Dear City Council,
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My name is Reed Moulds. I am Managing Director of Sand Hill Property Company, which developed and for the last decade has owned the ???Residence Inn Palo Alto Menlo Park??? located at 555 Glenwood Avenue.?? I am also a Menlo Park resident.??
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It came to our attention last week that tonight this Council will be considering a resolution to call an election for an increase in the transient occupancy tax rate from 12% to 15.5%. We have serious concerns with this proposal. Unfortunately, I am overseas and will not be able to attend, but we intend to have a hotel representative at the meeting, and I will share a few of my thoughts here.
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1. The City???s timing for this TO tax increase is not good for the hotel industry. The pandemic had a devastating effect on Menlo Park hotels and for the last 4 years we have been clawing our way back. 2020 and 2021 were almost total losses. 2022???s performance was about the same as what the hotel did 10 years ago. 2023 was a little better, but we are still a long way from our pre-Covid levels in terms of rate or occupancy, generating only 75% of the TO tax the hotel generated in 2019. Of course, in this same stretch our operating expenses have gone up dramatically.?? It is a challenging situation these days for all Menlo Park hotels even without an unprecedented tax increase.
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1. This TO tax rate increase likely won???t have the intended effect of materially increasing tax revenue. The silver lining is that things are beginning to stabilize and recovery is happening. But it is delicate. Our hotel has historically depended on business travelers, which has been great for the city because business travel usually involves stays longer than just a day or two, allowing TO tax to add up quickly. But business travel, like the return to the office, has taken much longer to recover to pre-pandemic levels, and what travelers there are today are budget-conscious, mindful of all-in costs instead of just room rate. This is especially true of our corporate accounts, who negotiate rates in bulk. Assuming a $300 per night rate, a 3.5% tax increase would add over $10 to the nightly bill.?? If the tax rate goes up, our customers will demand that the room rate goes down by that same amount. The City will be collecting a higher rate on less revenue, effectively relegating this increase to a lateral move.
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1. Local hotels, not the guests, will be the biggest losers. Unfortunately, this does mean that Menlo Park???s hotels will be the losers. The effect of this tax increase will be zero-sum, as hotel guests will pay more tax but less room rate. The new tax will be subsidized by Menlo Park hotels directly who will need to lower rates to maintain occupancy. Moreover, travelers have options and if all TO tax rates are the same they will have less incentive travel to Menlo Park instead of Palo Alto, where demand is greater. (This is why Marriott required us to put ???Palo Alto??? in our hotel???s name.) The lower TO tax rate is an important tool for our hotel to recruit guests to enjoy the tax savings and stay in Menlo Park, not Palo Alto. This measure will deprive us of this competitive advantage, and we will lose business to Palo Alto hotels.?? This means all Menlo Park businesses that are patronized by our guests will lose, too.
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Sand Hill Property Company???s position is that the City Council should not adopt the resolution to call an election to raise the TO tax. It would be bad for Menlo Park hotels, bad for Menlo Park businesses, and ultimately bad for Menlo Park. Menlo Park hotels are already suffering; it is the wrong time to increase the burden on visitors to our local economy or more likely cause hotels to subsidize the additional tax by lowering rates to maintain all-in prices. The City is risking the loss of hotel guests to other cities, and Council should question how much additional tax revenue Menlo Park will actually receive going down this path.
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If the Council feels, despite admonitions, that it must increase the tax, please adopt a revised resolution limiting the measure to a single increase of 1%, maybe 2% at the most, and eliminate the step-up to 15.5% altogether.?? Take a wait-and-see approach, and once the local hotel industry recovers and the additional tax is concluded to be sustainable consider putting another measure on the ballot.?? Nothing is stopping the City from pursuing a more normal, gradual path to the state???s highest tax rate.?? Palo Alto stayed at 14% for 4 years before increasing TO tax again. We are not aware of another instance where in one year a TO tax rate has increased from 12% all the way to 15.5%.?? While it would still be painful to Menlo Park hotels, a smaller increase would reduce the risk of shock to the system and give time to let the increase set in, allowing hotels and guests to make the adjustment and the City to observe the effects on the local economy and fiscal situation.
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Perhaps the most prudent course of action is to postpone tonight???s item altogether to allow more notice and give the City an opportunity to study the effects of different TO tax rate increases and consider ways to meet the City???s budgetary needs without concentrating the burden on one payer.??(For example, passing the quiet zone will by itself increase the City???s TO tax revenues, as our hotel???s rates and occupancy have always been depressed by the train noise.)?? Many hotel owners/managers are traveling at this time and may never even become aware of the issue ??? not to mention be able to weigh in ??? before the Council takes action tonight. I am sure if they are engaged they would express similar concerns.
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I don???t doubt there is a good chance voters would approve the measure as proposed. But just because you can do something doesn???t mean you should. This is an excellent opportunity for this Council to show restraint and cut a more thoughtful path. Thanks for your consideration.
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Reed Moulds
Sand Hill Property Company
Residence Inn Palo Alto Menlo Park
