Hotel developer seeking $11M+ in Berkeley tax rebates

The developer of a new hotel at 2129 Shattuck Ave.wants Berkeley to rebate some of its fees so the project is more economically viable. Image: JRDV Urban International

Update: Berkeley City Council on Tuesday night approved the occupancy tax rebate, with eight votes in favor and one abstention (Councilman Max Anderson). There was heated public comment that the rebate was an unnecessary giveaway to the developer, but city staff and councilmembers said their independent analysis had concluded the rebate was essential for the project. “In the end, the economic benefit to the city is significant,” said Councilman Jesse Arreguín. “We cannot lose this opportunity.”

Original story: Saying that it might not get construction financing unless its rate of return improves, the company slated to build a 16-story hotel at 2129 Shattuck Ave. is asking Berkeley to rebate as much as $11 million in fees.

Center Street Partners wants the city to provide “financial assistance” equivalent to the amount it will pay in permit and impact fees. To achieve this, the company is asking that Berkeley rebate half of the transient occupancy taxes (TOT) the hotel pays the city for up to eight years. With inflation, that could amount to around $13.1 million, according to city staff.

City staff, citing Berkeley’s desire for a hotel with its economic benefits, is suggesting to the City Council that it accept this financing deal. Even if Berkeley agrees to rebate about $1.5 million in TOT taxes each year, the hotel will still be a financial boon, according to Michael Caplan, the manager of the economic development program. The City Council will take up the proposal at tonight’s meeting.

With the rebate, the hotel will add $2.7 million in new revenues to the General Fund for eight years, and as much as $4.1 million after that, said Caplan, who prepared an economic analysis for the city. That doesn’t include the $2.3 million in special taxes, fees, and assessments the hotel will pay in its first year to other government agencies such as the Berkeley Unified School District, the affordable housing trust fund, the streets and improvement fund, and the childcare fund. In later years, the hotel should generate $300,000 annually to those funds, said Caplan.

“The development is going to pay all of its fees when it is supposed to, up front,” said Matthew Taecker, whose Taecker Planning and Design helped Center Street Partners get the 334-room hotel at Shattuck and Center approved. “What’s being requested is nothing out of pocket for the city. It’s a rebate of 50% over time. The city ends up getting much more TOT revenue out of the gate and will get all of that revenue once this amount that allows things to become much more feasible is reached.”

If the city offers the financing, the hotel project’s rate of return would go from 6.7% to 7.6%, still short of the 8% to 10% considered by experts to be the minimum to ensure hotel financing, according to city staff documents.

“While CSP has invested significant resources to ready the project, the estimated rate of return is insufficient for the project to move forward,” Taecker wrote City Manager Dee Williams-Ridley on May 31, just five days after the Zoning Adjustments Board approved the hotel project. He had also presented the information to ZAB, he said.

“Hotel development faces market risks that are higher than many other forms of development – and with higher risk comes a need for higher rates of return to attract capital that would otherwise go to safer investments,” Taecker wrote. “Hotels are not like commercial real estate, such as offices, industrial buildings, and retail space, which typically sign long-term leases with creditworthy tenants. Nor are hotels like apartments that have yearly leases. Instead, hotels must rent their rooms every day, subjecting demand for hotel rooms to greater volatility. Demand for hotel rooms is extremely dependent on the national and regional economy, and a recession would significantly reduce revenues. The project might also face market risks that cannot be anticipated, as illustrated by the sharp decline in tourism following “9/11.”

Jim Didion of Center Street LLC (left) and Richard Kelleher, CEO of Pyramid Hotels, are teaming up to construct a 16-story hotel in downtown Berkeley. Photo: Frances Dinkelspiel

Center Street Partners, along with Pyramid Hotel Group, which owns a majority share in Center Street and is the developer and operator of the hotel, is still seeking construction financing, said Taecker. Even with a 7.6% return on costs, rather than an 8 to 10% return, Pyramid believes it can find the funds because of its reputation of running hotels efficiently, said Taecker.

Center Street Partners asked the City Council to address the issue by July since that is when it must renew its lease with the Bank of America, which owns the land the new hotel will go on, said Taecker.

Berkeley hired two independent firms to examine the hotel project’s “pro forma” or balance sheet. Both firms remarked that the hotel had relied on optimistic hotel room rental rates to get to the 6.7% rate of return, according to city documents. Williams-Ridley said that the consultants’ reports confirm what the hotel developer is saying about profits.

If the City Council grants the financial assistance, it should not impact the community benefits the hotel developer has promised, according to Williams-Ridley. These include the promise to use union labor (the equivalent of 125 FTEs) to construct the hotel, which city staff estimated was worth $10 million. The hotel will also directly create around union 110 jobs and indirectly create another 100, according to city staff.

Taecker said that “the need to financially assist hotels so they can be realized is not unique to Berkeley.” A number of cities, including Los Angeles and Santa Barbara, have provided multi-million packages to encourage hotel development, he said

Mayor Tom Bates agrees.

“It’s commonplace,” said Bates. “They need to get the relief. Almost every hotel that has been built in the U.S. in the last five years has gotten some sort of relief.”

City Councilman Kriss Worthington said he would need to see the hotel developer’s pro forma to be sure that the city would not unnecessarily lose dollars if it grants the rebate. However, he thinks Berkeley does need a hotel.

“The city needs to look at the long-term picture and not just accept numbers without proof,” said Worthington. “As a city council member who is expected to waive $13 million, the council needs to get the information it is based on.”

Worthington also wondered if the hotel developer could pay out the funds over a 30-year period.

Caplan said Center Street Partners has been good at communicating with the city about both the project and its needs. He stressed the positive economic impact the hotel will have on both downtown and city coffers.

“They are being pretty honest about their cost structure and they are being modest about the rate of return they need,” said Caplan. “They are not being overly-demanding given the product they are delivering to the city. I hope this goes through and we should be the beneficiaries of a really nice hotel downtown.”

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Frances Dinkelspiel