The Downtown Investment Authority board wants an incentives package for the proposed $17.31 million Home2 Suites by Hilton hotel in Brooklyn, despite DIA’s staff position that the project is financially viable without city help.
The DIA board declined a request Nov. 17 by Kelco Management and Development Inc. and Corner Lot Development Group for a property tax refund on their proposed six-story, 100-room hotel and restaurant at 600 Park St.
The companies are developing the hotel under Kelco Brooklyn LLC.
DIA CEO Lori Boyer and Director of Downtown Real Estate Development Steve Kelley recommended the board deny the Recapture Enhanced Value grant, a refund on property taxes, because they said the project did not qualify.
The board voted 5-1 to direct DIA staff to return with a deal that would give the developer financial assistance to equal a REV grant.
After the meeting, Boyer said that would be a $2,385,219 cash grant.
She said the incentive likely would be paid to the developer over several years after the hotel is completed.
The staff report, prepared by Kelley, says the developer did not provide proof of a financial gap requiring an incentive. The report said the Home2 Suites would negatively impact existing the occupancy rates of existing Downtown hotels.
Board member Ron Moody disagreed.
“I think Downtown is a different market,” he said.
Moody suggested each Downtown neighborhood like Brooklyn, LaVilla and the Sports and Entertainment District are their own markets.
“(In) Brooklyn, for this instance, there are some fabulous corporate clients there who could use a facility like this.”
Kelco says the hotel is the best use for the 1.2-acre parking lot used by GuideWell Inc. employees.
Developer attorney Steve Diebenow of Driver, McAfee, Hawthorne & Diebenow, and David Gray, executive vice president for real estate analyst Newmark Knight Frank’s Hospitality, Gaming & Leisure practice, worked to convince the board the project warranted the incentive.
Gray said the Home2 Suites would bring a new product to the Downtown market.
He told board members that unlike other extended-stay hotels Downtown, the Kelco project caters to a more cost-sensitive customer.
The other Downtown hotels that offer extended stay are the Marriott Residence Inn in Brooklyn and the Homewood Suites by Hilton on the Southbank.
Boyer told the board she thinks the City Council Auditor would agree with DIA staff that a REV grant for the hotel would run counter to DIA’s incentives strategy.
She said the DIA does not offer an incentive targeting hotel development.
Effect on occupancy
The Kelco proposal is similar to two other Home2 Suites built without city incentives on Gate Parkway and near Jacksonville International Airport.
The staff report says Kelco and Corner Lot were told in multiple meetings since 2020 that the project did not qualify for the REV grant and could drag down the Downtown hotel occupancy rate, which the city hopes will reach 70% from 2021-2025.
“The DIA has communicated consistently that, while the project itself has merit, providing incentives for its development runs counter to the BID Strategy Performance Measure goal of improving the occupancy rate of hotels in Downtown Jacksonville,” the report says.
The report cited research by RedRock Global and Urbanomics for the DIA’s 2015 Business Investment and Development Strategy that says the Downtown market has “adequate room coverage for the level of hospitality demand and lower than needed” at average daily rates.
The study says those points make the case for new hotel products “very difficult.”
The staff report said Kelco’s feasibility study by Newmark Knight Frank says hotel occupancy is expected to be negatively impacted through 2021 because of the COVID-19 pandemic.
Downtown hotel occupancy is rebounding from pandemic lows. Average occupancy was 55.6% the week of Oct. 31, according to Visit Jacksonville. That’s a 31.8% increase from that same week in 2020.
Average occupancy for all of Jacksonville for that week was 71.3%, up 22.5% from the year before.
The staff report shows pandemic average occupancy rates in 2018 and 2019 were 68.88% and 69.09%.
Diebenow and Gray pushed back against Kelley’s methodology, saying the 951-room Hyatt Regency Jacksonville Riverfront should be left out of any calculation when determining the impact the Home2 Suites would have on the market.
They said the Home2 Suites would not be detrimental to the Hyatt because it will not be a direct competitor. Home2 Suites is a select-service hotel, which usually offer fewer amenities and lower room rates than the full-service Hyatt.
“Yes, we’re going to take some room nights. But we’re also going to bring room nights that otherwise wouldn’t have gone to Hyatt,” Diebenow said.
Nearly all the board members at the meeting supported incentives for the Home2 Suites.
“A lot of the information is based on historical information. This board knows that Jacksonville’s on the rise,” Todd Froats said.
“I look at where the city’s heading, and I don’t think we have too many hotels five years from now, six years from now. I think this is a different property, so I think we have to look at it differently.”
Bill Adams was the lone vote against requesting the incentive package. He said it would be “taking money out of our pocket” instead of refunding property tax collected.
A REV grant would refund 75% of new property taxes generated by the project over the next 10 years.
Boyer said DIA should have a new term sheet that includes the incentive offer to the board in December or January.
Any incentive will have to be approved by City Council.
Board member Jim Citrano Jr. abstained from the vote because of his company’s professional relationship with Corner Lot.
Braxton Gillam and Oliver Barakat were absent for the vote.
Promoting hotels
The DIA’s decision comes after it supported an incentives deal in July that included a $47.7 million REV grant for Jacksonville Jaguars owner Shad Khan’s proposed Four Seasons Hotel and Residences on the Downtown riverfront by TIAA Bank Field.
A statement in the staff report from Visit Jacksonville President and CEO Michael Corrigan said the local hotel market focus since the 2005 Super Bowl has been a select-service hotel, adding 3,000 such rooms since then.
He said the organization wants to see the city shift its hotel incentives focus to high-end products.
“While these types of (select-service) hotels fill an important need for tourism, at Visit Jacksonville we believe incentivized growth in our city needs to shift to upscale, full-service properties,” Corrigan said.
“Incentivizing select service hotels shifts demand from a property to another newer version of it,” he said.
“More of the same hotels promotes a focus (on) service economy resulting in less revenue for a room, which means less overall profit and economic impact on the community.”
Other speed bumps
This is not the first time the DIA has pushed back against the Kelco-Corner Lot project.
In May, the Downtown Development Review Board said the developer could have a surface parking lot despite DIA staff objection that it conflicts with the area’s design code.
The DDRB is under the DIA’s purview.
That board granted the final design approval after attorneys for Kelco and Corner lot argued the structured parking garage required by the Downtown Zoning Overlay would not be feasible or financially viable for the 10,720-square-foot hotel.
