United States: EB-5 Financing For Hotel Development: Using Guest Expenditures To Calculate Job Creation For Hotels

Last Updated: June 24 2013
Article by James Butler, Jr.

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
by
Catherine DeBono Holmes and Victor T. Shum

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.

My partners, Catherine Holmes and Victor Shum, have written some great articles on various key aspects of the EB-5 Immigrant Investor Visa Program and regularly help hotel developers take advantage of this opportunity where it is appropriate. We invite you to take a look at the free information on EB-5 financing for hotel development and to call us if you would like to discuss it further.

To learn more, go the HotelLawyer.com. Scroll down on the home page until you see "EB-5 financing" on the right side and click there. You will then see all the EB-5 articles we have posted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
James Butler, Jr.
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.