Articles Posted in Hotel Investments

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Recent posts on the Investment Law Blog have focused on Opportunity Zone Funds, a new source of financing for real estate development projects, created by the Tax Cuts and Jobs Act of 2017.

While these articles have focused broadly on real estate investment, I recently spoke with Bryan Wroten of HotelNewsNow, specifically about hotel development and Opportunity Zone investment.

His article, “What opportunity zones mean for US hotel development,” describes both the opportunities and challenges that hotel developers face when it comes to taking advantage of Opportunity Zone development.

The article also describes how the Peachtree Development Group is taking advantage of opportunity zones for viable projects that were already in their pipeline.

Read the full article here.

— Catherine DeBono Holmes


Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years.  She has also worked as a senior member of the JMBM Global Hospitality Group and JMBM Chinese Investment Group. Within the Investment Capital Law Group, she helps real estate developers and business owners, brokers, investment advisers and investment managers raise and manage investment capital from U.S. and non-U.S. investors. In the last ten years, she has represented over 100 real estate developers obtain financing through the EB-5 immigrant investor visa program for the development of hotels, multi-family and mixed use developments throughout the U.S. She also advises real estate developers on Qualified Opportunity Zone investments. She has also represented private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues. For the last two years, she has been named as one of the top 25 securities lawyers in the country by EB5 Investors magazine. Contact Cathy at or +1 310.201.3553.

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JMBM’s Investment Capital Law Group is pleased to announce that Catherine DeBono Holmes, Chair of the Group, will participate as a panelist during the webinar, “How can EB-5 issuers make the most of the Opportunity Zone program?” sponsored by NES Financial.

Last year’s tax reform created massive incentives for holders of unrealized capital gains to put their money into “Opportunity Zones” (OZs) — economically distressed census tracts across the US. The list of Opportunity Zones was finalized in June 2018, with 8,700 census tracks designated – 11% of the country.

The Opportunity Zone program is likely to grow into a sizeable source of development funding over the coming years. The total available market is estimated around $6 trillion. The question is: How can your business benefit?

The webinar will be of interest to regional center operators, issuers and project managers, immigration and securities attorneys, and economists and business consultants.

Date: Thursday, September 20, 2018
Time: 11:00 AM PT (2:00 PM ET)

No registration fee is required. Register here.

Topics that will be covered include:

  • An introduction to Opportunity Zones
  • Requirements to set up an OZ Fund
  • Overlap of EB-5 Targeted Employment Areas and Opportunity Zones
  • Modifying EB-5 projects to welcome OZ investment
  • Emerging best practices in operation and administration of OZ Funds

We invite you to join us for this free and informative webinar. Register now!

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Hotelier Roadmap to EB-5 Financing for New Hotel Construction, Expansion or Renovation: Ten Steps to a Successful EB-5 Offering

This article was first published in EB5 Investors Magazine.

The EB-5 investor visa program allows non-U.S. persons to invest $500,000 (or $1,000,000) in a business that is expected to create at least 10 new permanent jobs per investor, and to obtain a conditional visa upon review and approval by the United States Citizenship and Immigration Service (“USCIS”).  Hotel projects are one of the best investment categories for EB-5 investors, because they tend to create more operating jobs than many other businesses, they are investments in real estate, which tend to be more stable in value than some other forms of investment that qualify for EB-5 financing, their business model is easy for investors to understand, and they are often operated by or under franchise licenses with hotel brands such as Hilton, Hyatt, Intercontinental, Starwood and Wyndham that are known around the world by potential EB-5 investors.

For those hotel developers seeking to access EB-5 financing, here are our recommended steps on the road to a successful EB-5 financing:

1.  Determine if the project has the necessary characteristics to successfully raise financing through the EB-5 program. The sponsors of EB-5 investment offerings are always looking for good new projects, but the market is competitive, and to be successful, a project will need to have some key markers that demonstrate the project will be attractive to EB-5 investors. It is not necessary that all of these elements exist immediately, but the more of them that do exist when a developer first approaches potential EB-5 sponsors, the better the developer’s chances will be of attracting the most experienced and successful EB-5 sponsors:

  • Project preliminary work —  The developer should have completed a significant amount of the preliminary project work, such as obtaining a hotel market feasibility study, preparing preliminary plans and budgets for the project, obtaining franchise approval or a hotel management agreement or letter of intent, acquiring the property and determining zoning and permit requirements.
  • Developer with Financial Strength and Track Record – The most successful EB-5 projects are those with experienced and financially strong developers.  EB-5 sponsors and investors alike want projects run by strong companies with a history of success in developing similar projects.
  • Developer Equity Commitment – EB-5 sponsors and investors favor projects where the developer has a financial commitment of its own equity invested in the project – 20% equity or more is expected.  There are some EB-5 projects where the developer has less than 20% equity in a project, but these are often more difficult to sell to investors unless there are other counterbalancing factors.
  • Commitments to Fund Entire Project Cost– EB-5 investors know that the success of a development will often depend on the developer’s ability to obtain a senior loan or other financing in addition to EB-5 capital, and having a committed senior loan or other financing shows that other lenders or investors have underwritten the project and determined that it has the potential to succeed.  If a developer does not have committed capital, it may help to show that the developer is actively seeking this financing and has obtained some indications of interest.

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By Catherine DeBono Holmes and Bruce Baltin

This article was first published in the Winter 2015 edition of EB5 Investors magazine.     

For EB-5 financing of hotel projects, proving that new jobs will be created requires evidence that there is a market demand for an additional hotel in the local market. The basic requirement for any EB-5 financing is to show that a project will create at least 10 new jobs per EB-5 investor. For new hotel projects that use EB-5 financing, it is necessary to show that the new hotel is not merely taking jobs from existing hotels in the area, but actually creating new jobs. That requires evidence that there is enough guest demand in a local market to allow a new hotel to open without causing existing hotels in the area to lose occupancy. If the project owner can demonstrate that the demand for hotel rooms already exists, it can show that opening a new hotel will create new jobs, without taking away the jobs of the existing hotels in the area. How can a project owner demonstrate that this demand for new hotel rooms exists?

Hotel valuation experts have developed a method to determine market demand in a local market that can be used for EB-5 financing. Hotel consultants such as PKF and HVS have developed standards for determining what they consider the natural optimum average occupancy rate for each local market, which we will call the “optimum occupancy rate.” The optimum occupancy rate refers to the percentage of occupancy that will maximize the profitability of the hotel, based on the market conditions in that local market rate. If the average occupancy is 80 percent but the optimum occupancy rate is 70 percent, hotel consultants conclude that there is a demand for hotel rooms that is not being met, because more people are staying in existing hotels in the market than the rate that would allow maximum profitability for all hotels in the market. This article explains how hotel consultants set the optimum occupancy rate for each local market, and why an average occupancy rate in excess of the optimum occupancy rate indicates a demand for additional hotels.

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Four years after the collapse of the traditional financing markets for new hotel developments, most hotel developers are still struggling to find the necessary financing to fill the capital stack required to build new hotels. Even for developers with access to construction loans, loan to cost ratios are hovering at 50%, and equity providers expect returns in the mid-teens to the mid-twenties. As a result, the “feasibility gap” between a typical project’s cost and its value is still too high, and hotel developments around the country are stalled.

Meanwhile, most cities and states are no longer providing public dollars to support private development. In California, for example, all community redevelopment agencies were abolished by the California legislature in 2011, and $1.7 billion that had been earmarked for redevelopment projects by approximately 400 redevelopment agencies state was instead required to be returned to state and local governments to fill operating budget deficits.

In other states as well, many governmental entities have no public dollars available, or are unwilling to use public dollars to support hotel development. Even in those areas where government financing is available, the time required to obtain approval is usually much longer than anticipated – often taking two to five years or more. There is also the risk that during that time mayors and city council members will change, and they may not support the projects approved by the prior administrations. In this economic climate, some hotel developers around the country are assembling multiple alternative financing sources for their hotel projects, such as EB-5 immigrant investor financing, new markets tax credits, historic tax credits (for renovation of historic buildings), and other forms of public incentives. Continue reading →

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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. Continue reading →

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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 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. Continue reading →

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What is due diligence?

Particularly in the context of a hotel acquisition, “due diligence” generally refers to the investigation conducted by a potential buyer of the hotel that is the target of the acquisition. The investigation covers both the physical asset (i.e. the hotel structures, parking, systems, equipment, inventories) as well as the operating business conducted at the hotel facility, and the relevant markets and environment.

The purpose of the investor’s due diligence is to understand and evaluate the potential investment in the hotel. It is the analytic review of the real and personal property, the business operations and potential of the specific hotel. This effort all seeks to validate the investor’s reasons for buying the hotel and to avoid surprises after the purchase has closed. Continue reading →

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Buying or selling a hotel operating under a brand name requires special attention – the existing franchise agreement will be assumed, terminated or modified in some way, which will have a significant and lasting impact on the value of the hotel. The JMBM Global Hospitality Group® has represented buyers and sellers of all of the major, and many minor, branded hotels and have developed practical solutions for our clients to achieve a smooth transition of the franchise from the seller to the buyer, or to change the franchise if that suits the buyer’s goals. Knowing when and how to work with the franchisor as part of the transaction can save both parties tens of thousands of dollars, avoid major disruption of hotel operations upon the ownership transfer and increase the ongoing value of the property itself.

In this article, we some of our experience in dealing with the key hotel franchise issues that need to be addressed during the negotiation and transition process.

The first thing you need to know: the franchise does not follow the property – it terminates when the hotel is sold.

Some buyers and sellers of a hotel believe that the hotel brand can be sold along with the hotel; that is not true. The existing franchise agreement terminates when a hotel is sold and the buyer has to enter into a new franchise agreement if the buyer wants to retain the brand. Franchises are personal agreements between the franchisor and the franchisee, and virtually all franchise agreements include restrictions on the ability of a franchisee to transfer the franchise. This leads to two key concerns. First, unless a franchisee has negotiated otherwise with the franchisor, the sale of the hotel may cause the termination of the franchise agreement, making the seller obligated to pay a significant termination fee. While most franchisors will waive the termination fee on an approved sale, this fact has to be addressed. Second, a franchisee must make independent arrangements with the franchisor to continue to operate the hotel under the same brand (if it chooses to do so), starting on the day the transfer takes place. Continue reading →

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Thank you to my partner, Marta Fernandez, a Labor & Employment lawyer at JMBM, who is my co-author for this article. In the article, we will share some of our hotel-specific insights concerning the key labor and employment issues that the seller and buyer should address as part of their negotiation of the hotel purchase and sale agreement. We will also discuss some of the important decisions that the hotel buyer must make with regard to hotel employees. In addition, we will highlight some of the special issues that will apply to any sale of a hotel that has a unionized workforce in place at the time of the transaction.

The first thing you need to know: Who Is the “employer”?

Is the hotel owner or hotel operator the “employer” of the workers at the hotel. Where the hotel is managed by anyone other than the owner, the answer will usually be in the hotel management agreement. If the seller is the employer, then the employment issues can be worked out between the seller and the purchaser in the purchase agreement. If the hotel operator is the employer, the buyer will also need to work with the operator on employment termination and transfer matters.

Because of the WARN Act notification requirements (discussed further below), the seller and buyer will want to make sure that these issues are decided more than 60 days prior to the intended effective date of the transaction.

A key decision for the buyer: Who should be the employer after the closing?

Outside the U.S., the hotel owner is usually the employer of all hotel workers. However, in the U.S., the hotel operator is probably most frequently designated as the employer. Some hotel owners believe that it is always better to have the hotel operator be the employer of the hotel employees, because the operator has labor experts necessary to handle employment matters and the owner does not. Some owners also believe that if the hotel operator is the employer, then the owner will not be liable for wage and hour claims, harassment, discrimination and other labor law violations at the hotel. Continue reading →