Closed Casino Banks on U.S. Program

Closed Casino Banks on U.S. Program

A closed Las Vegas landmark that was a Rat Pack hangout in its glory days may get a makeover through a federal program that offers green cards to foreign investors.

Los Angeles nightclub operator and hotelier Sam Nazarian is set Wednesday to begin construction on a $415 million renovation of the old Sahara casino and hotel, which once entertained such guests as Sammy Davis Jr., Frank Sinatra and Dean Martin.

Mr. Nazarian has been trying to finance the redevelopment since 2007, when he and partner Stockbridge Capital Group LLC purchased the property on the Las Vegas Strip from Gordon Gaming Corp.

Mr. Nazarian and his partners are now able to move forward because they believe they are close to coming up with as much as $215 million—or 52% of the overhaul’s cost—from the immigrant investment program known as EB-5. The program, which awards green cards to foreigners who make job-creating investments, has become increasingly popular among hospitality developers seeking financing during a down time for new construction.

Mr. Nazarian’s SBE Entertainment Group says it already has $150 million in commitments from Chinese and Thai citizens and other would-be immigrants who each agreed to make $500,000 debt investments in the project in exchange for a green card. None of the money is available at this point, but SBE will be free to use much of it once a handful of the foreigners get their initial visas from the U.S. Citizenship and Immigration Services.

If all goes according to plan, the Sahara, to be renamed the SLS Las Vegas, would become one of the first EB-5-financed casinos. At least one other in Las Vegas—the closed Lady Luck downtown—is seeking $120 million in EB-5 funds for a renovation and rebranding initiative.

The EB-5 program has been around since the early 1990s, but its use is now increasing because more-traditional forms of financing are more difficult to obtain. Hotels, in particular, are popular choices for EB-5 investors because they most often produce the targeted number of jobs needed—in desk attendants, housekeepers, valets and managers—for the investor to keep their visas, according to Jim Butler, a partner in Los Angeles law firm Jeffer, Mangels, Butler & Mitchell LLP, which advises hoteliers on EB-5 financing.

“Every couple of years there’s a new structure everyone’s talking about, and now it’s EB-5,” says Anthony Capuano, Marriott International Inc.’s  MAR +1.24% head of development. Marriott has done more than a dozen deals to franchise or manage hotels for third-party owners who have used EB-5 funds.

Hotel developers and government officials trying to spur development say EB-5 helps create jobs. But others criticize the program because it gives rich foreigners advantages not available to poorer ones. Also, hotel competitors worry that the new projects created by the program will put downward pressure on room rates and occupancies.

Jon Bortz, chairman, president and chief executive of Pebblebrook Hotel Trust, PEB +3.01%  which owns 26 U.S. hotels, called the EB-5 program “a travesty” in that it allows some foreigners to buy their visas while less-affluent applicants can’t. He added that hotels financed with EB-5 sometimes add rooms to markets when demand doesn’t justify them. “The financing is cheap because it’s from people who aren’t looking for a return on their investment,” he said.

There were 7,641 visas issued through the EB-5 program in 2012, a record year. The figure was 3,463 in 2011 and only 502 in 2006, a year when financing was plentiful from other sources.

Statistics on the number of hotel projects that are getting EB-5 funds aren’t available, but people in the business say it is on the rise. David Loeb, a hotel analyst for Robert W. Baird & Co. estimates that hotel projects financed at least in part with EB-5 could account for as much as a quarter of a percentage point of the industry’s tepid growth this year.

Developers haven’t built many hotels since the recession, with U.S. room-supply growing by only 1.5% in 2010, 0.8% in 2011 and 0.9% last year, according to Lodging Econometrics. The analysis firm predicts that growth rate will increase to 1.1% this year.

Major chains are using the EB-5 program more frequently. Hilton Worldwide Inc. executives said that roughly 3% of the 560 Hilton-branded hotels currently under development in the U.S. are financed at least in part with EB-5 proceeds.

Under the program, EB-5 investments can either be debt or equity and range in size between $500,000 and $1 million, depending on the unemployment rate in the project’s location. Investors get a visa upon making an investment. They get permanent immigration status, known as a green card, if they can document that at least 10 jobs were created after two years.

Applicants also are subject to standard background checks. They generally get the principal back on their investments in five years but receive very little return because of the numerous lawyers and other middlemen involved in the process.

Hotel executives say that the projects getting funded by EB-5 would be financially viable without the program. “None of these are magical solutions to finance bad deals,” said Mr. Capuano of Marriott. “The ones we’ve done we’ve been confident about underwriting.”

Still, the structure has become one way to finance projects that otherwise wouldn’t get backing from conventional lenders, or at least at a much lower cost. Since the recession, most developers have had to put up at least 50% of a given hotel project’s cost. Now, developers of some projects are covering more than 60% of the project’s cost entirely with EB-5 proceeds, allowing them to take bigger risks.

In Las Vegas, Mr. Nazarian and Terry Fancher, a Stockbridge executive managing director, have struggled to find affordable financing for the Sahara project partly because a glut of new rooms have kept rates down. But they insist the SLS Las Vegas will draw new visitors who are already fans of Mr. Nazarian’s night life and hotel empire in other parts of the country.

The developers said they are confident some of the visas will be approved soon. Stockbridge is confident enough that it has put about $24 million into the project to start construction.

Mr. Fancher said the group underestimated how much it might be able to raise from foreign investors. Recently, in a separate project—a mixed use development in Southern California—Stockbridge raised $200 million in just four months, he said.



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