Trump seeks local tax subsidy for conversion of the Old Post Office into a hotel

According to the Washington Business Journal, in "Trump seeks relief from D.C. tax on Old Post Office hotel," the Donald Trump Organization, which won the Old Post Office building through what was probably an outlandishly high bid ("How the Trumps landed the Old Post Office Pavilion," Washington Post), is now seeking local tax breaks for the project.

The WBJ article discusses the specifics of the tax on the building, which is assessed on federal properties--normally untaxed--that are used for a profit making purpose. Union Station finally capitulated on this tax, which they were opposing in court, according to "D.C., Union Station Redevelopment Corp. settle tax dispute" also from the WBJ.

From the first WBJ article:

The possessory interest tax on leasehold interests is calculated at the same rate, $1.85, as D.C.`s commercial property tax. The PIT was designed not only to generate revenue, but to exact some fairness: If the Ritz Carlton or the Four Seasons or the JW Marriott pays property tax, why shouldn`t Trump have to pay it too?

Two high-level D.C. government sources confirm that Trump operatives approached District officials last summer to seek relief from the possessory interest tax. They were told, flatly, ``no.`` But the discussions continue as the GSA, D.C. and the Trump organization tackle this sticky wicket. After all, the federal government is hoping to squeeze every dollar out of the Old Post Office redevelopment, and a hefty tax bill will certainly nibble that away.

Trump representatives declined comment, but expect the argument to run along these lines: The sales and occupancy taxes and jobs that a luxury hotel at 1100 Pennsylvania Ave. NW will generate will certainly exceed that of the PIT bill.

Interestingly, two weeks ago the Wall Street Journal had an article, "Subsidized Hotels: Boon or Boondoggle? Cities Like the Jobs and Taxes Lodging Can Bring. Critics See Oversupply and Unfair Room-Rate Competition," about how local jurisdictions provide tax abatements and other subsidies to hoteliers. And this raises the issue of some firms being advantaged with subsidies competing with firms not receiving subsidies.

For example, DC's "convention center hotel" is receiving subsidies. For a variety of reasons I think that's justifiable (see below). You could argue that the Old Post Office, to be brought back online as a rehabilitated civic asset, deserves subsidies too.

On the other hand, you could argue that Trump bid too much (in order to win) for the property given the cost to rehabilitate and operate the building--which is why they are asking for subsidies--and while that benefits the US Government, which received the money from the sale, if it requires subsidies from the locality, in this case DC, it comes at a cost.

In short, Trump bid too much--although that's why he won--and now on the back end he wants the local government to make up the difference.

Ideally what would happen is that the US Government would agree to reduce the price that Trump pays to lease the building so that local tax subsidies aren't needed. However, then they'd have to rebid the project, because obviously Trump bid expecting he could get subsidies, and perhaps the other bidders did not.

For the city, deciding whether or not to agree to a subsidy should be made using a comprehensive framework on accommodations, which I wrote about in 2011, in the entry "Start with a city-wide accommodations plan: then consider TIF requests comprehensively."

At this point, it's not DC's problem that Trump bid too much.  (Which was likely a deliberate decision used to game the process and this action shouldn't be rewarded with a tax subsidy.)

He can walk away, the project can be rebid, and ideally the project would go to an organization that made a realistic bid based on the costs of the project.  This would reduce the returns to the federal government probably--but would still be higher than what they get now--and not cost DC tax revenue.

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For more on the history of the building, see the entry "The Old Post Office, a stand-out on Pennsylvania Avenue," from the Streets of Washington blog (and book).

Start with a city-wide accommodations plan: then consider TIF requests comprehensively

Closed motel where the marquee pushed the "locally owned" trope.

The Washington Post reports, in "D.C. developers seek subsidies to build 2 more Marriott hotels," that property developers building the conference hotel adjacent to DC's Convention Center are asking for $35 million in tax incentives to build two smaller lower price point hotel properties adjacent to the conference hotel.

Actually, I am in favor of conference hotels generally, because when you have to split up big associations between hotels (like what the American Planning Association had to do in DC in 2005), events in the "secondary" hotel property tend to get the shaft in terms of attendee patronage. It just doesn't work.

And I like the idea of offering inter-connected hotels with various price points, because it allows you to serve a variety of market segments and capture more of the visitor business overall--some people might not come because the hotel prices are too high and others (like me) seek out lower priced options such as bed & breakfasts or other discount options, even hostels.

The real problem is that most cities do not create comprehensive "accommodations" plans to address this and related issues.

And when you don't have a plan, you don't have a good way of addressing various one-off requests comprehensively, including prioritization.

(Although this is a problem with DC's TIF program generally--it's actually abominable, because there is no one central point in the city government where requests are received and evaluated and addressed.)

In commercial district revitalization framework plans I did for Brunswick, GA and Cambridge, MD, one of the recommendations I made for each is that the communities need to develop a broader and complete "accommodations" plan as part of the economic development element of the city's comprehensive/master plan.

I don't think I've ever come across such a component in master/comprehensive plans in the U.S., but it's something that has occurred to me over the years because most communities don't offer a complete array or set of accommodations to visitors. At least for communities that are tourist destinations, it ought to behoove them to think more comprehensively about this to better meet the needs of various market segments.

Probably I got the idea because it is laid out as part of the Tourism Destination Areas Self-Guided Workbook assessment and economic development process created by the Province of Nova Scotia in Canada. (I have written about pieces of this idea in the blog as well, such as in "Lower cost travel for the young and creative" and "More phenomenal tourism business development resources" in 2006.)

Accommodations plan worksheet, Nova Scotia Tourism Destination Areas Workbook. This is pretty simple, but it's more a scoping/current conditions assessment. It's not at the detail of a full-blown economic development plan.

Such accommodations plans should include hotels, motels, conference facilities, bed & breakfast, boutique inns, and depending on the market, hostels and campground facilities, at a variety of price points.

This is from the Brunswick plan:

The provision of accommodations within a community has nuances that are not always considered. The type and quality of the hotel brands that are present says things about the market and how the community is perceived. This was shown jokingly in the movie Total Recall when a Best Western brand was displayed on a hotel located in a low income neighborhood, while Hilton Hotels was the brand pictured in the more up-scale precincts of the Planet Mars.

In Glynn County, some of the most exclusive hotels and other accommodations are located on the islands--Sea Island Resort is world-renowned. For the most part accommodations located within the City of Brunswick are low end brands of national chains. (And motels located within Glynn County on I-95 are referred to as being in the City of Brunswick.) A now closed and dilapidated Days Inn is one of the most prominent buildings as a driver enters Gloucester Street from Highway 17 to travel downtown, creating a terrible impression, one that belies the beauty of buildings, parks, and streets located but a few blocks away.

Glynn County has a great demand for hotel-motel accommodations, not only because of tourism, but to provide rooms for students attending courses and training at the Federal Law Enforcement Training Center. While large room blocks are reserved throughout the year to serve this market, for the most part these are at significantly discounted rates--price, not quality of the experience, being the most important factor. There is no question that hotels developed as part of Liberty Harbor will be a welcome addition to the city's array of hotels, and will fill in a gap for higher end offerings. ...

Recommendation: That the City and DDA consider broadening the scope of the Downtown Hotel Market Study being conducted currently, and develop a broader accommodations development plan, as part of the Economic Development Element in the Comprehensive Plan, through the inclusion within a Destination Development Plan of an element on accommodations.

The price point issue is important for DC because the properties here tend to be more expensive, so a lot of people visit "DC," and spend most of their tourist visit in DC (with the exception of visiting Mount Vernon, Arlington Cemetery, and Alexandria) but their overnight stays in hotels/motels are outside the city (where they visit the U.S. Capitol, White House, National Mall, Smithsonian Museums, National Gallery, and Georgetown) so those communities get the bulk of the occupancy taxes generated by visitors.

In fact, Montgomery County, Maryland used to have a promotion program promoting visits to DC as "DC Days, Montgomery nights," playing off the fact that certain segments, especially families, seek cheaper accommodations in the suburbs while visiting DC. See the past entry, "Marketing the local experience that is also DC."

That's why the point by the developers asking for the TIF support is worth considering. The high cost of accommodations in DC is a key issue identified in travel economic impact and tourism research conducted for Destination DC.

(Note that a huge chunk of DC's hotel visitorship is generated by business related to the U.S. government including trade associations and lobbying. Actually some of the strongest months in DC tourism are February/March--spring lobbying, and October--the real start of the year's Congressional session after summer recess.)

But there is another element that needs to be considered in terms of responding to requests by developers for hotel-property-related government incentives and inducements.

Most hotel properties are not locally owned. And most of the money spent on hotel rooms is spent on debt service.

So much of the money generated by a "room night" other than that spent within the hotel or on hotel staff (housekeeping and other maintenance functions, food & beverage staff, etc.) is repatriated to the property owner, as well as a percentage that is paid to the hotel management company (e.g., Hilton or Marriott--used to be based in DC, they are in Gaithersburg now, and in fact, Marriott started in DC with a hot dog and root beer stand, or Choice Hotels, etc.).

While it happens that many of the major hotel/motel branding and management companies are based in the DC region, they are not based in DC proper, so these profits don't trickle down much to DC proper.

I haven't seen an economic multiplier study of hotel (accommodations) properties based on local vs. non-local ownership, and such a study is required to determine whether or not the return on investment from government subsidies pays off.

Now, we have to recognize that hotel stays support other business within the city such as at retail, restaurants, and other attractions. But more differentiated economic impact studies are in order to get better numbers and a sense of the success or failure of government incentives to generate deeper and broader economic development.

The Oak Park Motel in better days. Postcard image.