The Morgan Hill City Council, hoping to send the message that Morgan Hill is “open for business,” recently approved a hotel incentive policy that provides tax rebates to new or existing lodging facilities that meet specific criteria or make expensive upgrades.
The council approved the policy 3-1 at the June 1 meeting. Councilmember Yvonne Martinez Beltran voted against the policy, arguing it needed more input from existing hotel owners in Morgan Hill. Councilmember Rene Spring was absent from the meeting.
The policy is modeled on the city’s established automobile dealership incentive policy, which offers sales tax rebates to dealers who meet certain sales benchmarks. Both policies are intended to attract new business to town, and encourage existing businesses to upgrade or expand, according to city staff.
The hotel incentive policy was further inspired by a growing sentiment outside of Morgan Hill that the city is not business friendly, Economic Development Director Matt Mahood told the council. This feeling is partially the result of the outcome of a ballot measure in 2020, in which 64% of voters rejected the construction of two new hotels that had already met the city’s planning guidelines in Madrone Village.
Mahood added that hotel developers are skipping over Morgan Hill for new sites, instead choosing to build in San Jose, Gilroy or other nearby cities. There are currently three pending hotel projects on tap in Gilroy, and one in Hollister.
And even though the hospitality industry may not fully recover from the impact of Covid-19 for another year or more, the city needs to act now in order to be ready, Mahood said.
“We’re being leap-frogged from San Jose to Gilroy,” Mahood said. “We need to get in the game, we need to be prepared and we need to create incentives to make sure the hotel development community knows that Morgan Hill is open for business.”
The hotel incentive policy offers hotel developers and owners a share or rebate of the transient occupancy tax (TOT) that the city normally collects for hotel room stays. New hotels that meet certain guidelines are eligible for a TOT rebate from the city for up to 50% of their cost of any off-site improvements they have to make during construction.
Existing hotels can obtain a rebate if they upgrade their facility to a higher “chain scale” (Luxury, Upper Upscale, Upscale, Upper Midscale, Midscale, Economy and Independent), the policy says. Hotels that are independent can apply for a chain brand or request a rebate up to $100,000 for improvements. The rebate value is 50% of the upgrade improvements.
Any rebate more than $100,000 must be approved by the city council. The policy is designed to ensure the city will always collect a minimum baseline of TOT revenue from participating hotels and developers—regardless of the value of any rebate they receive—Mahood said.
“The Hotel Incentive Policy (HIP) provides rebate incentives to encourage the construction of new hotel development and the rehabilitation and upgrade of existing hotels to help enhance the tourism and travel experience and hospitality services for businesses and residents in the area,” states the policy introduction. “The intent of this program is to promote economic development, support business operations, and provide attractive and desirable visitor-serving facilities and experiences to enhance the city’s economic sustainability.”
Some existing hotel owners and the president of the Morgan Hill Chamber of Commerce voiced their support for the HIP and its potential to promote new business and tourism activities here.
“The chamber fully supports economic growth in this business sector and its cascading contributions to other business verticals such as retail, restaurants and tourism, as well as the forecasted gains and TOT revenue that the development of a hotel strategic approach and incentive policy will bring to bear,” Chamber President Nick Gaich said.
Councilmember John McKay made a motion to approve the HIP, with a request for another report from city staff in a couple months.
Councilmember Gino Borgioli, who seconded the motion, said, “If we sit back and do nothing we’re going to get nothing. This is an opportunity for us to look at the future.”
Martinez Beltran, however, said the policy should be more considerate of existing hotel owners. “We need to get to a point where we’re putting our businesses first and trying to decide what’s good for the health of our city,” Martinez Beltran said.
City staff said they did not reach out individually to all existing hotel owners for input on the HIP. A concept of the plan was shared with some local hotel brands and business organizations before it was presented to the council, Mahood said.
The city’s TOT rate is 11% of the cost of a night’s stay at a local hotel room. In 2018-19, the city collected about $2.9 million in TOT revenues. But in 2020-21, at the height of the pandemic, that number dropped to $1.3 million.
The tax currently generates about 5% of the city’s general fund, according to city staff.
There are a total of 17 hotels in Morgan Hill, but only 14 could potentially be eligible for TOT rebates with upgrades under the HIP, Mahood explained. Others serve more as very low-income housing where guests stay more than 30 days, thus not contributing TOT revenues.
Two new hotels on tap—the boutique Granada Hotel downtown and one at the Evergreen development off Butterfield and Cochrane—would not qualify for rebates under the HIP. These are either already under construction or have already completed off-site improvements, city staff added.