Agenda Index City of Vancouver

ADMINISTRATIVE REPORT

TO:

Standing Committee on Planning and Environment

FROM:

City Manager in consultation with the General Manager of Corporate Services / Director of Finance

SUBJECT:

Vancouver Convention and Exhibition Centre Expansion -
Funding the Industry Contribution

 

RECOMMENDATION

A. THAT Council advise the Provincial Government and Tourism Vancouver that, unless Tourism Vancouver identifies a viable alternative source of funding, it supports the allocation of future growth in the 2% hotel tax to provide the industry contribution of $90 million to the expanded Vancouver Convention and Exhibition Centre.

B. THAT Council advise the Provincial Government and Tourism Vancouver that any commitments required by the City to provide funding for the industry contribution will require the safeguards to ensure Vancouver taxpayers face no financial liability.

C. THAT the City Manager be authorized to enter into discussions with the Provincial Government and Tourism Vancouver on how this plan will be implemented and administered with a report back to Council prior to any commitments being made.

CITY MANAGER'S COMMENTS

The Provincial Government has requested Council to make its views known on a funding source for the $90 million industry contribution to the Vancouver Convention and Exhibition Centre expansion. In order to allow the Province to

complete the financial arrangements with its developer/operator and to provide some certainty to the Olympic Bid Corporation in development of its final bid book, Council is being asked to provide those views prior to its summer recess.

There are a limited number of ways the tourism industry can generate the cashflow necessary to provide its $90 million contribution to the centre expansion. In fact, only two streams, the 2% hotel tax and the City's business licence - both controlled by Council - have the potential to provide this cashflow within the 30 year time-frame required. The industry has requested a 0.5% increase in the hotel tax, however, for more than a year, the Provincial Government has indicated that it does not support this approach. The industry has indicated it does not support the use of a business licence surcharge proposed by the City Manager last September. These positions, leave only the existing hotel tax as a viable alternative.

Staff review of the hotel tax projections suggest that there are scenarios that provide the necessary funding to the expansion and provide Tourism Vancouver with ongoing (and perhaps increasing) funding to continue its tourism promotion program. Moreover, with partnerships among Tourism Vancouver, Tourism British Columbia and the convention centre developer/operator, the amount of funding available for promotion of the centre and tourism in general in the future will exceed Tourism Vancouver's current budget.

Provincial and City staff have met with Tourism Vancouver and the hotel industry to relate our position.

Staff are not asking Council to approve a specific formula to apply the hotel tax to the industry contribution at this time. Rather, Council's decision will set the context within which discussions can proceed with the Province and the tourism industry to develop that formula. At the same time, the door is open to Tourism Vancouver to identify other ways by which the industry contribution can be secured.

The City's involvement in this arrangement arises because the proposed source for the industry contribution are controlled by Council. While it will provide indirect benefit the City if the convention centre expansion proceeds, any arrangement with the province and industry must recognize that the financial risks will be transferred from the civic taxpayer to those that benefit directly from the expansion. The concept outlined in this report, with the appropriate safeguards in place, should provide that insurance. As a result, The City Manager RECOMMENDS approval of A, B and C.

COUNCIL POLICY

In September 2001, Council endorsed the current proposal for expanding the Vancouver Convention and Exhibition Centre and agreed that it was prepared to forego general purpose property taxes on the centre.

PURPOSE

The purpose of this report is to seek Council's input to arrangements for funding the $90 million industry contribution to the Vancouver Convention and Exhibition Centre expansion.

BACKGROUND

As part of the $495 million financing package for the Vancouver Convention and Exhibition Centre expansion, the provincial government will require the tourism industry to contribute $90 million.

There have been a number of proposals over the past two years as to how the industry contribution will be funded. However, because the funding sources available to the tourism industry are limited, most of the discussion has focused on the Hotel Tax. The Hotel Tax is imposed under the Hotel Tax Act (RSBC 1996, Chapter 207), which sets out the requirements for and limitations on the tax. Generally, the act provides for the imposition of the following taxes on the purchase price of hotel rooms in the City of Vancouver:

· a tax equal to 6.35% that is directed to provincial general revenue;
· a tax equal to 1.65% that is directed to Tourism British Columbia;
· a tax equal to 2.0% that is levied on behalf of the City of Vancouver.

These three components are equivalent to the maximum tax (10%) that can be applied under the act.

In 1988, the Province adopted a regulation under the Hotel Tax Act authorizing the additional 2% tax levied on behalf of the City provides for the following uses:

3. The purposes for which the amount paid to the municipality out of the revenue collected from the tax may be expended are convention centre marketing and tourism promotion, projects and programs.

With some minor exceptions, the City of Vancouver has directed all of the revenue generated by the civic portion of the hotel tax to Tourism Vancouver. Since its inception, the hotel tax has generated the following amounts:

DISCUSSION

The Provincial Government has approached the City requesting Council's views on how the industry contribution to the convention centre expansion will be funded. A response by Council has been requested by August 1 in order for:

· the Province to meet timing commitments related to its negotiation with the proposed developer/operator of the convention centre expansion
· the Olympic Bid Corporation to complete its final bid book, indicating a commitment to complete the convention centre expansion.

The tourism industry's access to a cashflow to support the $90 million contribution is limited. The following describe the options that have the potential to provide the industry contribution:

Increase the Hotel Tax by 0.5%

There are two options for increasing the existing hotel tax, one involving unilateral action by the Provincial Government and the other involving both the City and Province. In both cases, the proposed tax increase would generate approximately $57 million of the required industry contribution over the 30 year financing period.

1(a) The first option is to increase the provincial component of the hotel tax to 8.5%. The province can impose this increase unilaterally, however it would require an amendment to the Hotel Tax Act to increase the maximum amount of the tax above the 10% limit.

1(b) The second option would be to increase the municipal portion of the hotel tax currently at 2.0% to 2.5%, having the same effect as option 1(a) above. The 2% Hotel Tax is essentially a "civic levy" although it is not currently identified as such on individual hotel bills. Although this component of the hotel tax was requested by the tourism industry, it was the Council that passed a bylaw requesting the province to implement the levy and, under the provisions of the Hotel Tax Act, it is the City that is responsible for allocating and accounting for the proceeds. It would take a request from the City to initiate an increase in the current tax, however as with option 1(a), it would require an legislative amendment to the Hotel Tax Act and an amended regulation to implement.

It has been the position of the provincial government since mid2001 that it does not support an increase in the hotel tax to achieve option 1(a) or 1(b). Apart from being in opposition to its "no new taxes" policy, there are a number of reasons for this position. Perhaps the most compelling is the fact that this increase would result in a tax regime that is among the highest in North America. In addition, using an increase in the hotel tax, under either option, would result in the industry component of the convention centre cost being passed along to visitor-taxpayers rather than being funded from existing sources.

Utilize the existing Hotel Tax

The industry proposal indicated that the additional $33 million necessary beyond a tax increase would come from the existing hotel tax revenues. However, with no agreement to increase the hotel tax, the requirement necessary from this source will increase to $90 million.

There are a number of ways that the hotel tax could be used to generate the industry component of the convention centre funding, but in each case, there will be an impact on the funding of Tourism Vancouver during the period in which the contribution is being generated. However, analysis of the existing hotel tax and its potential for growth in the future provides an opportunity to continue funding Tourism Vancouver and generating sufficient additional revenues to generate the industry contribution.

City and provincial staff are supportive of this approach to generating the industry commitment to the convention centre expansion because it does not involve any new taxes, it is easy to administer and it ensures continued funding for Toursim Vancouver along with some incentive for the organization to partner with other funders to increase tourism to repay the obligation more quickly.

The tourism industry on the other hand has taken the view that the use of the existing 2% hotel tax to fund this obligation would undermine an agreement with the City that the hotel tax would be utilized exclusively for tourism promotion and marketing and that diversion would put the tourism marketing program, and potentially room night sales, at risk. However, with the exception of option 1 above, the other alternatives identified by the industry - including a levy on sightseeing fares, taxi drop-off fees and/or car rentals - do not generate significant revenue and were more complicated to administer and collect. The developer/operator of the convention centre expansion will be looking for simplicity and certainty in any financing arrangement that these other sources cannot provide.

Introduce a Business Licence surcharge on hotel rooms in the City.

In September 2001, the City Manager and Director of Finance proposed that one of the ways the industry contribution could be provided was through the imposition of a surcharge on hotel business licences. This could be accomplished within the current authorities of Council. A number of alternative ways of imposing this fee are possible, however, modelling done at the time suggested that a surcharge of averaging $350 per room-year would generate sufficient revenues to fund the $90 million obligation over 30 years.

In preliminary discussions, the hotel industry felt other options were more viable in part because of a concern the charge could not be separated on individual hotel bills and because it may have to be absorbed in existing room rates rather than added to it. A more important drawback of this option is that the City would have to develop the infrastructure necessary to collect and remit the new charge, a problem not involved in the other three options.

With no provincial support for an increase in the existing hotel tax, option 1 was no longer considered by City staff. Option 3 - a business licence surcharge - could be implemented, however, it would be a new tax similar to an increase in the hotel tax; would require new administrative processes; and, would be more difficult to collect than the current hotel tax. As a result, staff have worked with provincial staff to review the potential of Option 2 - to use the existing hotel tax.

RECOMMENDED OPTION

The option favoured by the provincial government and deemed the most likely to be successful by city staff is to commit a portion of the existing 2% hotel tax to the funding requirements. With the anticipated expansion of tourism in the future, especially with the growth that will come from an expanded convention centre, there is enough capacity in the existing tax to provide the industry contribution of $90 million and to fund Tourism Vancouver.

In September 2001, staff undertook modelling of the hotel tax to determine the potential for completing the industry contribution through this means. This modelling has been updated and validated based on similar work undertaken by the Provincial Government. As Tourism Vancouver currently depends on this source for the majority of its funding, any solution involving the hotel tax needs to consider the impacts on the funding available for marketing and promotion by that organization. Staff are prepared to discuss this modelling with Tourism Vancouver, however, to date, these discussions have not taken place.

In approaching the modelling, staff asked the following question:

What would be the impact on the allocation of hotel tax to Tourism Vancouver of funding the $90 million industry contribution to the convention centre expansion over a 30 year period using the existing 2% hotel tax?

The Potential of the Existing Hotel Tax

The revenue that can be generated by the 2% hotel tax is a function of several variable factors:

· the number of hotel rooms on which the hotel tax applies
· the average occupancy rate for these rooms; and
· the average daily room rate

The annual hotel tax revenue is calculated by the following formula:

# of hotel rooms X average occupancy X average room rate X 365 days X 2% rate

With the impact of the convention centre expansion factored in, it is anticipated that the number of rooms will increase along with the average room rate over the 30 year period. This increase has been added in the analysis along with expectation on average room occupancy and escalation factors in average room rates to determine the potential revenue over the 30 year period. The following table summarizes the key variables in the equation:

Based on historical patterns, staff believe these variables to reflect a reasonably conservative base for the analysis:

· the number of rooms includes rooms in budget to highest quality hotels in the City but excludes hotels that have been identified as SRO.
· the average growth rate for rooms over the last 10 years has been 300 per year, however, the analysis has utilized 150 rooms per year to generate an additional 4,500 room over the 30 year period. At present there are up to 2,000 new rooms in various stages of development.
· Occupancy rates at 68% are at the low end of recent experience and below the average of about 70% over the past 10 years. Occupancy can be influenced by visitor nights and room supply. Occupancy rates have been as high as 76% (1996) and as low as 63% (2001) during the last 10 years.
· average room rate for the hotel inventory indicated above is currently at about $140. Although room rate growth has been relatively flat during the last 3 years as a result of increased capacity and lower occupancy rates, growth of 2.5% annually used in the analysis for the 30 year period is below the overall average for the last 10 years.

The analysis is particularly sensitive to the changes in the number of hotel rooms and to average room rates. For example:

· if hotel room growth averages 200 rooms annually, with all other variables remaining the same, the contribution will be paid off in 26 years. If room growth averages just 100 room annually, the contribution will be $9.0 million short of achieving a 30 year payback, requiring approximately four additional year to pay off.
· if average room rates increase by 3% annually, with all other variables remaining the same, the contribution will be paid off in 25 years. If average room rates increase by 2% annually, the contribution will be $13 million short of achieving the 30 year payback requiring an additional five years to repay.

It should be noted that these two variables are not independent; if the supply of rooms does not meet the demand, average room rates can be expected to increase more quickly, offsetting the loss to the cashflow. Likewise, should room capacity increase faster than demand, growth in room rates can be expected to lag. In short, the two key variable in the analysis are somewhat dependent on each other such that shortfalls in one will likely be offset by increases in the other, balancing out the cashflow projection.

Using these variables, the analysis indicates that:

· a stream of payments with a net present value of $90 million can be provided from the growth in the 2% hotel tax revenue over the 30 year period.
· Tourism Vancouver's budget, which would be capped at $7.9 million in 2003, could see inflationary growth after providing for the financing requirements. The net present value of this stream of payments to Tourism Vancouver is about $110 million.

Participation of Tourism British Columbia

Discussions with the provincial government have indicated that Tourism British Columbia will participate in funding the industry contribution. This seems appropriate in that Tourism British Columbia will also benefit from the increase in the hotel tax that the convention centre expansion will bring.

The Province has indicated that Tourism British Columbia will contribute $18 million over the 30 year period of the financing, however, the terms of that contribution are unknown at this time. As a result, the modelling above assumes that the entire contribution will be provided from the existing 2% hotel tax. Additional funding that would be available, could be used for one or a combination of the following purposes:

· provide a pool of funds to "backstop" the funding commitment to the convention centre developer/operator and province;
· shorten the payback period for the industry funding;
· supplement the funding for tourism marketing and promotion that will be otherwise capped under the recommended option.

What Funding Will be Available for Tourism Promotion?

The option outlined above indicates that funding to Tourism Vancouver will continue at current levels of approximately $8.0 million. In addition, if the projections prove to be conservative, or if the 2010 Olympic bid is successful, there is the potential that the contribution to Tourism Vancouver can be increased in the future. While this position will limit the ability of Tourism Vancouver to expand it marketing efforts beyond current levels, it does provide the incentive for the organization to enhance tourism activities in order for its funding base to increase. That might be the incentive necessary for the organization to seek other funders from within the industry, as requested by Council in approving the 2002 business plan.

However, there are potentially two other sources of funding that can be put to tourism marketing and promotion. As noted above, Tourism British Columbia will be providing funding for the convention centre expansion from its share of the hotel tax which could be directed to marketing initiatives. Moreover, as the arrangements between the Province and the convention centre developer/operator will likely include some performance incentives, there will be a strong likelihood that promotion funding will be available from this source as well. As Tourism Vancouver and Tourism British Columbia have developed strong marketing skills, it is likely this funding can be brought into a strategic alliance that will allow Tourism Vancouver and these other funders, to have access to opportunities beyond the those available on their own.

LIMITING THE CITY'S INVOLVEMENT

If the hotel tax is the chosen vehicle for funding the industry contribution, it is the City as owner of that cash stream that will be taking the financial risks, despite the fact that it is the industry that is making the contribution. Should hotel tax revenue grow more quickly than anticipated, the obligation can be retired more quickly, the contribution to Tourism Vancouver can be increased or the City can allocate the funding to other tourism initiatives. On the other hand, should the future not produce the increased revenues, the City must identify how it will ensure the responsibility for repaying the financing remains with the tourism industry rather than having it fall to City taxpayers. The City will need to ensurethat the industry understands the nature of our involvement:

· that Tourism Vancouver and the hotel industry will be wholly responsible for funding the industry component of the convention centre expansion cost, even if the anticipated hotel tax revenues are insufficient;
· that periodic reviews need to be scheduled at which the base level of funding to Tourism Vancouver is reviewed with the financing plan and potentially adjusted;
· that as long as the financing plan continues to be valid, Tourism Vancouver can expect inflationary increases in its annual funding, but that there are no guarantees about the extent of these increases during the term of the financing;
· that should the financing plan prove not to be viable, that the City will look to other ways to recover any deficiencies, including the possibility of a business licence surcharge on hotel rooms or other tourist facilities.

It should also be noted that the modelling undertaken by staff makes no assumptions about the impact that the 2010 Olympics could have on hotel tax revenues. Should the Vancouver bid be successful, there are a range of possible outcomes for tourism. Work undertaken by the provincial government suggests that up to $25 million in additional revenue might be generated in the years leading up to the games and for several years afterwards. Leaving this potential revenue out of the modelling provides an extra level of flexibility around the financing plan and around the staging of the games. Once this revenue begins to appear in the actual hotel tax receipts, Council will have several options for using the proceeds, including:

· to pay down the financing, either by balloon payments to the financier or by creating a reserve against future growth in hotel tax revenue;
· allocating additional funding to Tourism Vancouver
· allocating funding to offset City costs in hosting the games

The purpose of this report is not to have Council make decisions on a final agreement on the funding of the tourism industry participation in the convention centre expansion. What is required at this point is Council agreement that, since the Provincial Government does not support an increase in the hotel tax to fund the convention centre expansion, and that Tourism Vancouver and the tourism industry have not identified other viable options for funding their contribution, the source of funding will be the existing 2% hotel tax. With this agreement, staff will begin more detailed discussions with the parties on the necessary agreements to implement this plan, with a report back to Council outlining options and seeking ratification.

CONCLUSION

The Provincial Government is in the final stages of developing a financing strategy for the expansion to the Vancouver Convention and Exhibition Centre and is seeking Council's view on how the industry contribution should be financed. While there are discussions necessary with the parties involved before finalizing the details of this funding plan, it is recommended that Council support the allocation of funds based on the projected growth in the hotel tax over the next 30 years.

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