Hotels have been a popular choice for EB-5 investors for many years. Nearly everyone has stayed at a hotel and can relate to the project. Additionally, hotel projects that complete construction and have ongoing operations produce a bounty of job creation.
However, while a prospective EB-5 investor might feel extremely confident about a hotel producing the jobs needed to secure their permanent green card, they may not know where to start when evaluating the project from a repayment standpoint. You could teach an entire course on hotel underwriting and due diligence, but let us start by highlighting three basic terms that all EB-5 investors considering a hotel project should be familiar with.
Occupancy Rate
A hotel’s occupancy rate is the percentage of available rooms in a hotel that are occupied by guests. It is calculated by dividing the number of rooms sold by the total number of rooms available. For example, a hotel that has 100 total rooms with 70 of them being occupied by guests has a 70% occupancy rate.
While occupancy rates can fluctuate due to seasonal and other factors, the higher the occupancy rate the more likely a hotel will be financially successful. Hotels that have a higher occupancy rate are often able to charge higher room rates.
Investors that are considering an EB-5 hotel project can look at the occupancy rate of comparable howls in the area to help determine what a reasonable occupancy rate for the hotel would be. The project sponsor will likely provide a valuation report from a third-party such as HVS that will contain occupancy rate statistics.
Average Daily Rate
The Average Daily Rate (ADR) is the average price a hotel charges for a room per night. It is calculated by dividing the total room revenue by the number of rooms sold.
By looking at the project’s projected ADR in conjunction with its projected occupancy rate, investors can start to gain an idea of the revenue the hotel should produce. The potential investor can begin to ascertain whether the hotel will have the revenue to pay its expenses and interest on the EB-5 loan.
RevPAR (Revenue per Available Room)
This metric measures the revenue a hotel generates per available room, whether it is occupied or not. It is calculated by multiplying the average daily rate (ADR) by the occupancy rate or by dividing total room revenue by the total number of rooms available.
As with ADR, RevPAR is a useful tool in projecting a hotel’s revenue stream. Many hotels, especially larger hotels, will have other revenue streams such as renting out event space, but looking at occupancy rate, ADR and RevPAR is a good starting point for reviewing a hotel’s financial prospects.
Hotels with strong occupancy rates, ADR and RevPAR should be in solid position to meet expenses, pay EB-5 loan interest payments and refinance or sell at a price that will repay the EB-5 loan and any other construction financing.