{468x60.media}
Ms. Cadwalader

Hospitality Law

Yearning for Yuan - Chinese Investment in the U.S. Hospitality Sector

By Lynn K. Cadwalader, Partner, DLA Piper

The news has been full of headlines recently heralding the significant increase in Chinese investment in the United States. Chinese companies are increasingly looking to the United States as a place to invest in property or to set up business in order to take advantage of depressed asset pricing and "Buy American" provisions in government contracting, avoid trade barriers, and to allow better service of U.S. customers by establishing manufacturing plants in the U.S. Although there have been several high profile examples where the Committee on Foreign Investment in the United States (CFIUS) and the Foreign Investment National Security Act (FINSA) have forced Chinese companies to abandon their investment and acquisition plans in the U.S., these cases presented unique circumstances relating to national security concerns. The reality is that the United States is one of the world's economies most open to foreign investment, including from China. Further, with unemployment hovering at 10 percent, the U.S. government has put aside concerns about unfair Chinese competition and rolled-out the red carpet for Chinese investors, hoping that their investment will help maintain and create jobs in the U.S.

Chinese Appetite for Real Estate Investment

The Chinese government has evidenced an appetite for investment in U.S. real estate through Chinese Investment Corp. (CIC), China's $300 billion sovereign investment wealth fund, which began investing in the U.S. as the credit crunch took hold in 2007. Recent investments include a 7.6 percent stake in General Growth Properties in November 2010 and CIC's recent backing of Carlyle Group's refinance of the 650 Madison Avenue office tower in New York. Chinese real estate acquisitions jumped to $127 million in 2010 up from $18 million in 2009 as reported by Bloomberg last month, including Shenzhen New World Group Ltd.'s acquisition of the Los Angeles Marriott Downtown, and SouFun Holdings Ltd.'s $46 million acquisition of a Lower Manhattan building once owned by AIG. These figures do not include purchases through property funds which are much more opaque, a route that Chinese investors typically prefer.

Why Invest in Hospitality?

As evidenced by Shenzhen's recent investment in the hospitality sector through its acquisition of the Universal Sheraton Hotel in January of 2011 and the Los Angeles Marriott Downtown 10 months prior, hospitality has been targeted by Chinese investors as a preferred investment opportunity. The good news about investing in the hospitality sector is that this industry presents no national security issues which have thwarted several recent high profile investment attempts by the Chinese. Further, hotels are operating businesses, which if purchased for the right price, can operate upon acquisition at positive EBITDA with little or no additional capital outlay.

Investment in the hospitality sector is also attractive to Chinese investors due to the still depressed real estate pricing and number of distressed assets on the market, the significant amount of available cash Chinese companies have to invest which translates into low debt to equity ratios, preferred pricing from Chinese banks and the continuing appreciation of the Chinese yuan resulting in a favorable exchange rate relative to the U.S. dollar. With an increase in Chinese tourists traveling abroad and the attractiveness of many U.S. cities as popular destination venues, hotels have recently become targets for Chinese investors entering the U.S. real estate market.

As to the state of the U.S. lodging sector, hotel values rose about 10 percent overall in 2010 as stronger hotel demand coupled with a decelerating supply growth began to push occupancy rates up. As demand and occupancy levels rise, hotels are expected to post higher room rates for 2011 with a resulting increase in ADR and RevePAR. According to STR's recent hospitality forecast, STR projects 2011 occupancy to increase 1.8 percent to 58.5 percent, ADR is expected to end the year up 4.2 percent to US$102.20, and RevPAR is projected to rise 6.1 percent to US$59.78. All of these factors combine to indicate a quicker turnaround in the lodging sector than expected. For foreign investors, this means that the window of opportunity to acquire prize hotel assets at discounted pricing may be closing.

How are Chinese Investments Structured?

As to the structure of these foreign investments, we have seen investment by individual companies and investors, investment through conduit funds and investment through the EB-5 Visa program. Investment through individual companies or investors tends to involve medium-sized companies with less sophisticated investment knowledge or strategies relative to the U.S. market. Decisions with respect to these investments tend to ultimately be made by the chairman of the company, with little delegation of authority. This can be particularly challenging when investing in a hotel asset, which from an operating standpoint is very complex. Acquiring a hotel involves diligence, decision making, and the review and negotiation of agreements in the areas of purchase and sale, hotel management or franchise, union contracts and related employment issues, as well as title, survey, zoning and entitlements, to name a few. To adequately assess and negotiate these components of the transaction requires expertise in the hospitality industry and engaging a team of experts to assist. Most Chinese investors are accustomed to the Chinese business model, which, as mentioned, is highly dependent on the decision of the chairman of the company, whose business decisions are typically made with little diligence and are based on relationships as opposed to contracts. Further, settled business points may be viewed as always up for renegotiation.

There is often a steep learning curve for many Chinese investors in understanding proper U.S. business protocol. Knowing the difference between doing business in China and the U.S. is critical to the success of representing Chinese clients investing in the U.S. Although it may take time, once a relationship of trust is established with a Chinese client, the transition to the American way of doing business becomes easier. But it takes a lot of time and effort to establish a trusting relationship with Chinese clients, which is not the typical practice model for U.S. lawyers or investment bankers who are used to working at a faster pace and usually billing by the hour. Therefore, it may be beneficial to embrace, not fight, the cultural differences and learn from the Chinese. The Chinese consider their "circle" - which merges business and friendship relationships - to be the most valuable tool and asset they have in life. Acceptance into the circle can be rewarding both personally and professionally.

Investment through funds tends to focus on larger assets and the decision makers tend to be fund managers who are more experienced and sophisticated in doing business. Most of these investments are structured as a combination of large amounts of equity (typically around 50 percent of the investment) together with debt financing from major Chinese banks which are looking for more lucrative investments than are currently available in China. Some of these investments are through joint ventures with U.S. equity funds. Another method of Chinese investment involves the pooling of individual investors in an EB-5 Visa Fund. This is a fund established with a minimum investment requirement of $500,000 to $1 million per individual, to invest through a regional center established by the fund under the Immigration and Nationality Act in order to provide immigrant visas (i.e., green cards) to qualified immigrants seeking to invest in certain commercial (operating) enterprises in the United States. Hotels are operating businesses which can qualify as commercial enterprises, subject to other qualifications, and good targets for these funds. Certain funds cater to individuals seeking to buy residential real estate, but an increasing number of funds are being established through regional centers to invest in commercial real estate.

Forecast for 2011

Whether investing through individual companies, investment funds or EB-5 Visa programs, Chinese investment in the hospitality sector will increase in 2011, as the outflow of capital from China seeks to take advantage of the window of investment opportunity still available in this industry. As indicated by the recent optimistic forecasts for 2011/2012 projected by hospitality industry experts such as STR and PwC, this window of opportunity may be closing earlier than expected. The increased demand and occupancy levels resulting in strong rate-based growth and RevPAR increases will likely drive pricing for well located assets up from 2010 depressed pricing. As the need for available capital, and hence the "yearn for yuan" continues, we should see a significant increase in Chinese investment activity in 2011. These investors will need good advice and counsel, which will present an opportunity for those willing to respect cultural differences, take time to learn the Chinese way of doing business and earn the trust of these clients. This type of relationship, once established, will most likely prove to be both personally and professionally rewarding and enduring.

Lynn K. Cadwalader represents clients acquiring, developing and operating hotels and mixed-use projects in the United States, Latin America and the Caribbean. Her practice includes providing legal and business advice to foreign investors seeking to invest in hospitality and real estate assets in the US. She also represents clients in the EB-5 immigrant visa program. Ms. Cadwalader represents private equity firms, developers, owners and operators in all facets of hospitality and mixed-use real estate. She understands the legal aspects of negotiating key transactions in this area. Ms. Cadwalader crafts workable solutions for tough legal and business issues. She is also adept at creating flexible legal structures. Ms. Cadwalader can be contacted at 415-615-6050 or lynn.cadwalader@dlapiper.com Please visit http://www.dlapiper.com for more information. Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

OCTOBER: Revenue Management: Technology and Big Data

Gary Isenberg

Hotel room night inventory is the hotel industry’s most precious commodity. Hotel revenue management has evolved into a complex and fragmented process. Today’s onsite revenue manager is influenced greatly by four competing forces, each armed with their own set of revenue goals and objectives -- as if there are virtually four individual revenue managers, each with its own distinct interests. So many divergent purposes oftentimes leading to conflicts that, if left unchecked, can significantly damper hotel revenues and profits. READ MORE

Jon Higbie

For years, hotels have housed their Revenue Management systems on their premises. This was possible because data sets were huge but manageable, and required large but not overwhelming amounts of computing power. However, these on-premise systems are a thing of the past. In the era of Big Data, the cost of building and maintaining an extensive computing infrastructure is incredibly expensive. The solution – cloud computing. The cloud allows hotels to create innovative Revenue Management applications that deliver revenue uplift and customized guest experiences. Without the cloud, hotels risk remaining handcuffed to their current Revenue Management solutions – and falling behind competitors. READ MORE

Jenna Smith

You do not have to be a hospitality professional to recognize the influx and impact of new technologies in the hotel industry. Guests are becoming familiar with using virtual room keys on their smartphones to check in, and online resources like review sites and online travel agencies (OTAs) continue to shape the way consumers make decisions and book rooms. Behind the scenes, sales and marketing professionals are using new tools to communicate with guests, enhance operational efficiencies, and improve service by addressing guests’ needs and solving problems quickly and with a minimum of disruption. READ MORE

Yatish Nathraj

Technology is becoming an ever more growing part of the hospitality industry and it has helped us increase efficiency for guest check-inn, simplified the night audit process and now has the opportunity to increase our revenue production. These systems need hands on calibration to ensure they are optimized for your operations. As a manager you need to understand how these systems work and what kind of return on investment your business is getting. Although some of these systems maybe mistaken as a “set it and forget it” product, these highly sophisticated tools need local expert like you and your team to analysis the data it gives you and input new data requirements. READ MORE

Coming Up In The November Online Hotel Business Review




{300x250.media}
Feature Focus
Architecture & Design: Authentic, Interactive and Immersive
If there is one dominant trend in the field of hotel architecture and design, it’s that travelers are demanding authentic, immersive and interactive experiences. This is especially true for Millennials but Baby Boomers are seeking out meaningful experiences as well. As a result, the development of immersive travel experiences - winery resorts, culinary resorts, resorts geared toward specific sports enthusiasts - will continue to expand. Another kind of immersive experience is an urban resort – one that provides all the elements you'd expect in a luxury resort, but urbanized. The urban resort hotel is designed as a staging area where the city itself provides all the amenities, and the hotel functions as a kind of sophisticated concierge service. Another trend is a re-thinking of the hotel lobby, which has evolved into an active social hub with flexible spaces for work and play, featuring cafe?s, bars, libraries, computer stations, game rooms, and more. The goal is to make this area as interactive as possible and to bring people together, making the space less of a traditional hotel lobby and more of a contemporary gathering place. This emphasis on the lobby has also had an associated effect on the size of hotel rooms – they are getting smaller. Since most activities are designed to take place in the lobby, there is less time spent in rooms which justifies their smaller design. Finally, the wellness and ecology movements are also having a major impact on design. The industry is actively adopting standards so that new structures are not only environmentally sustainable, but also promote optimum health and well- being for the travelers who will inhabit them. These are a few of the current trends in the fields of hotel architecture and design that will be examined in the November issue of the Hotel Business Review.