New York City hoteliers are looking beyond the core Manhattan market and taking advantage of property tax breaks to build hotels in the outer boroughs.
The costliness and scarcity of land in Manhattan makes farther flung hotel development more appealing, especially in a boom market.
They may not feature storied bars and $1,000-a-night rooms, but the Holiday Inn Express in Maspeth, the Best Western in Jamaica, the Comfort Inn in Jackson Heights, the Days Inn in Long Island City and the Independent Hotel in East New York are among the outer borough hotels getting breaks on property taxes through a city program known as the Industrial and Commercial Incentive Program, generally called ICIP.
ICIP was established by the city in 1984 to encourage commercial and industrial development in the Bronx, Brooklyn, Queens, Staten Island and Manhattan north of 96th Street. A portion of Lower Manhattan also qualifies for the program, which offers a partial exemption from or abatement of property taxes. The program will expire June 30, 2007, though developers said that’s not influencing their decisions to build outside of Manhattan.
Hotel developer Sam Chang, the CEO of McSam Hotel, has almost 2 million square feet of new hotel space in the pipeline. He plans to apply for ICIP benefits for some of his projects, particularly budget hotels in Queens and the Bronx.
“It’s definitely a big help,” Chang said. “It does motivate me to build more. It helps to reduce your operating costs by like 3 to 5 percent.”
Tax breaks are a particular necessity for development in the Bronx, he said. With expected daily room rates of less than $100, Chang said he needs the tax exemptions to help offset the costs of the land and construction. Manhattan rates averaged $260 a night in October, according to market research firm PKF Consulting.
Hoteliers can get the tax benefits for building new hotels or renovating existing ones in most of the city outside small pockets of Manhattan. Developers pay taxes on the assessed value of the existing land, not the assessed value of the new construction or building improvements.
Depending on the area, projects can receive the full exemption for 16 years, followed by a nine-year period when the exemption declines by 10 percent annually, or an 11-year exemption followed by four years when the exemption declines 20 percent per year. At the end of the exemption period, the full tax load is assessed.
“That can be a significant benefit,” said Robert Altman, a Manhattan real estate attorney who specializes in government benefits. To illustrate, the Best Western City View Inn in Long Island City, which has the ICIP program in place, received the benefits for 16 years with the nine-year phase-out. Averaging the assessment values over the years at $195,000 a year, multiplied by the current tax rate of 11 percent (which fluctuates each year), the hotel developers get $21,450 times 20.5 years (a blended number), saving $440,000 in taxes during the term of the hotel’s eligibility.
John Fox, senior vice president and executive in charge of the New York office at PKF Consulting, which covers the hospitality industry, said the outer boroughs appeal to hotel developers because prices are lower than Manhattan, where “we’re at record room rates,” he said.
“Until very recently, meaning the last year or two, in no disrespect to the people in the boroughs, the boroughs have not been an area that had much in the way of development or development interest,” Fox said.
There are 129 hotels in all four outer boroughs, excluding SRO-type hotels, dorms or private clubs. Manhattan has 198, according to the Department of Finance, which administers ICIP. Of the outer borough hotels, 48 have ICIP exemptions.
Eric Lewis, managing director at the hospitality and gaming group at Cushman & Wakefield, said hotel development in the outer boroughs is on the rise and that property tax reductions in the early years can aid in the feasibility of their development.
In the past year, Cushman & Wakefield appraised eight hotel sites in the outer boroughs, all of which use ICIP tax programs. Only two used the tax breaks last year and the year before.
Lewis said there was no causal relationship between the imminent ICIP expiration and the surge of hotel development, and said he thought that the program would be renewed.
“The city is supportive of the aims of the program and we are evaluating it in connection with other benefits that are available,” said Owen Stone, spokesperson for the Department of Finance.
But tax breaks alone do not make a project viable for a developer.
“The market conditions have to rise to a level that make a hotel project at least close to feasible,” Lewis said. “And then the ICIP exemption can get the project over the top.”
Stephen Peca, a partner at commercial real estate advisory firm Concourse Realty Group, said that he advises clients to investigate government-sponsored programs, though he said he doesn’t know the ins and outs of ICIP.
“As a developer you want to obtain as much money as you possibly can,” Peca said. “Every developer should always look for what the public incentives are because the government is really saying what they want to have in the city.”
Developers must apply for ICIP benefits before obtaining a building permit or starting construction. And, property owners have to file a certificate of continuing use annually with the finance department.
ICIP is not the only incentive program for city hoteliers. New York State Empire Zone Benefits also provide tax-related benefits in certain zones in the city.
The Hilton Garden Inn New York/Staten Island, for example, received tax breaks for investing in the West Shore Empire Zone in addition to ICIP tax exemptions.