EB-5 and the hospitality industry have a long history. EB-5 has been used by many developers as senior debt, mezzanine debt, or equity to complete hotel and resort projects across the country. EB-5 represents an interesting and potentially lower-cost piece of the capital stack, especially when traditional mezzanine debt is difficult to obtain or too costly to complete a hotel project. EB-5 mezzanine financing also can help hotel developers reach a higher combined loan-to-value ratio. When structured and planned correctly, EB-5 can be a great match for hospitality projects. Below is a review of the primary documents that must be prepared for a hotel-based EB-5 petition along with the top issues affecting hotel EB-5 cases today.
The Matter of Ho business plan
The business plan should always meet the requirements of Matter of Ho. It should go into as much detail as possible about the location of the hotel, the number of keys, the various amenities at the hotel, the marketing strategy, and the competing and comparable hotels in the area.
The plan also should discuss the capitalization for the hotel along with the status of the other parts of the financing and when they will enter the project. The construction budget used to calculate the construction jobs must be in the business plan, and inputs for the economic model must always be laid out in the business plan. A detailed multi-year financial pro forma must be in the business plan, along with a complete discussion of the calculations for RevPar, average daily rate (ADR), and the occupancy rate. The plan also should cite the source of these calculations and any financial assumptions.
Additionally, business plans must clearly discuss the hotel brand and the material agreements in place for the hotel brand and management. It is best if both the franchise and management agreements are executed prior to filing any EB-5 petitions. If they are not, the business plan should discuss the timelines for executing the franchise and management agreements and letters of intent with the franchisor, and the manager should be included with the EB-5 petitions.
The economic report
The economic report is a primary document for any EB-5 case through a regional center, as it calculates the number of jobs that will be created by the project. Most EB-5 petitions for hotels will create jobs through construction and then operations.
Construction jobs are relatively easy to calculate using the EB-5 eligible hard costs (less contingencies) plus the EB-5 eligible soft costs (engineering, architectural and legal). Operations jobs for the project are usually calculated using hotel revenues. The revenues for this purpose are taken from the hotel’s pro forma found in the Matter of Ho business plan. For the purpose of developing revenues for the business plan and the economic report, revenues are usually calculated by RevPar—revenue per available room. RevPar is calculated by multiplying the hotel’s average daily room rate (ADR) by the hotel’s occupancy rate. The ADR and the hotel’s occupancy rate always must be found in the Matter of Ho compliant business plan.
A common issue arises from the use of operations jobs resulting from the restaurants, bars, and nightclubs operating at the hotel or resort if the hotel does not own and operate those establishments. USCIS may view these as “tenant” jobs and apply the February 2012 Tenant Occupancy Guidance to those jobs. However, if the hotel or resort is the owner and operator of the restaurant, bar, or nightclub, those jobs can be included in the overall operations jobs calculation.
Another hot issue in hotel economic reports is whether the operations jobs can be counted at all if the construction timeline is protracted. USCIS has imposed an arbitrary rule that jobs must be created within two and a half years of the I-526 petition approval per the December 2009 Neufeld EB-5 Memorandum. While this is not law, it is an adjudicatory standard used by USCIS in the EB-5 adjudication process. Depending on when the construction of the hotel starts and how long the construction takes for the hotel, the timeline must be examined to see if operations jobs can be used at all. For example, if construction will not start until the EB-5 money comes into the project, and construction will take 30 months, then the economic report may only be able to use construction jobs because operations will not occur within two and a half years of I-526 petition approval. If construction is starting with other financing (such as developer equity or bridge financing) or construction is only 24 months for example, the economic report may be able to use the first year of revenues if operations will start within two and a half years of I-526 approval. Stabilized occupancy that may occur some four to five years in the future is almost always outside the USCIS-imposed job creation timeline.
Visitor spending is another input that can be used by an economist to calculate job creation in the hotel context. The economist will use a study (usually from a convention/visitor’s bureau) that will calculate the average amount of money spent per night by visitors to the area. The economist will then multiply that number by the occupancy rate of the hotel to determine the revenues the hotel guests will generate in the area through visitor spending. The visitor spending revenue then is used as an input to the economic model to calculate additional job creation in and around the area. Visitor spending has received much scrutiny. USCIS wants the hotel to demonstrate that the hotel is the reason why visitors are coming to the area, but it is very hard to show this causation in most cases. The decision on whether to use visitor spending in the job creation calculation requires a very fact-specific inquiry for each case in which it is considered.
The feasibility study
It is always important to provide independent data to support key facts in the Matter of Ho business plan. A hotel feasibility study should support the RevPar, ADR, and occupancy rates for the hotel, which are then used to create the revenue projections in the business plan, which, in turn, are used by the economist to calculate operations jobs. HVS regularly conducts hotel feasibility studies for EB-5 purposes, which gives background and support for the data contained in the Matter of Ho business plan. A best practice is for the assumptions in the business plan, including RevPar, ADR, occupancy rates, and revenues for the hotel, to come directly from the feasibility study.
When you follow these key points, EB-5 can be an integral piece for your next hotel project.