By: Ali Brodie
EB-5 financing has grown in popularity for hotel development. As we have worked with a number of hotel developers, we are frequently asked whether EB-5 financing may be used to purchase or renovate an existing hotel.
Generally, EB-5 financing may not be used to purchase an existing and operating hotel because the EB-5 investment must create a minimum of 10 new jobs per investor. The key involves understanding what qualifies as a ‘new’ job. Jobs that already exist within an operating hotel at the time of purchase are not considered new jobs. Therefore, these jobs may not count towards the required minimum of 10 new jobs per investor.
There are several caveats to this general rule, where EB-5 financing may be used for the purchase or renovation of an existing and operating hotel, leading to creation of new jobs:
- If a hotel is purchased with plans to temporarily close for substantial renovation and expansion, new jobs may be created and counted towards the job creation requirement. For example, if renovations include increasing the number of guest rooms, adding restaurants/spas/conference facilities, or expanding existing accommodations, then the additional employees that will be added as a result of the renovation/expansion may be counted towards new job creation. It is important to highlight that employees already working at the hotel at time of purchase may not be counted towards new job creation, even if they are assigned to new job duties post renovation or expansion.
- An alternative concept that may be used for EB-5 financing involves purchasing a building, such as an apartment/condominium building or office building, and converting it into a hotel. This purchase would qualify as a new business and jobs resulting from construction, renovation, and operations, would be counted towards the job creation requirement.
- A buyer may utilize EB-5 financing when purchasing a hotel that qualifies as a ‘troubled business.’ According to U.S. Citizenship and Immigration Services, a ‘troubled business’ is defined as one that has been in existence for at least two years and has incurred a net loss during the past 12-month or 24-month period of at least 20% of the troubled business’ net worth prior to the loss. If the hotel meets the definition of a ‘troubled business’, then the jobs that are saved (through purchase of the hotel) may be counted towards the job creation requirement.
- A final option involves purchasing a hotel that closed prior to the purchase date, where the purchaser plans to re-open and/or renovate the property. For example, a buyer may purchase a previously operational hotel that was shut-down by the prior-owner due to foreclosure or bankruptcy. In this case, in order to count new jobs, the hotel must have been closed by the prior owner before purchase, and the buyer will re-open the hotel and have to engage in hiring, resulting in new jobs.