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
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.