Hilton on the hook

Gilroy
– In a sign of continuing hard times for the hotel industry, the
Hilton Garden Inn and Gilroy officials are negotiating a debt
repayment plan after the hotel failed to generate tax revenues
promised under an economic incentive agreement with the city.
The contract, which expired in July 2004, gave the hotel three
years to channel $859,000 to city coffers in the form of Transient
Occupancy Tax revenues. In exchange, the city exempted the Hilton
from $764,612 in development fees.
Gilroy – In a sign of continuing hard times for the hotel industry, the Hilton Garden Inn and Gilroy officials are negotiating a debt repayment plan after the hotel failed to generate tax revenues promised under an economic incentive agreement with the city.

The contract, which expired in July 2004, gave the hotel three years to channel $859,000 to city coffers in the form of Transient Occupancy Tax revenues. In exchange, the city exempted the Hilton from $764,612 in development fees.

“We have economic incentive programs for a lot of the new businesses,” said City Administrative Services Director Mike Dorn. “Three years ago the Hilton signed an economic development agreement in which we waived their impact fees in exchange for them guaranteeing that we would receive sales tax revenues – in this case the TOT revenue – to offset the payments. Because of the downturn in the economy, they didn’t make their commitment. We’re asking for them to pay the difference.”

Hotel representatives were unavailable for comment. City officials would not disclose the amount still owed by the Hilton, citing Public Records Act exemptions that protect businesses from disclosure of sales and tax information.

“I, as a business owner, would not appreciate it if people saw the figures,” Mayor Al Pinheiro said of his own business. “Based on the sales tax amount they certainly would know what my gross is. As long as I’m paying my share, that’s all they need to know.”

To that end, Pinheiro stressed the importance of preserving the integrity of the economic incentive program.

“If they do not meet the obligation, we have to find some way for them to pay,” he said. “We have to make sure the contract is honored.”

City staff are now working out the final details of the payment plan, according to Dorn, who said the Hilton “couldn’t pay it all at once and they asked if they could spread it over three years.”

The 137-room Hilton opened up June 2001, off the Monterey Street interchange at U.S. 101. But an ideal location was not enough to spare the Hilton – and hotels across the country – from the drop-off in tourism after Sept. 11.

“The tourism industry in the state of California has been fighting to recover for the last five years,” said Kirstin Carr, director of the Gilroy Visitor’s Bureau. “San Francisco, Los Angeles, San Diego – the big metropolitan areas –  were hit hard but they were able to recover a little faster because of the name value. Monterey, Gilroy – any of these smaller communities – have been harder hit. We don’t have the marketing dollars.”

The local hotel industry’s problems were compounded by an economic downturn in Silicon Valley, according to Carr.

“A lot of the corporate travel we didn’t have anymore,” she said. “Plus there were a lot of hotels built between Gilroy and San Jose, making it an even thicker filter.”

The city’s roster of 17 hotels have seen their collective earnings dwindle since 2001, when revenues topped out at a record $10.23 million, according to figures from the visitor’s bureau. Since then, annual revenues gradually dropped off, settling at $8.1 million in the 2003-2004 fiscal year. Officials predict similar earnings for the current fiscal year.

The Hilton contract is just one of many economic incentive programs designed to lure businesses to Gilroy. The city began offering such incentives in the early nineties, according to Gilroy Revenue Officer Irma Navarro. The first agreement took place in 1993 with Wal-Mart.

Aside from the Hilton, the city has two active agreements involving businesses that pay TOT revenues – one with Country Garlic USA RV Park and another with Garlic Farm RV Park. Prior to the Hilton, the city entered into agreements with Forest Park Inn and Motel 6.

Navarro declined to identify any businesses that defaulted in the past, but said the city is currently reviewing all of its economic incentive contracts to ensure compliance.

“The majority do make the agreement and exceed it,” Navarro said. “Others defaulted and paid the difference.”

As the city works on a payment plan for the Hilton, officials are taking steps to improve the tourist base in Gilroy.

The visitor’s bureau, for instance, is planning a bluegrass music festival and an arts and wine festival to attract people to Gilroy during the off-season. Projects such as the sports center complex, which the city will begin constructing across the street from the Hilton this month, make the hotel a good bet as a creditor, according to Councilman Charles Morales.

“I think it’s a particularly viable area,” he said. “It only makes economic sense to work with them.”

Hotel revenues decline

Year Revenues Tax revenues

2000-01 $10,230,666 $920,760

2001-02 $9,739,855 $876,587

2002-03 $8,489,277 $764,035

2003-04 $8,108,277 $729,745

Source: Gilroy Visitor’s Bureau

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