Cornell Study Analyzes Effects of EB-5 Financing on Hotel Development
A federal program that encourages foreign residents to invest in U.S. projects can create distortions in the hotel development cycle, according to a study published by the Center for Hospitality Research (CHR) at Cornell University. The program, known as EB-5, offers U.S. citizenship to foreign residents whose investments create jobs in the United States. Hotel developers have taken advantage of the EB-5 program's relatively inexpensive capital, as detailed in the study, "Creative Capital: Financing Hotels via EB-5," by Arian Mahmoodi and Jan A. deRoos. The report, which is published in association with the Center for Real Estate and Finance, is available from the CHR at no charge.
Based on Mahmoodi's intensive thesis research, the report explains how EB-5 allows foreign nationals to invest as little as $500,000 in a U.S. enterprise, in consideration of potentially receiving permanent residency in the United States—provided the investment creates a specified number of jobs. The report includes a simulation of a hotel development, illustrating how EB-5 financing can more than double the developer's profit.
"This program has attracted considerable attention from foreign nationals, particularly those residing in China, and we've seen considerable recent growth in investment volume," Mahmoodi explained. "But the market for this financing is opaque and inefficient. Without proper checks and balances, we believe that the availability of EB-5 financing may encourage development of speculative hotel investments." A graduate of the Cornell University School of Hotel Administration, Mahmoodi is now a financial analyst at Wells Fargo's Hospitality Finance Group in Los Angeles. He is also a CHR Fellow.
"Renewal of the EB-5 program is currently being discussed in Congress," added deRoos, who is the HVS Professor of Hotel Finance and Real Estate at the School of Hotel Administration and supervising faculty member for Mahmoodi's thesis. "Although it certainly has attracted foreign investment, the program has considerable potential for fraud. As we demonstrate in the report, it also could encourage marginal hotel projects."
About the Center for Hospitality Research
The purpose of the Center for Hospitality Research is to enable and conduct research of significance to the global hospitality and related service industries. CHR also works to improve the connections between academe and industry, continuing the School of Hotel Administration's long-standing tradition of service to the hospitality industry. Founded in 1992, CHR remains the industry's foremost creator and distributor of timely research, all of which is posted at no charge for all to use. In addition to its industry advisory board, CHR convenes several industry roundtables each year for the purpose of identifying new issues affecting the hospitality industry.
Center Members: Accenture • Access Point Financial, Inc. • Barclaycard US • Cvent • Davis & Gilbert LLP • Deloitte & Touche USA LLP • DerbySoft • Four Seasons Hotels and Resorts • Fox Rothschild LLP • Hilton Worldwide • Host Hotels & Resorts • Hyatt Hotels Corporation • IDeaS Revenue Solutions • InterContinental Hotels Group • Jumeirah Group • Marriott International • NTT DATA • Preferred Hotels & Resorts • priceline.com • PwC • The Rainmaker Group • RateGain • ReviewPro • Revinate • Sabre Hospitality Solutions • STR • Taj Hotels Resorts and Palaces • Tata Consultancy Services • Wipro EcoEnergy • Wyndham Hotel Group
