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Resolution Number 18-06-19-04CITY OF SAN JUAN CAPISTRANO COUNCIL POLICY Subject: Effective Policy Page Date Number CITYWIDE LUXURY HOTEL TRANSIENT OCCUPANCY TAX (TOT) REVENUE 1 of 4 6/19/2018 135 SHARING INCENTIVE PROGRAM PURPOSE The City of San Juan Capistrano City Council adopts this policy to create a Citywide Luxury Hotel Transient Occupancy Tax (TOT) Revenue Sharing Incentive Program. Hotel Incentive Programs are typically intended to encourage development of luxury hotel properties, which in turn provide significant TOT revenue, create local jobs and serve as an economic stimulator for the community. Luxury hotels (4-star properties) are generally differentiated from select service hotels (3-star properties) by the following characteristics: • Higher level of finishes (furniture, fixtures, flooring, etc.) • Additional amenities offered, such as fitness room, room service, 24-hour valet, spa facility, and pool & hot tub • Additional landscaping that is maintained at a higher level • Higher suite to standard room ratio • Secured parking area • Additional back-of-house space • Larger room sizes • Larger lobby and common areas Additional community benefits of a luxury boutique hotel often include: • Attraction of leisure travelers in addition to the primary business travel market. Leisure travelers (tourists) tend to stay longer and spend more in the surrounding community • Enhanced global destination marketing • Higher quality of on-site and off-site finishes • Higher guest occupancy levels • Higher potential land value, increasing all surrounding property values • More amenities available to downtown visitors (spa, valet parking, etc.) Participation Criteria 1. Quality of Luxury Hotel To be eligible for participation, an applicant must be able to demonstrate full compliance with either the Forbes Travel Guide star criteria or American Automobile Association (AAA) diamond ratings. Approval requirements include a thorough CITY OF SAN JUAN CAPISTRANO COUNCIL POLICY Subject: Effective Policy Page Date Number CITYWIDE LUXURY HOTEL TRANSIENT OCCUPANCY TAX (TOT) REVENUE 2 of 4 6/19/2018 135 SHARING INCENTIVE PROGRAM certification of property characteristics such as: cleanliness and condition, management and staff, exterior, grounds, and public areas, guestroom décor, ambiance, amenities, bathrooms, and guest services. The City will require confirmation that the hotel is operating as a Forbes 4- to 5-star rated or AAA Four Diamond and above hotel. This certification will be provided by the owner, at the owner’s sole cost and expense, resulting from an independent third party audit by an auditor approved by the City. Additionally, this certification will be conducted on an annual basis to ensure ongoing adherence to the luxury hotel standards. 2. Revenue Sharing Term The term of the revenue sharing shall commence on January 1 of the year following the first day of hotel operation. For example, if a hotel opens its operation (begins guest occupancy) on July 15, 2019, the TOT revenue sharing term shall begin on January 1, 2020. Sharing of TOT revenue will cease after a 10-year term (or earlier if desired by the applicant). 3. Base TOT Amount For new hotel developments, the City will establish a minimum base TOT amount to be collected by the City in the amount of 1.25% of verified total project investment. The total project investment amount shall not include land value/acquisition costs. For existing hotels desiring to upgrade to a 4-star or 4-diamond rating, the existing hotel’s highest year TOT amount collected over the preceding three years will be added to 1.25% of the upgrade project investment to determine the base TOT amount. The total project investment amount shall not include land value/acquisition costs. Investment amounts will be reviewed and certified by a financial expert selected by the City at the applicant’s expense. Only the incremental revenue generated above the base amount will be shared with the applicant, subject to the cap described in the next section. 4. Revenue Sharing Percentage Split and Cap The City will share TOT revenue on a 50/50 basis above the established base amount, up to a maximum amount equal to the greater of (i) the amount of conditioned public improvements pursuant to California Labor Code Section CITY OF SAN JUAN CAPISTRANO COUNCIL POLICY Subject: Effective Policy Page Date Number CITYWIDE LUXURY HOTEL TRANSIENT OCCUPANCY TAX (TOT) REVENUE 3 of 4 6/19/2018 135 SHARING INCENTIVE PROGRAM 1720(c)(2) or (ii) a de minimis amount pursuant to Labor Code Section 1720(c)(3). For example, if the qualifying luxury hotel property developer invests $50 million into a new project, the base TOT amount would be $625,000 ($50 million x 1.25%). If $725,000 in TOT revenue is collected in a specific year, the City would receive $675,000 in TOT that year ($625,000 base amount plus 50% of $100,000 increment) and the developer would receive $50,000 in shared TOT revenue, for a maximum of ten years, subject to the cap above. On an existing hotel property, if the property owner invests $10 million into upgrades and the highest grossing TOT year (over the past three years) was $300,000 in gross TOT receipts, the base TOT amount would be $425,000 ($300,000 + $10 million x 1.25%). If $725,000 in TOT revenue is collected in a specific year after the hotel is operating as a luxury property, the City would retain $575,000 in TOT that year ($425,000 base amount plus 50% of $300,000 increment) and the owner would receive $150,000 in shared TOT revenue, subject to the cap above. 5. Deposit and Reimbursement Clause The applicant shall absorb all of the costs associated with preparation of the revenue sharing agreement, including staff time, consultant costs and legal expenses. The agreement will include a provision that transfers the obligation to assess the applicability of prevailing wages for the project to the applicant, and requires the applicant to indemnify the City for all associated prevailing wage risks. Participation Process 1. The applicant shall submit to the City a letter of intent to participate. The letter of intent shall include at least the following information: a. Detailed description of the property site and proposed project, including detailed cost estimates. b. Description of compliance with all criteria outlined in this policy. c. Project team members. d. Initial deposit in the amount of $20,000 to cover all City expenses incurred during the process of evaluating the letter of intent and the applicant’s CITY OF SAN JUAN CAPISTRANO COUNCIL POLICY Subject: Effective Policy Page Date Number CITYWIDE LUXURY HOTEL TRANSIENT OCCUPANCY TAX (TOT) REVENUE 4 of 4 6/19/2018 135 SHARING INCENTIVE PROGRAM participation in the program, including but not limited to staff, consultant and attorney fees. The applicant shall also absorb all of the costs associated with preparation of the revenue sharing agreement, including staff time, consultant costs and legal expenses. 2. Staff will work with the applicant to develop a reimbursement agreement consistent with this policy. 3. The City Manager is authorized to negotiate and approve the reimbursement agreement and any associated appropriation of funds, so long as the agreement is consistent with all criteria within this policy and includes all required indemnification agreement language.