Sonoma’s Economy and Hotels - An Op-ed from Carol Giovanatto

Editor's Note: The office of City Manager Carol Giovanatto, through assistant city manager Gay Johann, distributed the following "op-ed" to Sonoma media today. It has not been edited, though some paragraphs have been broken up for easier online readability. It's also attached as a PDF.- ck

In light of the dialog surrounding the proposed Hotel Limitation Measure and the varying degrees of understanding of facts and terms related to this initiative, I have prepared this narrative fact sheet.

As City Manager, I thought it would be helpful for our citizens to understand the basics of Sonoma’s economy and the role that tourism plays in supporting public services. Sonoma continues to work hard to ensure that the Statewide economic/recessionary impacts are mitigated through every means possible. Tourism is our City’s life-blood and the revenue derived from tourism STAYS LOCAL! It is the only major revenue source of the City that is not shared with any other governmental entity (County, State, Federal).

So, what is Transient Occupancy Tax [TOT] anyway? In 1965 the City enacted Ordinance #354 entitled, “uniform transient occupancy tax ordinance of the City of Sonoma.” The language in this ordinance states, “For the privilege of occupancy in any hotel, each transient is subject and shall pay a tax measured by rent charged by the operator . . .”

Simply said, the rate charged for a hotel stay is subject to a tax rate of 10%. Each hotel operator is required to collect and remit this tax to the City on a monthly basis. TOT is often referred to as the “Hotel Tax.”

What is a “Hotel?” Per the definitions contained in the TOT ordinance, the term “Hotel” is used for any hotel, inn, tourist home or house, motel, studio hotel, bachelor hotel, lodging house, rooming house or any structure or portion of any structure which is designed for occupancy by transients for dwelling, lodging or sleeping purposes.

What is the TOT tax used for? TOT taxes are a major revenue source for the City’s General Fund Public services contained in the General Fund include Police, Fire, Public Works, Parks, Community Activities, Planning, Building and City Administration. TOT comprises 21% of the General Fund total revenue.

How valuable is TOT Revenue? TOT is one of the top three revenue sources for the City (the others being property tax and sales tax) which has been consistently increasing. For the past ten years your Council has been working diligently to protect all revenue sources.

TOT is one revenue source that will grow based on local efforts and unlike the sales tax it is not shared with other governmental entities. During the period 2000 through 2013, TOT revenue has increased 374%, from approximately $600,000 to $2.5 million annually.

What efforts has the City made to stabilize this vital revenue source? Over the past several years the City has focused on partnering with the Sonoma Valley Visitors Bureau (SVVB), the Sonoma Valley Chamber of Commerce, and most recently the Tourism Improvement District [TID]. The basic premise of all of these partnerships is to “increase tourism in the off-season months.”

The SVVB has instituted events in the “off-season” including Girlfriends Weekend and Festival of the Olive events. The TID now funds the Special Events Grant program which supports events that increases overnight stays in the ‘off-season’; the TID also funds the overall marketing program which was previously funded by the City and the Redevelopment Agency.

Both the SVVB and TID have increased marketing efforts to attract off-season visitors and it appears to be WORKING based on the continuing rise of TOT revenue. Absent this increased revenue through TOT and related increases in sales tax income, the City would be facing dire budget impacts. The public would feel those impacts through reductions in public safety and public services overall.

What is the “off-season” and how does it affect Hotels? Hotels are one of the most impacted businesses in the “off-season” [defined as the period November through April] as are our local businesses which benefit from tourist trade. While we all know Sonoma is beautiful year around, many tourists do not travel during the winter months and most parents stay ‘close to home’ during the school year. Increasing tourism and the resulting TOT revenue continues to be the challenge during these times of the year. The underlying effect of the “off season” is that hotel stays are less and therefore it reduces the overall occupancy rate for purposes of the annualized total.

How realistic is the 80% Occupancy Rate as reflected in the Hotel Limitation Measure? The language contained in the Hotel Limitation Measure directs that the establishment of a hotel with more than 25 rooms would be prohibited until the “annualized hotel room occupancy rate for the calendar year exceeds 80%.”

That would mean that every lodging-type establishment throughout a 12-month period would need to be at near capacity year-around without regard to the visitor’s preference as to the type of lodging property they prefer. Sonoma has never experienced an annualized occupancy rate of 80%.

So, just how full are our hotels? There are 527 total hotel rooms available in Sonoma. The information contained in the charts following reflects the total occupancy of all hotel establishments combined. The annualized rate of TOT for all establishments is approximately 65%.

How is the Occupancy Rate [%] calculated? The Hotel Occupancy Rate is calculated based on the number of room-nights available [1 room night = 1 day]. On a monthly basis, each room would need to be rented every night to achieve 100% occupancy for the month. Based on a 30-day month, 0-50% occupancy rate equates to that same room being rented to a maximum of 0-15 of the 30 days; a 51-79% occupancy rate would mean that the room would need to be rented 15-24 days; and, 80% occupancy would mean the room would need to be rented 25-30 full days within a 30-day period.

Do other factors affect occupancy rates? External factors such as remodeling and repairs of rooms which cannot be rented affects the total occupancy, or if the owner of a small property closes for a period of time, that closure brings down the overall occupancy rate.

Just the facts please . . .

There were 38 reporting lodging properties in the City in 2012. These vary in size of property and number of rooms, with the smallest being one room and the largest being 182 rooms. Sonoma has something for every type of visitor. BREAKDOWN OF LODGING ESTABLISHMENTS

Bed & Breakfast

10 properties

Hotels

5 properties

Inns

3 properties

Motels

2 properties

Vacation Rentals

18 properties

Of the 38 lodging establishments in 2012, three properties were at the 80% level annually, 23 properties had a rental percentage of between 51-79%, and 12 properties were at the zero to 50% occupancy. OCCUPANCY RATE BY ESTABLISHMENT

Year

# of properties reporting

0%- 50%

51%-79%

80%-100%

2010

37

19

16

2

2011

38

17

18

3

2012

38

12

23

3

[An additional chart of "Occupancy Rate by Category & Month" in calendar year 2012 is attached as an image to this article, as we could not publish it as a table in this article.]

Finally, a small piece of trivia . . . According to a national travel company, only three cities in the U.S. have an average 80% Occupancy Rate -- San Francisco, New York City and Waikiki Beach.

As I stated in the opening paragraph, this Op Ed is provided solely for the purpose of providing information to the citizens of Sonoma. I hope that you find this helpful in your individual decision-making process.

Carol Giovanatto, City Manager