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US states consider hotel renovation incentives
March 6 2013

Several state legislatures are providing economic incentives to hotel owners who need assistance when renovating their properties.

Highlights
  • Two states, Mississippi and Pennsylvania, may provide help to hotel owners who renovate.
  • Tax incentives are credited with rejuvenating Waikiki hotels in the 2000s.
  • The Pennsylvania legislature has yet to take action on its tax credit proposal.
By Ed Watkins
Editor-at-Large
ewatkins@hotelnewsnow.com

REPORT FROM THE U.S.—Legislators in at least two states, Mississippi and Pennsylvania, are considering bills that would provide economic incentives to hotel owners who renovate their properties.

Lawmakers in Hawaii last year defeated legislation that would have revived a similar program in effect in that state from 1997 to 2005.

The Mississippi bill sailed through the House of Representatives by a 115-3 margin earlier this year and is now under consideration by the Senate finance committee. The bill, which only targets hotels, would set aside some sales tax revenues collected by hotels to create a pool of funds from which hoteliers could use to pay for up to 20% of renovations on their hotels. Some caveats: each renovation project must cost at least $500,000, and the owners must complete their projects within 10 years to collect the incentive funds.

For hotel owner Bharat Patel, chairman, CEO and co-founder of Sun Companies, such an incentive might make the difference on whether to do a renovation project.

“If such a law was in place, we might consider renovating two or three properties there,” said Patel, whose company operates five hotels—two Comfort Inn hotels, a Comfort Suites, Holiday Inn and Candlewood Suites—in Mississippi. “It’s a great example of long-term thinking of how to assist local businesses.”

Patel said the funds could help owners close the gap between what they typically held in reserve for property improvements and the actual costs of a renovation project.

“Most hotels are on a six-year renovation cycle, but the money you put aside isn’t necessarily sufficient because every year costs go up 4% to 6%. This could help make up that difference,” he said.

State Rep. Rita Martinson, who introduced the bill in the Mississippi House, believes the plan wouldn’t lower state revenues. In fact, she anticipates a return.

“If, for example, a hotel spends $10,000 to renovate each room, it would be able to rent rooms more easily and charge higher rates, which would generate more sales taxes to the state,” said Martinson, who projects every dollar paid by the program would return $6 in taxes.

Hawaii
Legislation was introduced last year in the Hawaii legislature that would have extended a similar tax credit originally passed in 1997 but expired at the end of 2005. The 2012 bill, which was defeated, would have provided a 10% income tax credit for qualified hotel construction or renovation projects in the state. The bill would have covered project costs incurred before 1 July 2017.

The original law provided a 4% tax credit on hotel renovation projects. Three years later, the law was expanded to include new hotel construction, and in the wake of a tourism slowdown following 9/11, the legislature upped the credit to 10% of costs. It reverted to a 4% credit from mid-2003 to the end of 2005.

According to Joseph M. Toy, president and CEO of Honolulu-based Hospitality Advisors LLC, the tax credit program in effect during the 2000s helped rejuvenate the hotel stock in Hawaii’s Waikiki Beach tourism zone. In the 1980s, Japanese firms bought many of the hotels on Waikiki, Toy said, but once the Japanese economy fell during the early 1990s, these owners were unable to make needed improvements to their properties.

“Over time, there was significant deterioration to many of these hotels, and there was a question whether they could recover from years of deferred maintenance,” he said. Eventually, many owners sold their hotels, primarily to U.S. investors and operators. The credits enabled the new owners to more easily renovate the hotels, which coincided with significant infrastructure improvements to the area done by the city and county.

“The tax credits made quite a difference since in many cases the renovation monies spent were huge,” said Toy, noting that some projects cost between $60 million to $80 million. “A 4% cash back on that kind of investment was pretty meaningful. And while the credits weren’t the sole driver of the huge renovation and new development projects in the early to mid-2000s, it certainly was helpful.”

Toy said last year’s proposal to revive the tax credit died in the Hawaii legislature in a battle over budget shortfalls and a measure to increase and make permanent increases in the state’s accommodations tax. “Unfortunately, the tax credit proposal has taken a back seat to those larger issues,” he said.

Pennsylvania
In Pennsylvania, State Rep. Dwight Evans of Philadelphia last month included a hotel renovation tax credit proposal in a legislative package he introduced in the House. It calls for a 10% tax credit for hotel construction and renovation projects. The legislature has so far taken no action on the measure.

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