EB-5 Hotel Investments: Opportunities & Risk
In the EB-5 industry, there are many opportunities to invest in hotels. Hotels employ many people and are a great investment for developers if done successfully. If not done correctly, hotels can be a nightmare constantly losing money and eventually forcing the developer to lose all its capital. For the EB-5 investor, 2 main objectives need to be secured in order to feel confident in making the investment
- The EB-5 project will create at least 10 jobs within 2 years.
- The EB-5 project will be successful and return the investors capital at the end of the investment term.
EB-5 Hotel Job Creation Opportunities:
- Strong job creation that requires a minimal amount of capital
- Budget or business hotels, which dominate many EB-5 project offerings, traditionally can be built very quickly and with high cost efficiency. The jobs created versus the amount of capital needed can be strong making the job creation risk seem low.
- Revenues can create a large amount of job creation through RIMS-II
- The RIMS-II model rewards projects that generate strong revenues with large amounts of job creation further making hotels an attractive EB-5 investment (as long as it is successful).
Hotel Job Creation Risks
- Using Direct Jobs
- Developers whom can generate profit by limiting the number of staff will make higher profit margins. This puts the Developers goals in conflict with the EB-5 investor. The jobs also need to be “Full Time” jobs which means the worker will have benefits including insurance and other high cost items. Service industries such as restaurants and hotels save considerable cost by only hiring part time employees and avoiding those traditional cost increases. Staff whom generate significant revenues on tips or as an “independent contractor” and don’t mind the part time status again resulting in a conflict with the EB-5 investor.
- Many hotels try to record their job creation by using the direct hiring method. Hotels do have the potential to hire significant amounts of staff but there is risk in utilizing direct hiring as a job creation strategy. Hiring is traditionally in conflict with the developers main goals of profitability. If you hire more people, your operating cost goes up. Revenue per employee is an operating metric that developers strive to keep as high as possible which means they don’t want to hire if they don’t have to.
- Indirect Jobs Based on Revenues
- Indirect jobs are jobs that are recorded through measuring the economic impacts of a project are easier to document than direct hires. Using a traditional model such as IMPLAN or RIMS-II can record job creation without having to submit personal documents for each full time employee. Indirect jobs stem from 2 major sources: Spending or Revenues. Spending based job creation is more reliable as the developer is in complete control of whether to spend money or not. Revenue based indirect job creation rely’s on the market to produce those jobs. For a hotel, if their revenue assumptions are too high for the room rates, occupancy, gift shop, restaurant, tour guides, bar service or any other revenue stream they claim will create jobs, then the projects job creation will suffer accordingly. The EB-5 investor needs to be sure that the hotel they are investing in is capable of financially succeeding in order to create the jobs they claim in their economic report.
- Indirect Jobs from Construction are traditionally limited
Indirect jobs from construction are usually limited in most hotel projects because the construction period is shorter than 2 years (USCIS will only count a minimal number of jobs in this case because it is not considered Permanent employment) or Construction is not a huge factor within the projects total cost. Construction jobs have proven to be the most reliable and easily documented method of job creation but the amount is usually limited within a hotel project.
Hotel Market Opportunities
- Given that EB-5 investors traditionally don’t participate in any upside profits within the EB- investment, the opportunities to gain financially are nearly none. Although, hotels that are run successfully can earn significant rates of return on investment thus supporting the EB-5 investor’s ability to get their capital back from the developer.
Hotel Market Risk
- Economic market conditions: If the economy stops growing and companies stop spending on business travel, guests don’t travel for vacations or overall demand lessens, the EB-5 projects business assumptions may have to change significantly.
- Risk of new competition: If the market is strong, rates are up and hotels are making profits then it will surely attract competition. If a significant number of new hotel rooms are expected to come on-line this should be taken into account. Many EB-5 projects will produce a 3rd party market study and this should outline any new supply expected to come online in the new future. It would be wise to consult a separate outside consultant to verify any information in the report.
- Management Risk: Hotels are a service oriented business and require a significantly talented management staff. Many large operating companies are experienced in this aspect but it doesn’t necessarily mean that every hotel is ran by strong staff. It is very easy for unhappy customers to spread the word and it is possible that the hotels reputation may get terrible reviews.