County’s iniquitous hotel tax rebate for boondoggle hotel is at expense of other hotels and their patrons

Jan Gardner, County Executive

Assume the City-sponsored downtown hotel, the Marriott at Carroll Creek averages $160/room/night and 70% occupancy, then at 207 rooms its annual gross revenue is $8.46m. At the new 5% hotel tax rate it would pay $423k in hotel tax if it were treated as a normal hotel. However under CB16-13 the County’s proposed hotel development incentive program (HDIP) up to 85% of this $423k or $360k can be rebated to be used for debt service for up to 25 years.

Apply an 7.5% capitalization rate (net operating income on capital value) to calculate what borrowing that $360k/yr hotel tax rebate will support.

That $360k tax rebate under the County’s incentive program will support 360k/0.075 = $4.8m in extra borrowing. Relative to the hotels not benefitting from the HDIP this is equivalent to a County grant or upfront subsidy of $4.8m, a decent fraction of the cost of the Marriott on Carroll Creek, as the City-sponsored Plamondon hotel will be called.

 

 

 

 

The second tier existing hotels, some 22 hotels, have around 1,800 rooms and revenue of $46.4m in FY15 according to County reporting. At the 5% hotel tax rate they will generate $2.32m/year for the Tourism Council, versus $1.39m at the old 3% rate. So the established hotels will pay $930k a year more hotel tax, while their new competitor is subsidized to the tune of $360k/year. (The rest of the increase in revenue will support larger Tourism Commission programs.)

Supporters of the HDIP suggest that somehow all the business attracted by the new downtown hotel is new business for the county, and that somehow the debt service subsidy is being generated by the new hotel. It is “self-financing,” they claim.

Wishful thinking or propaganda

This is wishful thinking or propaganda on the part of the hotel scheme’s supporters. It implies that some tens of thousands of people, staying some 52,900 nights a year (207×0.7×365) are only coming to Frederick because of the existence of a new Marriott on Carroll Creek. They suggest these vast numbers wouldn’t deign to stay in hotels located one mile to five miles from the historic district, and have been staying away.

Visitors come here to browse our little stores, to visit friends and family here, to take in a bit of our civil war history, to use it as a base from which to go to the battlefields or hike the Appalachians or canoe in the Potomac, visit businesses here, or try out our excellent restaurants, or walk the 19th century streets, just out of curiosity as a pleasant day trip from Rockville or Fairfax VA etc. None of that changes with the overnight lodging available downtown. The basic attractions are unchanged.

There will always be a few potential visitors at the margin, on the edge of deciding to come here. They might be induced to come our way by the new hotel downtown. And there will be some single-minded people for whom staying downtown and walkability are so important they won’t otherwise visit Frederick.

It will generate SOME entirely new visiting.

Rendering of proposed hotel complex

It is therefore plausible to argue 10 or 20 percent of the clientele of the downtown hotel will be new visitors, accounting for say 5,000 to 10,000 room-nights. The great bulk, 80 to 90 percent of the clientele of the new hotel will be gained by attracting to the Marriott at Carroll Creek people who otherwise would have stayed at the existing 20 or so hotels or the downtown bed-&-breakfasts or Airbnbs.  The existing hotels see some 460,000 room-nights a year. At an average $100/room-night some $46m of hotel revenue and at 5% of that revenue some $2.3m of hotel tax payment for the County Tourism Commission.

If the downtown hotel, catering to about 50,000 room-nights a year — rounded from 53,000 because the uncertainties are so great precision to the nearest thousand is misleading — attracts 20% of new visitors, 10,000 room-nights, then those attracted away from existing lodging will number about 40,000, taking their volume of business from 460k to just under 420k, down about 9 percent. That’s an average with bigger losses tending to be at the closest existing hotels closest and lesser losses for those further away.

[NOTE: We leave out of account likely growth or decline in overall visiting and lodging that are a product of the larger economy and changing consumer priorities, and have nothing to do with whether a downtown hotel eventuates in Frederick. Growth cannot be counted on.]

As a result of losses of about 42,000 room-nights a year the hotel tax paid by existing hotels will decline from $2.3m to $2.09m, a drop of about $210k. If full hotel tax were paid by the new downtown hotel its hotel tax bill would be about $420k. But as laid out at the beginning of this article the HDIP rebates $360k, 85% of that $420k for the hotelier’s debt service. Under the terms of thew county’s hotel development incentive program the new Marriott pays only 15%, or $63k is paid for Tourism Commission programs.

Tax rebate is not ‘self-financing

To reiterate: diversion of 85% of the hotel tax paid by the new hotel to its debt service leaves only about $63k extra for the Tourism Commission. Combined with the loss of business by the existing hotels to the new lower taxed hotel and the consequent $210k reduction in hotel tax payments suggests a net loss of $167k in overall hotel tax revenue. That gives the lie to the claim that the incentive program is self-financing.

Without an implausibly large proportion of the business of the incentivized hotel downtown being totally new visitors to Frederick it cannot pay for itself. The other hotels, the ones financed by investors, will be paying for it. And their customers.

The iniquity of this development incentive program then is that:

— it is based on absurd ‘happy talk’ about the great bulk of the business of the downtown hotel being entirely new to Frederick rather than the larger proportion being a rearrangement of visitors between hotels

— it gives a favored hotelier chosen by a sham ‘competed procurement’ the favor of a large upfront subsidy as compared to competitors who are fully responsible for their own debt service

— it finances the incentive on the back of the existing hotels via the increase in the hotel tax from 3% to 5%

— other hotel-generated income of the Tourism Commission will likely be used to promote the downtown and hence the diversion of hotel patronage away from existing hotels to the Marriott on Carroll Creek will be further financed by those who lose

— the incentive program specifically aims to develop ‘full service’ hotels with their own restaurants, bars, lounges and a pool, minimizing spillover benefits to nearby establishments

— basing the incentives on ‘upscale’ 5 star hotels and financing them from higher taxes on lower price-point hotels subsidizes the wealthy and business account travelers at the expense of regular patrons, a a government engineered redistribution in favor of the well-off

The hotel development incentive program institutionalizes the worst kind of cronyism with huge rewards for a single favored business at the expense of others. It tells potential investors: ‘Don’t bother considering Frederick unless you are prepared invest years to work your way into an inside position by courting City bureaucrats and elected officials for favors.’

The City’s determination to sponsor a single, large downtown hotel, to choose the site and to specify  the features of the hotel and to spend tens of millions of taxpayer money, and to persist in desultory fashion for eight years now, has made this project an ‘ogre’ that has already scared away a small bunch of more modest, investor-financed hotel projects, denying the City the very hotel accommodations downtown that it claims to be promoting.  PSam 2017.01.08

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