The City of Morgan Hill recently passed a Hotel Incentive Plan, to both encourage developers to build new hotels and existing owners to renovate theirs. Rather than an incentive plan, we need a rescue plan because guests have not returned to Morgan Hill after Covid.
Occupancy at hotels in Morgan Hill was approximately 70% in 2019. Now, it is about 53%. From 2019 to 2020, hotel revenue in Morgan Hill dropped by 48 percent. From 2019, to 2021, it was a 43% drop in revenue. With rising labor costs and empty rooms, the current hotels are barely surviving. Today, they are generating a little more than half of what they earned in 2019. 2022 is unlikely to be much better.
The City’s Hotel Incentive Plan will provide tax rebates to developers who incur costs for off-site improvements for any new hotel. The city’s economic development team estimates the rebate could be as much $750,000 over 10 years if the new hotel’s revenue continues to exceed the baseline for transient occupancy tax. It does not matter if the new hotel is a limited-service mid-scale or upper mid-scale hotel like the ones we already have.
Further, it is not clear how the city will choose the baseline for a new hotel. The city also claimed that the rebate would not apply to the Granada in downtown Morgan Hill nor the proposed hotel on Butterfield near Cochrane Road.
For existing hotel owners, they would only qualify for the incentive plan only if their renovation led to an upgrade in their brand and their revenue exceeded what they made in 2019. Even then, the rebate is limited to 50% of the excess in taxes it would have paid as compared to what it paid in 2019. Neither is feasible.
Upgrading your brand often requires an addition of a swimming pool, restaurant or suites. It’s like trying to add two bedrooms to your existing house. Even if a hotel upgraded one’s brand, it is unlikely that an existing hotel could earn more than what it made in 2019 for several years.
Several hoteliers have since provided their recommendations in changing the plan. They include:
– Only new hotels that provide conference room space with onsite catering services or boutique hotels with spa or restaurant should qualify for the rebate. We do not need any more midscale hotels.
– The rebate would not be available for hotels built on land where the general plan or zoning was amended to permit hotel use.
– The baseline for whether a hotel would be entitled to rebate should be an average of revenue over several years rather than selecting the best year. 2019 was the high point for hotel revenue.
– Raise the cap of $100,000 for existing hotels or have the same cap for new and existing hotels.
– Extend the time period so that the maximum rebate is reached. The city’s plan is 10 years, after which no rebate was available. Extend it to fifteen.
– Require the hotels to report on the improvements they made to their property, so the public understands how their revenue from hotel taxes that were returned as rebates was spent.
Hotel transient taxes go into the city’s general fund. It pays for infrastructure and public safety. Before the city commits to rebates, it needs to ensure that the plan makes sense for everyone. Residents, city officials and hoteliers agree that a hotel with banquet room space is on our wish list. It would be great to have another place where one can have a wedding reception or hold a conference.
This plan should be narrowed to incentivize what we would like in our community, not more mid-scale hotel rooms that are just like the ones that are currently empty.
Asit Panwala, attorney
Morgan Hill
Panwala’s family owns the Comfort Inn in Morgan Hill. He wrote this letter on their behalf.
