EB-5 Financing for Hotel Development: Use of Stabilized Hotel Revenues for Determining Job Creation from New Hotel Development
USCIS has challenged EB-5 financing for hotel projects that rely on stabilized revenues as the basis for determining job creation. 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 rely on the revenues anticipated to be generated after the second or third year of hotel operation, instead of the revenues generated in the first or second years of hotel operation. In the hotel industry, a new hotel’s future value is based on its anticipated “stabilized revenues”, meaning revenues anticipated after the first two or three years of hotel operation. The USCIS has instead used revenues from the first one to three years of a new hotel’s operation, which are referred to as the “ramp-up phase” of a hotel’s operation. However, using revenue predictions from the ramp-up phase of hotel operations does not reflect the full economic value or job creation potential of a hotel development. In this article, we explain why we believe the USCIS should use stabilized revenues in evaluating the job creation from hotel projects, for the reasons we discuss below. Readers should note that the USCIS has not accepted the use of stabilized revenues as of the date of this article, and this article is intended to suggest that it should do so in the future.
Stabilized hotel revenues are the appropriate measure for calculating the full economic impacts (including job creation) created by hotel projects. Hotel revenues generally ramp-up over a period of three years and reach a plateau at the fourth full operating year, after which the hotel typically retains the same occupancy rates during its 20 to 30 year economic lifespan. The delay in reaching stabilized revenues can be caused by a number of reasons, including:
- Partial first year. The first year of operations is often only a partial year, because the hotel is opened in the middle of the year, and therefore does not reflect a full 12 months of operation;
- Time to develop market awareness. The hotel will be required to familiarize potential guests with the hotel’s presence in the market, since guests are usually from outside the area and may not know that a new hotel has opened for some time;
- Time to develop online presence. In an era where hotel guests often book through internet websites using guest reviews to locate potential hotel choices, a new hotel may not have reviews for some time after opening, and the reviews that are posted may reflect issues or problems experienced by guests due to the fact that the hotel has only recently been opened;
- Group booking lag time. Hotel bookings of groups are often made years in advance, so new hotels will take two to three years to book group business.
For these and other reasons, accepted hotel industry practices in forecasting hotel revenues generally project that the first partial year and up to the first three full years of hotel operations will generate lower annual revenues than the hotel will generate beginning in the fourth full year of operations.
The USCIS regulations do not require a two year time period for job creation in a project sponsored by an approved regional center. USCIS regulations make a distinction between substantiating the job creation requirements for direct EB-5 investments and regional center sponsored EB-5 investments. Direct EB-5 investments require evidence of actual employment such as tax records and Employment Eligibility Verification Forms (Form I-9) s. EB-5 investments through a regional center, however, are required to produce evidence that the investment will create full-time positions, directly or indirectly, through reasonable methodologies. In its May 30, 2013 policy memorandum, the USCIS has taken the position that the two year period in which jobs must be created is deemed to commence six months after the adjudication of the Form I-526 petition. This policy does not work for larger hotel projects, larger fund raises and projects with long project schedules since EB-5 investors could be filing their I-526 petitions one or more years apart which results in a moving job creation timeframe under the existing policy. There is no regulatory requirement that jobs created through a regional center investment be created within two years. In fact, the USCIS recognizes that many economic models have no temporal assumptions, and are therefore presumed to meet the requirements for job creation. With respect to hotel development, a reasonable methodology of determining direct and indirect job creation should be based on accepted hotel industry practices, and should not be subject to imposed deadlines that are not required by law or regulations and not appropriate for the industry in which the jobs are created.
The USCIS should consider the nature of the hotel industry in determining a reasonable methodology for determining the jobs created as a result of a hotel development. The USCIS recognizes in its internal policies that it is appropriate to consider the nature of the industry when making a determination of the time period within which jobs will be created. With respect to a hotel development, it is reasonable to expect that the EB-5 investor’s funds will be fully invested well before the end of a two year time period, and the hotel will likely be completed and opened within two years of the date the investor’s funds are used, barring any unusual circumstances. It is also reasonable to expect that the hotel will undergo a ramp-up period for the first three years of operations, followed by a long stable period of revenues lasting 20 to 30 years. Hotel investors and lenders use stabilized revenues as the appropriate measure of a hotel’s economic performance. Therefore, the USCIS should accept the same standard measurement as part of a reasonable methodology for projecting job creation with respect to a new hotel development using EB-5 funds.
A new hotel can be expected to create total jobs based on the hotel’s stabilized revenues within a reasonable and demonstrable period of time based on accepted hotel industry standards. If a new hotel is anticipated to be built within a period of two years, it is reasonable for the USCIS to conclude, at the I-526 petition stage, that the hotel will, over most of its economic life, have a level of revenues generally equal to the “stabilized revenues” forecast in accordance with generally accepted hotel industry practices for the fourth full operating year of the hotel. As previously discussed, the revenues for the period before the fourth full operating year are not considered to be representative of the long term revenues of a hotel. The USCIS should adopt the hotel industry standard for determining hotel revenues for the following reasons:
- Stabilized revenues are more reflective of total job creation that may be expected from a hotel development. The stabilized hotel revenues are projected to be earned during most of the economic lifespan of the hotel, which is typically a 20 to 30 year period, as opposed to the lower revenues typically projected for the ramp-up period of operations. It is reasonable for the USCIS to use the projection of revenues that are considered representative of operations throughout the long term of the project’s life, rather than the initial ramp-up period.
- Hotel development has a relatively high degree of predictability and virtually all hotel projects include a “ramp up” period of two to three full years followed by a “stabilization” period commencing in the fourth full year of operations. Among hotel developers, investors, lenders and operators, the hotel business is considered to have a relatively high degree of predictability, including the expected three-year ramp up period. For that reason, it is generally accepted hotel industry practice to include a three year ramp up period followed by a stabilization of revenues that will continue for a long term beginning in the fourth full year of operation.
- Hotel industry norms generally use lower revenue projections during the “ramp up” period. Hotel projections should be expected to include lower projected revenues during the first three full years of operation, to account for the factors anticipated during the ramp up phase of a new hotel. It would be inconsistent with accepted hotel industry practices, and would penalize the hotel industry as a whole, to treat revenues projected during the ramp up phase as the relevant standard to apply for EB-5 job creation purposes, because that would not account for the full economic impact and job creation for every EB-5 hotel project reviewed by USCIS.
- Hotel developers, investors and lenders, hotel brands and governmental agencies use “stabilized revenues” in making their economic decisions to support the development of a new hotel in a local market. All of the economic stakeholders in a hotel development use stabilized revenues as the basis for making their decision whether to invest in a hotel and whether the hotel will provide them with a return on their investment. This includes lenders who offer small business loans to hotel developers guaranteed by the U.S. Small Business Administration, and governmental agencies that “invest” in hotel development through subsidies and economic incentives, including tax increment financing and transient occupancy tax rebate programs. Economic stakeholders are primarily interested in the long term economic impact of a hotel on their economic interests in the hotel, and projected stabilized revenues are the best measure of the long term economic impact of a hotel. The USCIS is also primarily concerned with the long term economic impact of a project on permanent jobs, and should therefore use the same standards as other economic stakeholders in a hotel development.
The USCIS should review the projections of stabilized hotel revenues at the I-526 petition stage to determine that the projections are based on reliable data and prepared in accordance with standard hotel industry methodology. Like other economic stakeholders in a hotel project, the USCIS should review at the I-526 petition stage a hotel’s projected stabilized revenues to determine its likely long term performance. If projections are based on reliable data and have been prepared in accordance with hotel industry standards, that should be evidence that the hotel can reasonably be expected to cause the creation of jobs that correspond with the projected revenues. Since the stabilized revenues are considered the best measure of a hotel’s economic performance by economic stakeholders in a hotel project, it is reasonable for the USCIS to use stabilized revenues as the most representative data on which to base estimates of job creation.
Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.
Victor T. Shum is the Chief Executive Officer of the Advantage America EB-5 Group, Advantage America California Regional Center, LLC and Advantage America New York Regional Center, LLC. He was previously a corporate and securities partner at the law firm of Jeffer Mangels Butler & Mitchell LLP. Victor has significant experience advising clients on cross-border transactions, including representing investors and companies in inbound and outbound technology and real estate transactions with China, and representing high-net worth individuals, real estate developers and USCIS regional centers with the EB-5 immigrant investor program, a topic in which he is a frequent publisher and speaker.