LCCCA Article #2: Consequences of Hotel Room Rental Tax on industry

EDITOR’S NOTE: There were so many revelations at the Thursday meeting of the Lancaster County Convention Center Authority that we can only do justice through a series on the incredible revelations.

The sponsors of the Convention Center anticipated an annual increase in the Hotel Room Rental Tax that had been imposed to subsidize the problem.  In fact, revenue from the tax has remained flat over the past few years, despite the addition of hotel rooms including the approximately 300 room downtown Marriott Hotel.

Less room tax collected means less subsidy, and this is one of the factors that caused the Convention Center Authority to increase financing on the project in order to meet its debt service obligation.  Furthermore, the dour financial prospect forced the Authority to accept draconian fees and terms from Wells-Fargo as part of reconstructing in order to avoid even worse consequences were the Wells Fargo guarantee of the convention center bonds expired on March 1, 2012, triggering a default rate of the bank’s prime interest rate plus 3%, an absolutely usurious figure.   (We can thank project sponsors, their attorneys, and the City dominated majority board members for agreeing to such a preposterous default rate in order to secure the guarantee which no other bank or financial institution was willing to provide.)

Peter Chiccarine is a part owner and the operator of the Best Western Eden Resort and the Fulton Steamboart hotel.   The Eden Resort is one of the most attractive, best run hotels in Pennsylvania and has earned the rare accolade of being designated a “Premier” Best Western, one of the best in the system.   Chiccarine spoke from the audience at the meeting to help explain why, in general, the hospitality business is floundering in Lancaster County.

(Note: The following quotes are based on rapid lap top note taking and may at times be paraphrasing.)

He said the hotels were facing both a “rate problem and an occupancy problem.”

He indicated “It is an occupancy problem first.  Hotel and bed and breakfast operators are very concerned about occupancy and they therefore do the only thing they think they can do is to lower rates.  And that isn’t what we should be doing.” He says this is the first time in years that he has seen   “$49 rates along Rt. 30 in August.”

He  went on “Demand [for rooms] is there, but it is spread out over a lot more properties.   A lot of new product is on the market and that should raise the average rates since they tend to charge more.  Some have closed which should be helping.  We just don’t have enough demand.  We need to figure out what to do to generate more demand.   This has been trending this way for a number of years.   Occupancy is terrible when you look back ten years.”

Chiccarine continues:  “How do we create more demand?   STR [a hotel industry survey report] believes we can get a higher average rate.   Eden and Fulton have rate increases higher than average market.   Are we differentiating ourselves here in this market?  We need to address this.  We are concerned about what will happen next May and August.”

Then he dropped the bomb:   “What is tarnishing the image of the county is the quality of the product.   I can list 20—probably 40 properties – that have not put sufficient funds back into the product.   Read reviews on Trip Advisor and you can’t get past twenty hotels with an approval rating above 50%.”

He continued “What starts this is occupancy starts to decline. Individual operators cannot control occupancy by themselves.  We need efforts by the tourist bureau and the LCCCA.  We have lost our focus entirely. We are not focused on the right market.   So other places not far from us begin to take that business away from us.”

He concluded:  “This economy should benefit us, not harm us.   It should be helping us since people are not going as much to Europe.”

What Chiccarine did not go on to explain was the major reason why most local hotels have not been investing in upgrading their facilities and thus are disappointing guests and blighting the previous positive image of Lancaster as a tourist attraction.   They don’t have the earnings to invest!

Those who promulgated the Room Rental Tax would have us believe it does not affect local businesses, but only out of town guests.  This is a blatant untruth.  If the hoteliers could charge 5% more without losing business, they would do so without anyone needing to increase their costs with a tax!  This is just common sense.

Furthermore, the Watchdog can attest that when Room Rental Taxes were imposed on his firm’s Wilkes-Barre and Newark, NJ hotels, earnings fell the next year virtually dollar for dollar!

Consider that hoteliers don’t even earn 5% profit from revenue after debt service.   So if a large part of their profit is taxed way, how are they to have funds to invest or the capacity to borrow?  Thus Chiccarine observation that the quality of the majority of local hotels and motels has seriously declined and that tourists are now choosing different regional destinations.

But the sorry ramifications go further.  When rates and occupancy fall (remember there are more rooms added each year), one of the primary places to cut expenses is in wages since the hotel industry is highly labor intensive.  This means that workers not only do not get wage increases, but those earning more than new comers are often replaced.   So a $9 an hour employee replaces the $11 an hour desk clerk or maid.    And benefits are slashed or removed altogether.   This is not only tragic for the worker’s family, but means greater strain on the regions social safety network…and yes, likely more taxes on the general population and / or cut back on other essential services such as the libraries.

The $186 million plum of the convention center project meant multi-million dollars of profits for contractors, managers, consultants, law firms and ultimately  likely Penn Square Partners,  mostly paid for through public funds and loan guarantees.  Even worse, it is a source of blight for what used to be one of Lancaster’s most dynamic industries.

To be continued…

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Updated: August 27, 2011 — 10:09 am

1 Comment

  1. In light of this, why is High Real Estate planning to build a hotel at its Crossings shopping center across from Longs Park and how will this impact on other hotels in the area?

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