Falls hotel subsidies defy recommendation

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The American side of Niagara Falls has too many cheap hotels and not enough high-end ones – so a specialist consultant told state officials in a 2011 report.

The proposed solution: build more high-end hotels and don’t subsidize budget or mid-range ones because of their “limited potential for economic impacts.”

The state has since invested $5.6 million to help finance three upscale hotels. The Niagara County Industrial Development Agency has given another $8.3 million in tax breaks to three high-end hotels, including two that also received money from the state.

But the IDA has also approved $7 million in tax breaks to do exactly what the consultant’s report said not to: add to the city’s “glut” of lower-quality hotel rooms.

The IDA has given tax breaks to 8 budget and mid-range hotels since the report’s release in 2011, six of them new builds.

The IDA has subsidized an estimated 555 hotel rooms in price ranges the state’s report said not to, compared with 394 higher-end ones.

“That report explicitly said: don’t do lower-end hotels. Instead, they did just the opposite,” said Assemblyman Sean Ryan, a Buffalo Democrat.

“You get these IDAs essentially going rogue – and that’s what’s happened here,” he said.

Henry Sloma, the IDA’s chairman, said he had not read the report or discussed its findings with state officials.

“It’s just an opinion,” he said, when asked why he had had not considered the report’s recommendations. “They don’t understand our business.”

State study: subsidize strategically

In 2010, state economic development officials commissioned a hotel consultant to assess the tourism market in Niagara Falls. The American side of the Falls has lagged behind the Canadian side for decades and, with tourism a central focus of the Buffalo Billion, officials wanted to know what could be done to persuade visitors to stay longer and spend more.

The study, released in June 2011, found that the city’s lack of high-end accommodation was putting it at a disadvantage with Niagara Falls, Ontario.

The Canadian side of the Falls, the study found, had more and higher-quality accommodations: almost 14,000 hotel rooms in 2009, compared to the US side’s 3,300, and 5 upscale hotels compared to only one on the U.S. side.

The study concluded that economy hotel rooms on the American side attract “highly price-sensitive customers” and recommended that Niagara Falls focus on developing high-quality hotels affiliated with major brands, like Four Points by Sheraton and Hyatt Place.

The study specifically discouraged adding to the “glut of low-quality hotel inventory” by subsidizing mid-range and economy hotels – brands like Holiday Inn, Best Western and Motel 6.

Cheaper hotels are a less efficient use of public investment, said Hans Detlefsen, the study’s author.

For starters,  cheaper hotels create a weaker economic ripple effect because their room rates are lower.

Additionally, the customers they attract tend to spend less when visiting, on meals, shopping and other tourism activities.

Hotels with restaurants, banqueting areas and concierge and valet services also create more jobs than cheaper hotels with limited services.

Moreover, the study said, large numbers of midscale and economy hotels create “intense rate competition” that can make it harder for higher-quality hotels to compete – particularly in highly seasonal markets like Niagara Falls.

“If you’ve got a lot of supply at low rates, it’s hard to add supply at higher rates,” Detlefsen said.

“And it can be harder for higher-end hotels to justify and hold their rates,” he said, because a large supply of cheaper rooms creates “downward rate pressure throughout the market.”

Hotel occupancy rates in Niagara Falls, as well as the total number of room nights booked, have been gradually increasing over the past decade, according to data from industry consultant STR.

Occupancy rates increased from 43.5% in 2002 to 62.5% in 2013. But the overall supply of hotel rooms has increased only slightly, up 7% between 2002 and 2013.

Hotels in the city routinely sell out during the peak summer season, said Niagara Falls Mayor Paul Dyster – and this is bad news.

“If there are no rooms for people to stay in, we just lose their business,” Dyster said.

However, whereas economy and mid-range hotels simply cater to existing demand, upscale hotels create new demand, attracting visitors who might not otherwise come to the city, said Detlefsen.

“The issue with adding more economy and midscale hotels is that you’re just adding supply, not bringing in extra demand.”

Focus on quality hotel rooms

The state has largely concentrated its economic development efforts in Niagara Falls on high-end hotels, in keeping with the report’s recommendations.

Since 2011, the USA Niagara Development Corp., a state economic development subsidiary, has given $5.58 million in grants to three hotel projects, including:

• $2.75 million for the Hamister Group’s Hyatt Place, which will include retail space and apartments. The project is also set to receive another $1.1 million grant from the state that has yet to be formally approved.
• $750,000 for Canadian developer Faisal Merani’s DoubleTree by Hilton, which will also receive a $2 million loan from the state’s Upstate Regional Blueprint Fund. The loan will be converted to a grant over five years if job creation targets are met.
• $980,000 for developer Frank Strangio’s Wingate by Wyndham with 4,000 square feet of retail space on the ground floor.

In each case, the developers have asked the IDA for subsidies on top of the money they are getting from the state.

Merani and Strangio have received tax breaks worth a combined $9.2 million from the Niagara County IDA. The IDA has accepted the Hamister Group’s application for $4.24 million in tax breaks, and will likely approve the deal at their next meeting, once a public hearing has been held.

State officials are so confident that the IDA will give tax breaks to hotel projects that their economic analysis assumes that developers will receive IDA subsidies – even if they haven’t yet applied for them.

“Based on our understanding of the IDA’s philosophy, we make the assumption at the point of entry that a PILOT will be approved,” said Christopher Schoepflin, president of USA Niagara Development Corporation.

But, unlike the IDA, the state doesn’t generally subsidize cheaper hotels.

“That’s the one thing that has been happening on it’s own,” Schoepflin said. “It’s not the best way for the state to use the limited investment it has.”

Said Dyster: “We have to justify government participation in terms of spin-off benefits.”

Developers should only be building cheaper hotels, he said, “if they can be profitable within a reasonable amount of time.”

IDA ignores recommendations

The report’s recommendations fell on deaf ears at the Niagara County IDA.

“This is like home rule,” said Sloma, the IDA chairman.

“We’ve decided what’s best for our community and we’re taking steps to do that.”

Since the study’s publication, the IDA has approved tax breaks worth more than $7 million for eight hotels in price ranges the study explicitly discourages subsidizing.

These lower-end hotels are mostly on Niagara Falls Boulevard, where the majority of the city’s lodging is located.

IDAs aren’t normally supposed to give tax breaks to retail projects – a category that includes hotels – but state law includes a number of exceptions, including one for developments that will be “regional tourism destinations.”

State law gives IDAs a lot of leeway in determining exactly which projects qualify and in Niagara County, IDA officials have not asked hotels to document how they will meet those criteria.

The subsidies granted range from $500,000 for a Microtel Inn to $1.76 million for a Comfort Inn & Suites.

That’s a lot of lost tax revenue – particularly in a county which has consistently ranked as one of the most highly taxed in the country.

Between 2006 and 2009, Niagara County had the second highest property taxes, as a percentage of home value, in the country, according to an analysis by the Tax Foundation, an independent research organization.

Revenue from real property tax – the major component of IDA tax breaks – is the county’s second largest revenue source, according to data from the state comptroller’s office.

Niagara County qualified as “fiscally distressed” under guidelines released by the state in 2013 – the only county government in Western New York that did.

Of the IDA giving tax breaks to lower-quality hotels, Schoepflin said: “I wouldn’t encourage it for a long period of time.”

The Niagara County IDA and the City of Niagara Falls have disagreed in the past about how much hotels should receive in subsidies, particularly after the IDA in 2009 approved an unusually generous 20-year PILOT for what is now Faisal Merani’s DoubleTree hotel downtown.

The arrangement included 5 years of zero property tax on top of another 15 years of reduced property taxes. The normal length for property tax abatements is 10 years.

“It’s largely the city’s tax revenue they give away when they do a PILOT,” Dyster said.

A less-subsidized future?

“If you’re going to be on the tourism part of the economy, you have to do it in the right way,” said Assemblyman Sean Ryan. “Subsidizing one-night stays in cut-price hotels doesn’t fit that scenario.”

There are wider problems with basing economic development on tourism, said Sam Magavern, co-director of the Partnership for the Public Good, a coalition of 178 community groups based in the Buffalo metropolitan area.

“We would much rather see economic development money go towards public infrastructure that would attract more people to the region,” he said.

Dyster, meanwhile, is adamant that the next 1,000 hotel rooms in Niagara Falls will be built “with a lot less subsidy.”

“Maybe as the hotel and construction boom becomes more certain, the IDA will be less desperate about attracting investment,” he said.