A Little Hotel Seeking Big Tax Breaks

The hotel talk these days is mostly about the recent proposal from the District to pay $750 million to build a mammoth Convention Center Hotel.  We’ll write on that topic pretty soon.

Today we want to cover a lesser-discussed hotel subsidy – it’s an effort by a developer to get $7 million in tax breaks from the city for a planned boutique hotel at 22nd and M Streets, NW.   A bill before the DC Council to do just that was the subject of a hearing in May.

$7 million may be small compared with $750 million, but it raises big questions about why DC should provide any subsidy at all to a hotel in one of its strongest real estate markets, especially at a time of difficult budget conditions.

The justification for this bill is that a changing economy and weak credit market have made it harder to finance the hotel’s development.  But that hardly seems to be a good reason to give it a $1 million tax break for seven years, as the bill would do.

The District cannot bail out all stalled commercial projects. Many development projects are facing trouble.  The District cannot afford to subsidize all of them, and it is not fair to help some projects but not others.

There are plenty of affordable housing developments that are stuck due to financing problems. The economic downturn has forced a big cut in funding for DC’s Housing Production Trust Fund.  The city has $175 million in approved affordable housing applications, but only $27 million to pay for them.  Rather than spend $7 million to subsidize a boutique hotel, the city should use its resources to get more of these affordable housing projects going.

There is no evidence that the hotel needs this subsidy to succeed It’s not clear why it needs a tax break for seven years, when the credit market probably will return to normal before then.  If the hotel has a solid business plan, it eventually will get built even without a subsidy.

Other forms of assistance have not been sought. The federal stimulus law has provisions to help businesses access low-interest rate loans.  The District should pursue that for the hotel first.  A second option (though less desirable) would be to provide a direct loan from the District at a market rate.  DC passed legislation in 2008 to offer a similar loan to Arena Stage.

The Council often considers ad hoc tax breaks without considering the broader context – that a $7 million tax break for a luxury hotel means $7 million less for other, more important priorities.  We think these trade-offs need more attention before the city gives away too much of its precious revenue.