EB5 Investors Magazine - Page 24

Continued from page 21 “Finding the right balance of revenues versus expenses is the key to maximizing profitability of hotel operations.” Why is it better for a hotel to operate at the benchmark optimum average occupancy rather than a higher occupancy rate? Hotels that operate at higher than their optimum occupancy rate often find it difficult to maintain and service the hotel, because when rooms are full, they cannot be repaired and maintained in good condition. In addition, when hotel rooms are used too frequently, there is more wear and tear on furniture and soft goods such as linen and upholstery. Most importantly, when there are more hotel guests at the hotel, more employees are required to service the guests, and labor expenses increase. Labor expenses are in fact the highest percentage of all expenses of operating a hotel. Finding the right balance of revenues versus expenses is the key to maximizing profitability of hotel operations. If a hotel runs at a higher occupancy rate than the optimum occupancy rate for its local market, it usually means that the hotel could increase the rates and still maintain the optimum occupancy rate. If a local market has hotel occupancy rates in excess of its optimum occupancy rate, it typically means there is demand for new hotel room supply in the market. If all the hotels in a local market, or a segment of that market, are operating at above the optimum occupancy rate for that market, it usually means there are not enough hotel rooms in the market to satisfy existing demand. In this case, a hotel developer can show that there is a demand for a new hotel that justifies the project being built with EB-5 financing. “A feasibility analysis should be done to determine whether there is excess demand during the peak occupancy periods that could be captured with a new hotel development.” USCIS examiners and EB-5 financing providers should consider these industry standards in assessing the market demand for new hotels using EB-5 financing. If a new hotel developer has a feasibility study that shows an average hotel occupancy above the optimum occupancy rate in a given local market or market segment, that should be viewed as an indicator that there is likely demand for additional hotels in that market. A feasibility analysis should be done to determine whether there is excess demand during the peak occupancy periods that could be captured with a new hotel development. USCIS and EB-5 financing sponsors should look for these benchmarks in reviewing feasibility studies for new hotel developments. These are the hotel industry accepted standards used by hotel developers, investors and lenders for determining when a hotel is economically feasible, and the same standards should be applied by USCIS and EB-5 financing sponsors for hotel developments using EB-5 financing. ★ When hotel occupancy exceeds the optimum occupancy rate, the hotel owner should increase room rates to optimize profitability of the hotel. If a hotel runs at occupancy rates exceeding the optimum rate, the hotel owner may actually be able to earn more profit by increasing hotel rates and decreasing hotel occupancy. This is because the increase in revenues from room rates may exceed the net profit that is earned at lower room rates, after factoring in the extra costs of operating the hotel at higher occupancy rates. Catherine DeBono Holmes Bruce Baltin 22 EB5 INVESTORS MAGAZINE Catherine DeBono Holmes is the chair of the investment capital law group at Jeffer Mangels Butler & Mitchell LLP in Los Angeles, 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. Bruce Baltin is a senior vice president in the Los Angeles office of PKF Consulting USA. Mr. Baltin has had a wide diversity of experience in the hospitality and tourism industries, including market demand studies, valuations, economic and operational consulting and dealing with leases, franchises and management contracts.