Working with local municipalities is a key part of the hotel development process. Establishing strong relationships with key players at the local level can streamline entitlements and permitting, ensure a smooth working relationship, potentially reduce overall development costs, and create less of a headache throughout the development process. But it’s also important to remember that municipalities love hotels because they bring many benefits to the local community including:
- Job Creation: Hotels provide jobs for members of the local community including a considerable percentage for workers at or just above minimum wage.
- Taxes on Non-Residents: What’s a great way to provide additional revenue and not tax your residents? Tax your overnight visitors! Transient Occupancy Taxes (TOT) can be significant revenue contributors to a municipality’s local funds. As an example, TOT is the 4th largest contributor to San Diego’s general fund, the 7th largest contributor to Los Angeles’s general fund, and for smaller municipalities, TOT can be within the top 2 or 3 revenue contributors.
- Bringing Wallets to the Local Community: Particularly for leisure travelers but also true of business and other travelers, people travelling tend to make purchases they may not otherwise make at home. This economic impact is important to many locales, in particular to smaller municipalities.
- No Local Demand on Schools: Because hotels do not provide additional residents to a community, there is no impact on local schools by way of the addition of potential students. In the unfortunate environment where many of our local schools are already underfunded and overcrowded, this is meaningful to municipalities.
So how do you use these benefits to your advantage when developing a hotel? You can use the long-term impact of a hotel development to negotiate concessions including:
- Expedited Permitting: Among the many pitfalls of development is when the permitting process drags on. This has many potential detriments that could result in delays so lengthy that a project is no longer viable. Working with a local municipality to expedite the permitting process can help to push your hotel development forward in a reasonable time. And the sooner the hotel opens, the sooner TOT starts being collected.
- Reduced Permitting Fees: In conjunction with the above, if a municipality is very interested in your hotel, it could agree to reduce the permitting fees. A reduction in project costs can contribute to the success of your development and it will make your pro forma look more attractive to lenders.
- Changes to Standard Parking Ratios: Although there may be some limitations given parking requirements by one of the hotel brands, particularly in urban settings where public transportation or ride sharing services are prevalent, municipalities may agree to reduce standard parking ratios. For scenarios where parking decks or underground parking are necessary, this can be a large contributor to overall construction costs.
- TOT Rebate: Hotels need to ramp up in order to stabilize and while this period varies from market to market, many municipalities will consider a TOT rebate during the first few years after the hotel opens. Not only is this cash directly back to the property but it also makes for a more attractive pro forma. Municipalities tend to understand that a rebate in the short-term, even if it means less money coming in than anticipated, is better in the long run. Some money now is better than none.
- Property Tax Abatement: Another item to consider asking for is a property tax abatement. While the length of time on such an abatement can vary greatly, municipalities often use property tax abatements as an incentive to generate economic activity through the encouragement of development. Again, more cash to the bottom line makes for a more attractive development project.
The most important thing to remember is that like politics, all development is local. Getting to know local officials early on is a key element to your hotel development’s success. And if it results in cost savings and a reduction in the time to open, it becomes a win-win for all parties.