After a public hearing Jan. 16, the Hollister City Council approved in a 3-1 vote a resolution on an agreement between the city and Hollister Hotel LP, a California limited partnership, which is the new Fairfield Inn & Suites by Marriott at 390 Gateway Drive. The public hearing was continued from Dec. 4 and 18, 2017 meetings to consider an Economic Development Subsidy (EDS) that could be approved as part of the Hotel Incentive Program (HIP).
City staff estimate HIP will provide an annual rebate of 70 percent of the Transient Occupancy Tax (TOT) received for 10 years with a $2 million cap and the option for the city council to provide a five-year extension with a 33 percent rebate of the TOT until the cap is reached.
The purpose of the program, according to city documents, is to help attract new hotels and encourage upgrades of existing hotels by providing a rebate of a percentage of the annual TOT payments that can be used to secure additional financing from the primary lender for the project. The city received about $178,500 in TOT tax in FY 14/ 15. It’s estimated that TOT will increase by $61,300 in 2018, after payment of the subsidy. The City will also expects to benefit from an increase in local jobs, annual property tax and sales tax from visitors patronizing support businesses, such as gasoline, restaurants, and specialty retail).
The purpose for the EDS is linked to the city recently becoming a gateway to the newest national park, and the fact that the city lacks an American Automobile Association (AAA) rating of three or better or any hotel/conference facilities. The purpose of the subsidy is to provide an economic incentive to encourage the development of quality hotels to enhance the tourist travel experience and hospitality services for businesses and residents in the area, provide attractive and desirable visitor serving facilities and experiences and assist the city in achieving tourism goals.
The improvement will increase the estimated property tax at 390 Gateway Drive to $72,014 per year from the hotel improvements, which will be increased by at least 1.25 percent per year. Hollister will receive about $7,969.
Hollister charges an eight percent TOT for lodging with persons staying 29 days or less at the hotels. The TOT collected by the city has steadily increased over the past six years from $119,000 to nearly $180,000 in fiscal year 2014/15.
The new 77 room hotel could generate an estimated $204,335 in TOT in 2018/19 based on an estimated occupancy rate of 64 percent. Hollister would have an estimated net increase in TOT, after the 70 percent subsidy of $61,300. This would represent an estimated 34 percent increase to the TOT collected by the city in FY 14/15. The city could receive an estimated annual $64,552 net increase in TOT after the subsidy by the 10th year. If the incentive program is extended an additional five years because the $2 million cap has not been received, the total subsidy to the hotel’s developer could be about $1.8 million. The city would still receive a net total in TOT tax of about $735,739 dollars.
Both Mary Paxton, program manager of the Development Services Department, and Juli Vieira, CEO of the San Benito County Chamber of Commerce, have repeatedly told the city council that due to the lack of hotels in Hollister, the chamber has had to refer potential lodgers to hotels in Gilroy for films and family gatherings/weddings. In doing so, Hollister has lost potentially millions in revenues that customers at the hotels spend on Gilroy restaurants, gas stations and shops and contribute to an increase in local sales tax.
During the public comments portion of the discussion, Rakesh Patel, the hotel developer, said it took 15 years to complete the hotel and he appreciated the city council’s support in making it happen.
“There have been many trials and tribulations, one of which was getting funding,” he said. “Most banks just didn’t believe in the City of Hollister. With this program in place today and the performance of our property we will, hopefully, change that trend to let banks know that the City of Hollister is a great place to do business.”
Councilman Karson Klauer said he has strongly opposed the resolution every time it came before the council because he does not believe the original terms of agreement should be changed.
“I don’t see why we would change it after the fact,” he said. “The hotel is actually built. There’s no incentive. It’s already done. It doesn’t make any sense from a financial perspective for the city.”
He said the city has made a number of bad deals with contractors and developers that it is forced to comply with.
“Maybe in this case we have a decent deal and I don’t understand why we would give up our position in it,” he said. “A million dollars in TOT is essentially $1 million in General Fund money that could go to police, fire, parks and recreation, continuing tourism promotion. There’s a lot of places this money could go. I appreciate you guys opening up a business and it’s super exciting, but I still don’t think this is a good deal for the city.”
Despite Klauer’s comments, Councilman Jim Gillio told Patel he has the support of the council. He encouraged Patel to reach out to any member of the council should he need assistance with anything.
Councilman Ray Friend commented that he was confused by Klauer’s objections. He said the resolution was not to benefit existing hotels, but to attract new hotels. Paxton, however, reminded him that the council looked at the TOT program last August. At that time, it had a cap of $1 million. But when the council adopted it the following September, they raised the cap to $2 million (which was Klauer’s main objection).
“My question is we have a lot of businesses coming into town and we’re not offering them incentives,” Friend said. “If hotels want to be here they will build. If the traffic is here, they’ll build. Even in the first part, I couldn’t believe we were going to pay somebody back to build here when we don’t do that for other businesses.”
Paxton told him the program helps hotels leverage financing and that the city wants to encourage people visiting the area to stay in Hollister. She said because rooms are so expensive in Monterey when there are special events there, the hotels in Hollister are fully booked because they are much less costly.
Klauer came back, saying he did not have an issue with the concept of the program itself, he felt that the city and hotel should stick to the original $1 million rather than $2 million. Paxton said the program would be studied annually and other existing hotels would be considered.
Gillio asked if he was correct in understanding that city does offer incentives to other types of business and recalled that the council had offered Teknova an incentive because it was employing people locally, keeping them from the daily commute on Highway 25.
“The TOT is an extra tax that other businesses don’t pay, so to encourage other hotels to relocate here is important,” he said. “We ought to do everything we can to encourage businesses to come here, and if that means waving a one-time impact fee, something that’s not going to affect us for the life of the business, we need to focus on economic development.”
Bill Avera, city manager, described the agreement as an “off-the-shelf” offering for existing and future hotel operators. He said hotels often experience difficulties with funding, which is why the program is important.
“This council has never shied away from looking at something this specifically and if there’s a Hilton coming to town and it needs $3 million, I’m sure we wouldn’t tell Hilton you’re not going to get that,” he said. “We would come to the council and figure out what it wanted to do. If you offer an incentive that’s off-the-shelf hotel operators would know this is something that they can get in the City of Hollister. Staff will always bring something to you if it’s over and above that. These aren’t always meant to be across-the-board deals. What may be good for one developer isn’t necessarily good for somebody else.”
Gillio asked Avera why the agreement had changed from $1 million to $2 million, and why it’s still a good deal for the city. Avera said the original deal was never executed. He said when staff realized that the deal had not been finalized, they brought it back to the council with recommendations to expand it to help existing hotels.
“Communities spend a lot of money trying to attract businesses,” Avera said. “There are already a lot of good businesses here in town. Teknova is a prime example. The existing hotel operators are being allowed to be in that same game as the bigger hotels.”
The council passed the resolution, with Klauer voting no. Mayor Ignacio Velazquez had recused himself for a possible conflict of interest.
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