When Councilmember Rochelle Swanson was explaining her vote on the MOUs and explaining where the money might come from to pay for them, one place she really did not go in her discussion of revenue was hotels. But hotels might be one of the quickest and most lucrative fixes the city has in terms of short-term revenue.
The city, despite an improving economic picture, faced a precarious fiscal situation even before the council increased employee compensation through the new MOUs. The city has put up tax measures as short-term fixes and innovation centers as longer-term fixes, but perhaps an alternative is simply to build hotels to meet existing and potentially future demand for lodging in the city.
The fiscal analysis, for instance, from the August 25 staff report on the hotel conference center shows that an average 50 percent occupancy of the 89 net new rooms on the Richards Boulevard site would generate around $200,000 a year in transit occupancy tax for the city (remember, the site already has 43 rooms, so the net increase in taxes is reflected in that). Unlike property and sales tax, transit occupancy tax (TOT) goes directly to the community with no tax-sharing requirements with other jurisdictions.
In Scenario 3 of the Nishi Fiscal Impact Analysis, the option with a hotel, EPS (Economic & Planning Systems) projects that a hotel would generate $479,000 a year in TOT for the city, flipping the project from a slight fiscal negative to a positive.
Inherent in the net $2.2 million for Mace Ranch is $714,000 in TOT generated by their proposed hotel. And then there is a proposed hotel along the frontage road by I-80 in South Davis that could also generate substantial new revenue. They currently project about $600,000 in taxes to the city.
In essence, four new hotels could generate between $1.5 and $2 million in new revenue for the city just by themselves. While all of this sounds great, the question is really whether Davis needs all of these hotels and whether adding too many will dilute the market and thereby reduce the projected overall tax increase.
To address this issue, PKF Consulting was commissioned to do a study on the market demand analysis.
Right now, there are just 11 facilities encompassing Davis’ lodging market. Since 2000, when Comfort Suites opened 71 rooms, there has been only one new hotel – the 127 room Hyatt Place at UC Davis, the largest of the 11 facilities, nine of which are affiliated with a national chain. In total, Davis has 731 rooms.
The proposed Embassy Suites site becomes critical to the analysis of other hotel needs. PKF points out, “The ratio of meeting space to guestrooms at this property will be approximately 136 square feet per guestroom based on 132, which is significantly higher than a more typical average of approximately 30 to 40 square feet per guestroom. Group business booked at the proposed conference center that would utilize even half of the 18,000 square feet of meeting space would likely require additional guestrooms than what would be offered at the Embassy Suites, thus requiring additional, conveniently located hotels to accommodate this overflow demand. Based on this proposed development, as well as other positive economic factors presented above, we are of the opinion that the proposed hotels will be absorbed rather quickly by the Davis hotel market and will be necessary additions to accommodate growing individual business and group demand.”
They find that 18,000 square feet of meeting space could include between 500 and 1000 attendees depending on the type of function. “A hotel with approximately 18,000 square feet of meeting space would typically feature between 350 and 400 guestrooms,” they note. But the Embassy Suites will have just 132 rooms, which means that Davis will need other hotels to complement the Embassy Suites in order “to capture either overflow group demand that is booked at the Embassy Suites (but can’t be accommodated).”
In other words, the Embassy Suites will have the conference center size for a large conference, but not enough rooms to accommodate all of the guests, and therefore it will create the market for the need for additional rooms.
PKF argues that at least three new sites can be “readily absorbed by the market,” and they find “occupancy is projected to increase to 67.0 percent in 2019 and further increase to approximately 70.0 percent in 2020 and 2021. It is at this level we project the Davis hotel market to stabilize. While this stabilized occupancy level is above the annual average occupancy level achieved by the Davis hotel market since 2007, it is in line with the year-to-date performance and is reflective of the growth occurring in Davis.”
We have already seen the ability of the market to adjust to increases. Originally, the Hyatt Place was built with 75 rooms, but in 2014, it expanded by 70 percent, up to 127 rooms.
According to the Economic Evaluation for the Davis Innovation Park Proposals recently completed for the City of Davis by BAE Urban Economics, “The local hotel market appears relatively healthy. Consultation with the Yolo Convention and Visitor’s Bureau indicates that the market easily absorbed the Hyatt Place’s recent 55-room expansion, without affecting occupancy rates in other local hotels. “
They continue, “Further, the YCVB [Yolo County Visitors Bureau] and a number of tech businesses surveyed indicate that the Davis market is currently leaking hotel demand due to a lack of higher end offerings and/or due to a lack of extended stay offerings. Depending on the market segments targeted by a given hotel project, new hotels included in the innovation park projects may capture currently unmet demand without affecting demand available to support existing hotels.”
The bottom line from this analysis appears to be the following. First, building three or four new hotels in Davis appears to be a relatively straightforward way to generate substantial new revenue in the form of TOT taxes. Unlike property and sales taxes, TOT is almost pure revenue – there is little drain on city services and no requirement for tax sharing. Moreover, bringing more people to stay in Davis will generate additional sales tax revenue as they eat and purchase goods in the city.
Second, rather than being competitive, multiple hotels will complement each other, especially with the needs generated by conferences at the Embassy Suites.
Third, the demand is already there with the Yolo County Visitors Bureau finding that the “Davis market is currently leaking hotel demand due to a lack of higher end offerings and/or due to a lack of extended stay offerings.”
While there are some concerns about Richards Blvd., adding three or four hotels seems a relatively non-intrusive way to generate more revenue and to do so in the next few years.
—David M. Greenwald reporting