EB-5 Financing for hotel development: Using guest expenditures to calculate job creation for hotels

by Jeffer Mangels Butler & Mitchell LLP
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Hotel Lawyers on EB-5 issues. Because financing for new hotel development is still difficult to obtain, many hotel developers clients have found EB-5 financing to be a valuable source of alternative financing. One of the first things a hotel developer wants to know when considering EB-5 financing for the first time is: What percentage of the total cost of the project can be provided with EB-5 investments? The answer to that question depends entirely on the number of direct and indirect new jobs the project can be expected to create, and that is calculated based on economic models that calculate not just the jobs created directly by the hotel, but those created in the area surrounding the hotel.

One of the most important ways that hotels create new jobs is by increasing the economic activity in the local area where a hotel is located. That is one of the reasons why many cities want new hotels built in and around their downtown areas, and why retail shopping malls are also making hotels part of their projects.

For EB-5 financing, it is important that a hotel be credited with the indirect jobs created in the local area surrounding the hotel, because that will dramatically increase the percentage of financing that can be provided through EB-5 financing. In this article, my partners Catherine Holmes and Victor Shum explain the methods used by hotel developers, hotel brands and cities to determine the demand for a new hotel in a local area, and how those same methods should be used to evaluate the number of jobs created by a new hotel development for EB-5 financing.

Catherine and Victor are two of our EB-5 experts who:

  • Advise foreign investors on how to make sound investments in the US
  • Help developers structure their projects and investment opportunities to fit EB-5 and foreign investment profiles
  • Advise investors on how to form EB-5 regional centers and structure deals with developers and compliance matters

EB-5 Financing for hotel development: Use of hotel industry standards for determining job creation from new guest expenditures

USCIS has challenged EB-5 financing for hotel projects that rely on guest expenditures.

Since 2012, the U.S. Citizenship and Immigration Services (USCIS) has issued multiple Requests for Evidence (RFE) challenging the validity and reasonableness of economic job creation models for hotel projects that include jobs created from increased visitor arrivals or guest expenditures (also referred to as visitor spending), meaning expenditures of hotel guests for goods and services outside the hotel, such as at restaurants, retail and entertainment. This has resulted in high levels of uncertainty for regional centers and developers seeking to build hotel projects that include jobs from increased guest expenditures.

The current stated position of the USCIS is to accept job credit based on guest expenditures so long as the applicant demonstrates by a preponderance of the evidence with a data-based analysis that the new hotel project will result in an increase in new visitor arrivals and new guest expenditures. In this article, we explain what standards we believe the USCIS should use to determine that a new hotel will create new jobs as a result of filling demand for additional hotel rooms in a local market. Readers should note that the USCIS has been hostile to the use of guest expenditure jobs since approximately 2012, and this article is intended to suggest that it should more readily credit jobs from guest expenditures in the future where appropriate based on market data.

USCIS should accept hotel industry standards for determining excess demand for hotel rooms and resulting increases in new visitor arrivals and guest expenditures. This article describes accepted hotel industry standards for determining that there is demand for new hotel development as a result of unsatisfied demand for hotel rooms in a given location, and explains why the same methods used by hotel developers, investors, lenders and operators can and should be accepted by the USCIS as evidence that new jobs will be created from new visitor arrivals and additional guest expenditures as a result of satisfying the demand for new hotel rooms in a given location.

Demand for new hotel rooms is based on readily available data that can be measured and used as a basis for meaningful projections.

There are three key elements to are used to determine hotel demand: (1) underlying growth in population and business, (2) historical data showing high occupancy rates at existing hotels and absorption rates of hotels that recently entered the market and (3) induced demand created by new businesses, transportation facilities and other facilities in an area that create new demand for hotel rooms. Hotel analysts use readily available data on underlying growth, historical performance of existing hotels and induced demand to measure the number of new hotel rooms necessary to serve the existing and anticipated future demand for hotel accommodations in a local area. Projections are made of future growth in demand by using historical data and assumptions based on known trends in a local market. The same information is used to project occupancy rates of existing hotels and new hotels when the subject hotel is expected to open.

USCIS can and should utilize the same industry proven methodologies to determine excess or new demand for purposes of accounting for visitor spending economic impact of a hotel development funded through the EB-5 Program.

Using historical data and projecting trends in demand growth, hotel analysts determine excess, new and/or unsatisfied demand for hotel rooms (which we refer to here as "excess demand"). Spending by visitors that comprise excess demand constitutes "new money" into the local economy. Tourism industry consultants provide reports to local communities regarding the allocation of total dollars spent by hotel guests between rooms and other expenditures. This data can be used to show the total guest expenditures attributable to the excess demand captured by the hotel and accounted for in determining the full economic impact of the hotel's development and operation.

Reliable data are available to measure all three elements of demand for a hotel market analysis.

Hotel developers, investors, lenders and operators rely on readily available market data to monitor and predict trends to make projections of a hotel's future revenues and cash flows. These projections are one of the most significant factors on which each of these independent parties must rely to make their own economic decision to invest or lend millions of dollars on an asset that will usually take one or two years to build and operate for 30 years or more. The hotel industry has developed high quality data, particularly with respect to performance of existing hotels in a local market, that is generally available and considered to be industry standard by all participants in the hotel industry. These types of data include: (1) government agency data on growth in population, employment, domestic and foreign air passenger volume and other economic factors; (2) historical hotel performance data gathered and reported by Smith Travel Research, Inc. and its international affiliate, STR Global (collectively, "STR") to analyze the historical occupancy rates and room rates of the existing supply of hotel rooms in a local area. STR provides monthly, weekly, and daily STAR benchmarking reports to more than 43,000 hotel clients, representing over 5.7 million rooms worldwide. STR segments its data services into geographic areas and product types, which allows anyone who purchases the STR data to analyze the performance of a specific segment of hotels in any local market. Due to the quantity and quality of data collected by STR, STAR reports are widely recognized in the hotel industry as a key data source used in market analyses to determine excess demand.

Hotel data is used by hotel analysts to determine recent trends in the local hotel market.

Among the most important of these trends are:

  1. Absorption rates.How quickly were new hotel rooms "absorbed" into the local market, as shown by the change in occupancy levels after each new hotel was opened and added new hotel rooms to the total market supply? If historical absorption rates show that new hotels were absorbed quickly, it indicates that there was latent unmet demand before the hotels were built that was only satisfied when the new hotels were built.
  2. Trends in occupancy rates.Are occupancy rates in general rising in the market, indicating a growth in room demand in the market? If trends indicate rising occupancy rates in general, it is a signal that demand for hotel rooms is growing in the local market.
  3. General levels of occupancy rates in the market.Are the hotels generally run at high occupancy (nearing 80% or more)? If so, it indicates that the local hotel market is reaching or has reached practical capacity and cannot easily accommodate new guest demand.
  4. Occupancy rates by day of week and month.Are occupancy levels nearly full (over 90%) on specific days or months? If so, it indicates that there may be guests who are turned away on some days or during some times of the year who could be accommodated with new hotel supply.
  5. Changes in occupancy caused by economic events.Are there sudden shifts in occupancy or room rates that correspond to general economic events, such as the 2008-2009 recession? If so, have the occupancy or room rates returned to their pre-event levels? If so, it indicates that demand can be expected to continue growing in the future.

Induced demand for new hotel rooms is created by other facilities that people want or need to visit in a local area.

Another important indicator of the need for new hotel rooms is the opening, expansion or sometimes just the presence, of one or more external demand generators. Some examples of demand generators for hotels include convention centers, retail and/or entertainment venues, high tech business centers, new oil field developments, transportation facilities and transit villages, hospitals and universities.

These data are used as the basis for making projections of future demand for hotel rooms, hotel occupancy rates and revenues.

Hotel market analyses will generally account for known hotel development projects in a given local market, using information gathered from news reports and filings with government agencies such as planning commissions and building departments. Future projections are used to predict the number of new hotel rooms that are expected to be added to a local market; anticipated occupancy and absorption rates; anticipated occupancy capacity limits; anticipated room rates, and the amount of projected occupancy rates that will consist of new guests versus existing guests to a given location.

USCIS should accept the industry-proven hotel market analysis methodologies to determine excess demand and guest spending attributable to excess demand in accounting for the full economic impact of a hotel's development and operation.

This same data is frequently used by local government agencies to determine the economic impact of a specific project in a local market area, and is the most reliable available to the USCIS for determining potential future guest expenditures from a hotel project. Since these new visitor arrivals and guest expenditure predictions demonstrate "new money" being infused into the economy by a hotel's capture of excess demand, these guest expenditures are an appropriate economic impact related to the hotel's operations which should be considered by USCIS in relation to job creation.

How to find out if EB-5 financing could work for your hotel development project

Yes, EB-5 financing is real! In a time where debt is difficult to secure, it can play a meaningful role in the capital stack. But EB-5 financing must be used appropriately and its requirements (set forth by the U.S. Citizen and Immigration Services or USCIS) are very specific.

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Jeffer Mangels Butler & Mitchell LLP
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