Federal EB-5 program brings mixed results in area development projects

EB-5 brings mixed results in area development projects

Staff writerMay 4, 2014 

The 83-year-old former Foremost Dairies processing plant at South 25th and Pacific Avenue in Tacoma was remodeled as a mixed use office and retail structure in 2010 using money invested under the federal EB-5 program.

JOHN GILLIE/STAFF WRITER

When Tacoma recently sought proposals for a new convention hotel, one of the five potential bidders said demand for hotel rooms wouldn’t support another hotel. The second developer sought a $60 million subsidy, and a third wanted a bargain price and tax rebates. The fourth developer sought no formal aid, but asked to lease convention center parking spots for guests’ vehicles.

The Seattle developer who won proposed not only the 300-room hotel the city sought, but also up to 200 condominium units, 60,000 square feet of retail space and a 400-stall garage. Those spaces, according to the developer, Yareton Investments and Management LLC, would be housed in twin towers south of the Greater Tacoma Convention and Trade Center. The larger of those two towers would reach more than 30 stories, making it the city’s tallest building.

How could Yareton think it could build such an expansive and expensive complex (costs are estimated to be $200 million) when other hotel builders wanted special considerations to create less ambitious developments?

Yareton’s “special sauce” appears to be its low-cost financing plan. That plan depends on foreign investors willing to make commitments of $500,000 to $1 million each to help build the hotel-condominium project.

That’s the same source of funds Yareton is tapping to build a 240-room, eight-story hotel south of Sea-Tac Airport on Pacific Highway South. The hotel, to be called Four Points Sheraton Seattle Airport South, is the largest economic development project undertaken in recent years in Des Moines.

That hotel is expected to open in midsummer next year.

Yareton’s chief executive officer, Chun Yang, decided to build the upscale hotel in Des Moines after he met Des Moines’ mayor on a trip to China. Yang had been interested in building a hotel in Tacoma, but focused on Des Moines after touring the community.

Now that the Des Moines hotel is finally under construction, Yang has returned to Tacoma with big plans for a hotel complex.

EB-5 AND TACOMA

Yareton plans to tap Chinese and other mostly Asian investors under a program known as EB-5, a federal effort to attract foreign funds to the U.S. to build job-creating structures. In return, the U.S. grants the foreign investors and their families permanent resident status in the U.S.

The program has been so popular that the United States Citizenship and Immigration Service has about a two-year backlog of applications from investors seeking permanent resident or “green card” status.

The EB-5 program is targeted at communities with higher unemployment or economic issues where raising funds for development projects from conventional sources might be difficult. Foreign investors in such projects receive the extra bonus of accessing U.S. residency through the back door not available to foreign citizens with less wealth. In the U.S., 29,000 EB-5 visas have been issued nationwide since the program began in 1990.

The program has developed just one project within Tacoma’s city boundaries, the rehabilitation of the old Foremost Dairies building at South 25th Street and Pacific Avenue. That 2010 project turned the vacant former dairy processing plant into a handsome office structure. The 2010 $13 million rejuvenation of the Foremost Dairies building was undertaken by American Life Inc., a Seattle-based company that is the oldest and largest of the hundreds of companies that work with EB-5 financing. American Life, founded in 1996, has built or rehabbed some 40 buildings in the Seattle area.

Though American Life claimed that Foremost was 100 percent leased before construction was complete, the building now appears to have vacancies. Its chief tenant is the federal Social Security Administration’s adjudication division.

HOTELS AND EB-5

Hotel development projects have been frequent beneficiaries of EB-5 funding across the country. American Life, for instance, is now raising funds abroad for two hotel projects, one in Seattle and the other in Los Angeles.

Hotels are well-positioned to meet the job-creation requirements of the EB-5 program. Program rules require that each investor’s contribution create 10 permanent American jobs in order for the investor and his or her family to qualify for green cards. The EB-5 regional centers such as Yareton are allowed to count not only direct employment at the hotel, but also employment at suppliers and tertiary jobs created by spending of hotel employees and guests.

Developers say banks and domestic funds now have stringent requirements for loans for hotel projects,

That’s the reason that another potential Tacoma hotel developer, Portland’s McMenamins, is considering tapping the EB-5 source to fund a hotel development in the former Elks temple building at 565 Broadway. McMenamins, focused on raising funds for a Bothell hotel through local investors, said that once that Bothell property is underway, it would move on to Tacoma raising funds first through local investors and, if that money proves insufficient, going abroad to seek foreign investors through EB-5.

Elly Walkowiak, the city’s development manager for the convention center hotel project, said she and city attorneys now are still drawing up the city’s proposal to Yareton.

REGION’S EXPERIENCE

Des Moines Economic Development Director Marion Yoshino said the EB-5 process, while ultimately successful, proved far slower than both the city and Yareton had hoped in raising money for the Sheraton.

If construction stays on its present schedule, it will open July 2015.

Yoshino said Yareton found investors quickly enough through the company’s contacts in China, but the USCIS processing moved painfully slow.

While the EB-5 program has provided financing for dozens of projects worth billions, it has had some notable failures.

In South Dakota, the governor recently shut down the state-sponsored EB-5 regional center after a beef-packing plant financed by foreign investors under the program shut down after only a year in operation.

In Federal Way, a proposal to build twin 45-story condo towers and another 35-story hotel and condo building at the site of a former AMC theater collapsed in 2011 after three years and seven project development extensions. Congress recently reauthorized the EB-5 program in a vote that drew support from both political parties. The Obama administration has appointed a new head of the program who has pledged to speed up processing and to focus more scrutiny on project proposals.

John Gillie: 253-597-8663
john.gillie@thenewstribune.com

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