The EB-5 visa program that has provided billions of dollars of foreign investment to U.S. hotel developers is set to expire June 30.

The program offers a way for foreign nationals to invest in U.S. development projects that create at least 10 jobs as a way to gain green cards for themselves and their families.

The EB-5 Reform and Integrity Act of 2021 introduced to Congress by Senators Chuck Grassley and Patrick Leahy would renew the EB-5 Regional Center Program through 2026. The regional centers help connect foreign nationals with U.S. investors.

Both the American Hotel & Lodging Association and the Asian American Hotel Owners Association have partnered with the Coalition to Save Jobs to support the EB-5 renewal bill. In a news release, AHLA President and CEO Chip Rogers said hotels are facing many challenges because of the coronavirus pandemic.

“With travel not expected to return to pre-pandemic levels until at least 2023, it’s critical that Congress reauthorizes the EB-5 investor program, which has proven time and again to be good for the hotel industry and our economy,” he said. “The EB-5 Regional Center Program will create certainty in the marketplace and provide a significant source of financial support for hotels and hotel jobs at a time when we need it most.”

While the bill addresses several issues affecting the EB-5 program, it does not appear to address a major one that is stymieing foreign investment: the applicant backlog.

After securing roughly $1.5 billion in mostly hotel financing through EB-5, Jeffer Mangels Butler & Mitchells has not completed an EB-5 deal in two years, said Jim Butler, partner and chairman of the law firm’s Global Hospitality Group.

“It was until a couple of years ago one of the most interesting and important supplemental sources of financing, certainly for the hotel industry, but for real estate,” he said.

EB-5 funding has been especially important for hotel development, for which lending hasn't been as readily available as it has for other real estate classes, he said.

That's why almost half of all EB-5 funding was going to hotels, he added.

While EB-5 funding is still technically available, the program is essentially "on life support" — not only due to its pending expiration but also because of the political issues between the U.S. and China, Butler said.

There are up to 10,000 visas a year available to foreign EB-5 investors, he said. Each country has a 7% cap on the number of investors who can receive visas. If a country doesn't reach it’s cap, the program reallocates those remaining visas to the countries with the highest demand.

But because there were so many investors applying from China, they and investors from a few other countries were essentially put in a separate line for EB-5 visas, he said. The guidance provided an 18- to 20-year wait for Chinese investors and longer than average waits for investors from other countries such as India and Vietnam. Because of this backlog, many investors have backed out.

“That effectively killed the appetite, and 85% of all the EB-5 applications came from China,” he said.

The president or Congress could have taken action to reduce the backlog, such as allowing investors' families come along on the visa, he said, but there wasn’t enough political will to fix the problem.

“If you have to wait 18 years to get your green card, you’re not going to sign up for the program,” he said.

The proposed EB-5 Reform and Integrity Act of 2021 in part addresses levels of investment and improved security, Butler said, but “I haven’t seen anything that goes to the fundamental problem of getting rid of the backlog.”

Driftwood Capital entered the EB-5 funding space in 2014 as a way to sweeten its hotel deals and create relationships with high-net-worth individuals, said Alejandro Navia, chief commercial officer at Driftwood. After kicking the tires a bit, the company moved forward on an EB-5 investment for a project in Miami, replacing $9 million of a senior loan with EB-5 funding for a $25 million project.

Instead of working through regional centers to find investors, Driftwood created its own marketing platform to attract EB-5 funding, giving investors a closer look at the company and opening paths for due diligence on hotel projects, he said. Many of Driftwood’s EB-5 investors come from Latin America, instead of China.

The company’s second EB-5 project was the Canopy by Hilton West Palm Beach Downtown, which opened last year, Navia said. For this project, Driftwood created an option for the investor to participate on the deal as an owner/partner.

“That was very well received by our base of investors,” he said.

That approach allowed Driftwood to secure a form of a loan without over-leveraging the project and bring in investors on the equity side to increase funding, he said.

The minimum EB-5 investment requirements changed in 2019, increasing the minimum from $500,000 to $900,000 in Targeted Employment Areas, or rural areas or those with unemployment 150% above the national average. For investments in projects outside of TEAs, the minimum rose from $1 million to $1.8 million. The number of jobs an investor must create through a project remained at 10.

The increased threshold wasn’t a large problem for Driftwood, Navia said. Roughly 80% of its EB-5 investors who came in at the $500,000 level would still invest with $900,000.

“As a developer, you are basically doubling the amount of investment per investor, so I think it evens itself out in terms of the amount of people that are willing to go to the $900,000 level versus the amount of people you need to raise the same amount of money,” he said.

The biggest change for Driftwood was how the EB-5 program then determined what qualified as a TEA, he said. There are limited areas where such a project can work. Of the four EB-5 projects Driftwood is working on now, one is in a TEA.

Having such tight TEA regulations makes many developments risky for investors, he said. Many of those developments will fail because it doesn’t make economic sense to move forward with a project in those areas.