Questions & answers

What are red flags in U.S. project financing plans that foreign investors should watch out for?

We are a Chinese developer looking for a joint venture or other equity investment in Southern California or Texas. We own hotels in Europe but this will be the first hotel deal in the United States. What are some common points of concern to look for in the U.S. developer’s project financing plan?


Answers
  • Seth Williams

    Aimbridge
    December 13, 2017

    Thank you for your good question. I have a few thoughts on this topic: One important consideration is to not always believe the "spreadsheet vapor." A talented financial modeler can make investment returns in an Excel model for just about whatever they want. So, one developer might be more conservative and show a project that has a relatively lower reported return (which he plans to exceed) while another more aggressive developer might have a similar project that shows a much higher return (which he might not expect to achieve). It is therefore important to evaluate projects on their own merits and to use the XLS models as a guide while being aware that they are not objective and only reflect one version of reality. Another issue to be aware of is that some developers attempt to charge foreign investors above-market development fees or add additional fees inappropriately. There should not be too much market growth built into the projections. My advice is that market growth should generally be upside captured by the investor and not the developer. So, if your partnership is contingent on splitting cash flow at different valuations, be careful that the projections are reasonable before calculating your potential return or find ways to protect your downside risk. For example, you might request a higher % of cash flow split until you reach a certain IRR and then the developer can share in a higher % above the target IRR if the project performance is very good. Use a trusted lawyer so that you feel confident that you actually own (legally) what you believe you are investing in. Also, make sure that you have appropriate legal rights to prevent the developer from making decisions (e.g. selling the property) in a way that does not maximize your interests. The most important advice I can give you is to find a partner that is genuinely interested to build a long-term relationship with you and will not sacrifice a short-term opportunity to cheat you for the long-term opportunity to build a great partnership together that takes advantage of each other's strengths. I am actually leading international capital markets for Aimbridge Hospitality (based in Texas) and have a lot of experience in China and Asia. We are the largest hotel operator in North America and can be helpful if you are pursuing a hotel acquisition in the US. We also frequently co-invest with our partners. I am happy to send you more information, please feel free to contact me directly.

  • Donald Wen

    WenWinSolutions
    October 26, 2017

    The most commonly overlooked/underestimated process for Chinese investors looking to enter the US market is background checks. US companies (especially if you're looking at any branded projects) are particularly wary with Chinese investments. You'll need to be prepared to disclose multiple levels of ownership structure, and don't be surprised when the individuals' background and experience is scrutinized as well.

  • Paul Guan

    Paul Hastings
    October 26, 2017

    Development loans are more difficult to get than before; lenders, without exceptions, require US-based sponsors' guarantee (completion guaranty, carry guaranty, bad boy guaranty), which makes it very difficult to get financing for projects that do not have a US joint venture partner/sponsor. Chinese developers are strongly advised to partner with a decent local player to enter into the US real estate development market, rather than doing it by themselves.