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Hospitality Lawyer — New model for Condo Hotel regulation? In lieu taxes?

Author of www.HotelLawBlog.com
12 November 2006
Condo Hotel Lawyer on “in lieu taxes.” On November 7, 2006, the voters did more than put the Democrats in power in Washington, D.C. In Indian Wells, a wealthy desert resort community near Palm Springs, California, a 82.48% landslide vote approved Indian Wells Measure P — a condo hotel tax. Some think that the Indian Wells measure will serve as a model tax for the country. Others just fear it will stifle development and spread nationwide like a virus.


It’s no secret that municipalities have various concerns about the hotel/residential dichotomy — hotels generate transient occupancy tax, facilitate tourist traffic, provide overnight lodging for business travelers, and are generally perceived to impose less of a burden on infrastructure (schools, police, fire, traffic, etc.). The worry with condo hotels is that unit owners may decide to live in their units and not put them into the rental program, thereby depriving cities of the transient occupancy tax, taking hotel rooms out of circulation for transients, and burdening infrastructure. Some governments have adopted a lassez faire approach to the issue, noting that something like 80-90% of condo hotel buyers tend to put them into a rental program. Others have imposed use restrictions on condo hotels (i.e. not more than 60 days continuous use), and now there is a third model that Indian Wells has adopted.

As reported by Marcel Honoré, of The Desert Sun on November 8, 2006, the overwhelming approval from Indian Wells voters approved Measure P. This measure is hailed as “model tax” governing “condo hotels.” The city will now charge a 9.25 percent hotel tax on condo-hotel guests — the same as for traditional hotel stays, and a tax of up to $25 per day on condo hotel owners who live in their unit for more than 60 days in a year. In addition, Indian Wells is imposing an annual fee of up to $2,400 per year on condo-hotel unit owners. This fee will, however, entitle the owner to use the city’s golf resort. The measure applies only to future condo hotel owners.

Indian Wells City Manager Greg Johnson estimates Measure P to be worth about $2.5 million in annual tax revenue, which is about 2.5 times as much as the city generates from property taxes. He and the City Council hail the measure as likely to provide a significant amount of money to go toward city services, and they note that none of it would be paid by current city residents.

Johnson admits that some have argued that imposing a tax on non-residents is unfair, but he says the same is true for many taxes today, such as sales taxes and tourist taxes. He also notes that homebuyers commonly must agree to pay annual homeowners’ fees or one-time impact fees as the cost of doing business.

Only time will tell whether the tax accomplishes its purpose. Many fear that it will only impose an unrealistic additional burden on mixed-use developments with a condo hotel element. Construction costs for hotels have skyrocketed, making it difficult to get deals to pencil. This is just one more cost and burden testing the financial viability of new development. We will find out if it is the “straw that breaks the camel’s back.”

My partner, Catherine Holmes, has spent a lot of time working with every aspect of condo hotel regime structure, and published an excellent article on the issue of municipal regulation of condo hotel and mixed-use projects entitled, “A Developer’s Nightmare.” This article is available on our firm website, and Catherine has published a more detailed and authoritative article in Urban Land. For further information, contact Catherine Holmes whose contact information appears below.

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Catherine DeBono Holmes is a senior member of JMBM’s Global Hospitality Group® and a partner in the firm’s Corporate Department. Catherine assists clients with hotel management and franchise agreements, purchase and sale transactions, and condo hotel regime structuring. For example, Catherine provides national representation for a large hotel owner’s hotel management and franchise agreements. She recently assisted a client with a 1,500+ room convention hotel in successfully concluding a complex RFP process involving all the major hotel brands and negotiating a favorable management agreement. She devotes a significant part of her practice to advising condo hotel clients on many important business and legal aspects condo hotel regime structure and condo hotel documentation, including CC&Rs, HOA docs, unit management agreements, shared facilities agreements, rental management agreement programs, and securities compliance matters (structuring, documentation and training). Catherine can be reached at 310.201.3553 or cholmes@jmbm.com.

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Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or 310.201.3526.

Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why.

Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of 50 seasoned professionals with more than $50 billion of hotel transactional experience, involving more than 1,000 properties located around the globe.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done.

Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim’s books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues.

Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.