By Matt Williams
In all of the Vanguard dialogue about the Hyatt House project, to date there has been very little discussion about the fiscal viability/sustainability of the project. As a member of the Finance and Budget Commission, I received a copy of Dan Carson’s August 14, 2016 Hyatt House Hotel Potential Fiscal Impact report.
In his Summary of Findings, Dan states, “The Hyatt House project would financially benefit the city and local agencies. For example, it would likely result in a net fiscal benefit to the City of Davis of almost $700,000 annually.”
Over 90% of that ongoing financial benefit comes in the form of $629,000 of Transient Occupancy Tax (TOT), and Dan’s report goes on to acknowledge that the TOT estimate is sensitive to occupancy and room rate assumptions.
Dan’s report also addresses the question that the City Council has discussed over the past year, specifically the potential impact of additional hotel project projects, such as the Hyatt House, on the city’s existing stock of hotel properties.
When the Planning Commission weighs the benefits and objections to this project on Wednesday night, I believe it is important to ensure that the fiscal benefits are truly additional for the community. There is some concern that the TOT revenues the City will receive from this project will not be net additional revenues, but rather a redistribution of TOT revenues from the existing hotels.
To examine that concern I analyzed Dan Carson’s statement, “City hotel tax revenues increased in recent years even in the wake of past hotel expansions by UC Davis outside of the city limits.” The support Dan provides for that statement comes from the City’s Comprehensive Annual Financial Report (CAFR).
The CAFR reports that the City’s TOT revenues in FY 2009-10 were $912,456 and rose 44% to $1,319,909 in FY 2014-15. That strong performance happened at the same time as the Hyatt Place on the UCD campus added a total of 127 beds that are reported to have achieved 86% occupancy.
If the City received TOT revenues from the Hyatt Place, that would raise the TOT revenue increase from 44% to 77%.
Some of that 77% increase was due to improvements in the overall economy, as we emerged from the Great Recession, but I believe a more important factor was that the addition of the Hyatt Place tapped into unmet demand for hotel beds. The addition of the 127 beds at Hyatt Place increased the hotel bed supply in Davis from 379 to 506 (not including either Motel 6 or Days Inn). That represents a 33% increase, far short of the 77% increase in TOT.
Bottom-line, the adding beds to the Davis market tapped into unmet demand associated with the UC Davis campus, and the result was that according to the analysis provided by existing hotel owners “the occupancy rate has increased from 61 percent in 2012 to 67 percent in 2014 (the most recent data available).”
All of the above leads me to believe that the addition of Extended Stay beds to the Davis market will further tap into that unmet demand emanating from the UCD campus, especially since the HVS study provided to Council in March says that the current Davis hotels only derive 3% of their current revenues from the Extended Stay market segment.
In summary, I believe the City’s Comprehensive Annual Financial Report (CAFR) information gives the Planning Commission an objective measure of the health of the current hotel market in Davis, and that Dan Carson’s estimate of $629,000 of additional annual TOT revenues for the City is very likely to be accurate.
Thanks you Matt Williams. Data, data, data. I am sure council will be looking at this. Your article made the information very user-friendly for the average reader like me.
Apparently nobody wants to, time hard figures. It is much better to discuss alcohol near green belts. Thank you Matt for the effort.
Matt.. Just to play devil’s-advocate here.. the new proposed hotel’s financial contribution isn’t as rosy as I think you may believe it is. You do realize that the Hyatt Place does those numbers because IT’S ON CAMPUS.
When you’re visiting a city and you’re looking for a place to stay what are the steps you take to choose a hotel?
For me it goes something like this:
1. Location (proximity to where I need to be)
2. Brand (Loyal guest of Marriott here)
3. Price /Amenities (I’d be willing to pay a little more and have the same amenities if the above two were met)
So in my example.. If I was visiting UC Davis and I needed a place to stay.. my process of decision would be:
“Hyatt Place is on campus.. the location is great.. but hey is there a Marriott in town for my points? Nope… Okay the Hyatt Place has good amenities and priced competitively compared to the rest of the nearby hotels.. Looks like I’ll be staying ON CAMPUS at the Hyatt Place”
Now factor in the new Hyatt House.. and the thought/decision process would end up with the same result… I’d still stay at the Hyatt Place ON CAMPUS.. my 2nd choice would be the Hallmark or something in Downtown. Than to the South Davis Hyatt House.
I don’t think it’s is fair to say this hotel is going to do as well as that Hyatt Place. It will do as-well as the rest of the hotels in town. And, if that’s the case.. this hotel is not going to achieve this “600+k” in TOT revenue.
That being said, currently hotels are doing as you said 67% Occupancy at I’m assuming a $120 average rate. This means: 120 rooms x 67% x 365 days x $120 = ~$3,500,000. $3,500,000 x 12% TOT = $420,000.
Also important to remember – that is NOT A NET GAIN OF $420,000 for the city – meaning, not all of the customers of this proposed hotel will be new.. they’ll most likely be coming from other hotels in town.. thus just spreading out the existing TOT base among more hotels.. Another important fact is that TOT is not due on stays over 30 days..something which extended-stay hotels cater too.. very different from the Hyatt Place on campus that we all wished we got TOT from.
At the end of the day though.. I believe the hotel will bring in a net gain of TOT for Davis, that is for-sure.. Just not as much as these developers are promising and hinting at. If only they played by the rules and told the us the truth.
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Robert, thanks for taking the time to add your well reasoned thoughts to the dialogue. As a Million Miler on both Delta Airlines and American Airlines, I have walked the same walk you have described, so I hear you loud and clear.
My response to the issues/challenges you have raised is very similar to the one I made to Tia Will in today’s other thread, but with a slightly different focus. In their Market Analysis presented to Council on March 15th, HVS produced the following Figure 5.5 that segmented the current hotel visitors into four (4) segments, Commercial, Leisure, Meeting & Group, and Extended Stay. with the 506 current beds being filled by the following proportions, Commercial 40%, Leisure 36%, Meeting & Group 21%, and Extended Stay 3%.
You and I have made considerable contributions to the Commercial segment, and not surprisingly, HVS shows Hyatt Place with the highest proportion of Commercial occupancy in town (50%), as well as the highest occupancy rate (80-85%). When Hyatt Place is full and gets a call for a room, it isn’t clear what the room recommendation decision tree is going to be, but regular visitors to Hyatt Place on UCD related business will no doubt be members of the Hyatt frequent stay club, and want to buid u their Hyatt points if possible, even if the Hyatt Place can’t give them a room.
https://davisvanguard.org/wp-content/uploads/2016/08/2016-03-15-CC-Item-08-Hotel-Market-Analysis.jpg
With that thought out of the way, lets take a look at the four market segments. As I said to Tia, I worked very hard to be sure my article did not stray into the realm of opinion . . . and tried to stick to the facts, but with that said, here are my forward-looking thoughts about the Davis hotel market.
My opinion is that there is a substantial (dare I say very substantial) pent up demand for hotel rooms in Davis. I believe there are three reasons for the existence of this pent up demand.
The first reason is the afore mentioned recent arrival of the Hyatt Place on the UCD campus. It raised awareness within both the Commercial and the Meeting & Groups segments of the high quality and value of Davis hotels. Its 127 bedrooms added 25% more capacity to the existing 379 hotel bedroom supply in Davis. Think the Coke and Pepsi Wars ads back in the mid 70’s. Both companies “won” that battle because the overall awareness of the cola market grew at the expense of 7Up and Ginger Ale and others.
The second reason is the substantial rise in UCD enrollment, and especially in applications to UCD, which mean many more high school student and parent visits to Davis (the Leisure segment). The 2014 Occupied Beds number for Davis was 176,473. 10% of that is 17,647 stay days. If you assume two (2) stay days/beds per visiting applicant family (some will stay one day, some two days and others will need two rooms) then 8,825 additional applicant visits means a 10% increase in occupancy.
The third reason is the (dare I say massive) amount of money UCD is paying through its Accounts Payable Department for Faculty and Staff to go to out of town conferences and meetings (the Groups and Meetings segment) . Hyatt Place and the new UCD Conference Center have created an environment where some of those conferences and meetings can take place here in Davis.
Those three factors tell my Wharton brain that the Davis hotel marketplace is having its own 2010’s version of the 1970’s cola advertising battle. Just as Coke and Pepsi both saw their volumes and revenues skyrocket, I believe the recent 5-year trend of steadily increasing occupancy and revenues will continue, and possibly even accelerate.
JMHO
Matt to further prove my point about the 30 day tax exemption policy and how much it actually takes away from the taxable revenue of an extended-stay hotel.. take a look at a report of occupancy taxes in Texas by individual hotels (as hotel occupancy taxes are transparent in Texas.. you can search for any Hyatt House on the spreadsheet to use as an example):
http://www.texastransparency.org/Data_Center/Search_Datasets.php#hotel
You’ll see, there is roughly $100,000 worth of hotel revenue that is tax-exempt every month at these Hyatt Houses .. that is due to to the 30+ day exemption rules and the nature of this EXTENDED-STAY hotel. In contrast.. you’ll see the Hyatt Places will have very little tax-exemptions every month as they are regular transient hotels. They simply cannot be compared, extended-stay hotels do not provide as much as regular hotels do in occupancy taxes.
For example in the June 2015 data set.. The Hyatt House in Downtown Dallas (line 3971 of the spreadsheet) did $496,326 in total room revenue BUT only $355,238 of it, was taxable. That means $141,087 of their June revenue was not taxable mainly due to guests being there for over 30 days!
So do you still agree.. this hotel will bring in $600,000+ dollars to the City of Davis?
It’d pretty much have to outperform every hotel in Davis .. including the Hyatt ON CAMPUS.. let alone forgo the fact of how many of their guests will be under tax-exemptions…
Thanks for this piece of insight. I was not aware of that exemption policy. definitely some homework to do prior to our September Finance and Budget Commission meeting. It sounds like the “make whole” model we put together for the Nishi Development Agreement might apply (with some twists to match the specific situation) in this case.
Would you like to get together over a cup of coffee to talk about this in some iterative detail?