lower investment requirement, said Ryan Bosch, principal at Arriba Capital, a real estate investment banking firm. However, with the program up for renewal in September 2027 and likely with higher investment requirements, investors would only have until September 2026 to come in under the current parameters.
As a result, there’s a big rush in capital trying to deploy to these rural targeted employment area, or TEA, projects.
“It's probably a bigger rush of capital than we've ever seen right now, and people trying to deploy that and seeking projects that qualify,” he said.
Until about two years ago, EB-5 capital was deployed almost exclusively as mezzanine debt or preferred equity, said Rachael Sery, managing director and national head of operations at George Smith Partners, a commercial real estate finance advisory firm.
The pivot to EB-5 capital in the senior lending space has only been possible because of the cost of capital, and it’s still more attractive to do EB-5 as a senior loan than competing seniors would have been, she said.
Her company has been working directly with EB-5 regional centers, which are essentially hub entities designated by the U.S. government that administer EB-5 investment projects, taking care of organization, management and fund-pooling. This direct approach has its own pros and cons, but it usually provides a savings of about 250 basis points, she said.
However, because of the grandfathering period expiring later this year, she said she’s seen a slowing at rural EB-5 regional centers.
“The majority of the regional employers, meaning regional centers, on the rural side, they’re not really seeking new projects anymore,” she said. “It’s just too abbreviated a timeline to be starting those processes overseas.”
CPACE debt
Commercial property assessed clean energy loans are a source of financing that provide upfront capital to address qualified energy, water, resilience and public benefit projects through a voluntary assessment on the property tax bill.
Peachtree has grown its CPACE lending business over the years, and it’s seeing more volume on complicated deals, where it can do more CPACE amounts in terms of the overall loan-to-cost, Schlosser said.
The company has done certain deals where it’s effectively writing a senior mortgage as CPACE. Other times, a bank wants to lend on a property, but it has a $20 million limit while the request is for $50 million, so CPACE can make up the difference.
The misnomer that CPACE was a replacement for equity has been solved now, and George Smith Partners has been able to use it effectively on more complicated projects, Sery said. For example, if a developer has a 700-over senior product, they may go up to 70% loan-to-value. CPACE won’t necessarily give them incremental value on that, but if it’s running at 7% or 8%, it would lower the overall cost of that product at the same last dollar.
“We use it to reduce the cost when it’s paired with a lot of the debt funds that are more accepting of that,” she said.
There’s still some pushback on the senior side, and some of the distress on the market now that has CPACE attached to it is a new development, she said. The hyper-acceleration of the losses of the senior lenders is making people look more reticent, but she’s not against CPACE.
“I think that it has a lot of really new value propositions,” she said. “The retroactive capabilities of it are particularly interesting as they stand out those back deadlines, and certainly for kind of non-typical real estate uses, it's been really, really helpful.”
CPACE is also an option when working on mixed-use development projects, Schlosser said. Each component can benefit from it, and by playing the allocation game, it can sometimes solve leverage issues.
Peachtree recently used a U.S. Department of Agriculture Loan paired with CPACE debt for two branded hotels that were adjacent to one another but on separate tax parcels, he said. The company was able to get separate maximum USDA loans and CPACE loans for each individual hotel.