Though this move has already been met with legal challenges, it nevertheless presents a new layer of uncertainty for U.S. hotel investors and developers. The decision would effectively freeze key incentives and support programs tied to the Inflation Reduction Act (IRA) and bipartisan infrastructure law.
For hospitality investors who had factored these incentives into their development models, a funding halt could force a reassessment of project timelines, financial viability and return on investment expectations. The result could have far-reaching implications for the industry, which may include a potential rise in energy costs, delayed sustainability-focused renovations and greater financial risk for projects that had been relying on these funds to pencil.
“Layers of uncertainty can delay investment decisions,” explains Eli Hinckley, partner in Baker Botts’ Washington, D.C., law firm office. “Adding further uncertainty will increase this challenge across industries.”
The suspension of green infrastructure funding will undoubtedly add another layer of uncertainty during an already volatile economic climate – one that, for hotel investors and developers, is marred by high interest rates, rising construction costs and inflation-driven operational expenses. The mere suggestion that these funds may disappear also raises questions for investors surrounding stranded capital, investment viability and long-term ESG (environmental, social, governance) commitments.
So, where does one go from here?
Initiatives most likely to be impacted
Shweta (Shay) Natarajan, partner of strategy at private equity fund Mobility Impact Partners, believes one type of green capital investment may be most impacted.
“I think the sudden halt of federal funding will significantly slow down hospitality investors’ appetite for investing in new technology infrastructure,” she says.
This includes on-site electric vehicle (EV) charging stations, as well as on-site back-up energy storage. Though not directly tied to any hotel projects, about eight states have already announced their intention to pause the expansion of their EV charging networks, as funding through the National Electric Vehicle Infrastructure (NEVI) program has been suspended.
“Such infrastructure usually has a shaky business case – there are usually high capital costs up front, with a very long payback period and low initial utilization,” Natarajan continues. “Without policy-based financial incentives to subsidize the technology and shore up the business case, it gets very difficult for investors to confidently invest in such infrastructure.”
Based on the initial policies she’s seeing, Natarajan believes investors should not count on these policy-based ESG subsidies continuing.
Hinckley similarly thinks energy investments are on the chopping block. The reason? That word every current and would-be investor dreads: uncertainty.
“Energy investments tend to be longer-term investments that require stable returns,” he says. “These returns will incorporate support like tax credits, loan support, grants, etcetera, and decisions are based on this support. If there is uncertainty regarding that support being available, investors will wait on decisions until there is clarity, which may result in projects not being built.”
With uncertainty in the air, Natarajan can see a variety of ESG projects stalling out – or failing to get off the ground to begin with.
“I would say any project that has been approved for a loan from the DOE (Department of Energy) under the IRA provisions – but has not received funds yet – is at risk,” she adds. “The risk is much lower for projects that have already been funded, but ongoing subsidies and policy support should not be expected.”
Where to invest time, money
Green infrastructure funding may be halted (or, at least, jeopardized) but life – and hotel operations – must go on. In some instances, it’s prudent to carry on with planned developments or improvements, despite current conditions.
“Investors and owners with [environmental] reporting obligations will likely continue to move forward with sustainable development, despite the lack of clear government support here,” Hinckley says. “It may create opportunities for investors seeking sustainable [projects] as others delay or abandon plans.”
Natarajan believes some uncertainty can be removed from the equation if hotel investors focus on the initiatives with proven results.
“Hospitality investors should focus on installing technology that has a solid business case from Year One,” she says.
Technology initiatives that won’t become obsolete or require costly upgrades in the near future could be viable investments, according to Natarajan. She emphasizes that investors should favor projects with the clearest return on investment, versus speculative green projects that need those government incentives to be financially viable. It’s even better if the project has a high utilization from the start, either by driving measurable increases in occupancy rate or foot traffic.
“I would also encourage investors to identify ways to save on capital costs during equipment procurement – either by procuring at scale, or through negotiated agreements with equipment manufacturers,” she continues.
Hinckley concurs, emphasizing that investors should control what they can.
“It’s largely about focusing on those investments that can be modeled as durable in spite of uncertainty,” he adds.
For your consideration
Any savvy investor knows there’s more than one way to skin a cat. When one (financial) door closes, another may open.
Yes, we’re talking about alternative financing solutions for the projects that may be in jeopardy…
“For sustainability and energy projects where hospitality investors can prove a clear business case and high creditworthiness, private credit or specialized project finance will remain an option,” Natarajan notes.
She also recommends finding ways to save, which may involve looking at a project from a few different angles.
“Think about how a project is structured,” she says. “Examine the possibility of transferring infrastructure assets to asset management companies, which can access a low cost of capital.”
Still, the threat of $300 billion being taken off the table will understandably ruffle some feathers. The fallout, Hinckley believes, may be a scenario where hotel investors become reactive, rather than proactive.
“The lack of consistent policy likely causes businesses to follow market-only signals,” he says.
There may be other fallout as well.
“[It] will dramatically limit the government’s ability to influence investment decisions,” he continues.
For now, however, the fallout is simply worry. It’s concerns about continued uncertainty, rising costs, how and whether slated projects will get done.
With so much still unknown at this point (cue more uncertainty), Natarajan sees many investors standing still.
“I do think that the current policy environment will make it more likely that hospitality investors will take a wait-and-see approach or be more discerning in mobility and energy infrastructure investments,” she says. “This shift will make it more likely that hospitality investors will think long and hard about the business case and cost of capital for these types of projects going forward.”
By Nellie Day
