Palm Springs City Council
January 28, 2026

CITY COUNCIL STAFF REPORT
DATE: JANUARY 28, 2026 BUSINESS & LEGISLATIVE
SUBJECT: INTRODUCE AN ORDINANCE ADDING CHAPTER 5.27 TO THE PALM SPRINGS MUNICIPAL CODE, RESTRUCTURING THE CITY’S HOTEL

OPERATIONS INCENTIVE PROGRAM (CITYWIDE)
FROM: Scott C. Stiles, City Manager
BY: Economic Development
SUMMARY:

This report proposes an update to the Hotel Operations Incentive Program (Chapter 5.62) with a new Ordinance (Chapter 5.27, Attachment A) that establishes a restructured and simplified Citywide Hotel Operations Incentive Program. The existing Hotel Incentive Program, first adopted in 2007 and amended in 2013, 2019, and 2023, has successfully stimulated hotel renovations over the last decade.

However, the eligibility criteria of the current program have become restrictive, limiting participation over time. Moreover, because the current program was amended numerous times over the years to target different categories of hotels, the qualifying criteria for the program as a whole has become difficult to navigate. The new ordinance broadens and streamlines the criteria so more hotels can qualify – including hybrid developments like developments that partially renovate a property as well as add new room stock. It extends the program (accepting applications through 2030, vs. 2023 under the old rules) and introduces a straightforward tiered incentive structure for all hotels with potential TOT rebate percentages and terms scaled to the level of hotel investment.

These changes are aimed at continuing the City’s economic development and tourism goals by incentivizing substantial hotel renovations and new hotel construction, while also encouraging historic preservation of iconic properties. Staff recommends approval of the ordinance, finding that it will promote reinvestment in the hospitality sector, enhance the City’s visitor offerings and ultimately increase long-term TOT revenues and public benefits.

RECOMMENDATION:

Waive the reading of the ordinance text in its entirety and read by title only; and introduce for first reading an Ordinance entitled, “AN ORDINANCE OF THE CITY OF PALM

City Council Staff Report
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1 SPRINGS, CALIFORNIA, ADDING CHAPTER 5.27 TO THE PALM SPRINGS

MUNICIPAL CODE, RELATING TO A RESTRUCTURED HOTEL OPERATIONS INCENTIVE PROGRAM.” and approve the ordinance. (The new Chapter 5.27 will replace the current Chapter 5.26 program for future agreements.) BUSINESS PRINCIPAL DISCLOSURE:

Applicants to the updated program will be required to supply the appropriate business disclosure forms at the time of application to the program.

BACKGROUND:

Palm Springs first adopted a Hotel Operations Incentive Program in December 2007 (Ordinance 1730, effective January 2008) to encourage the development of new hotels and the renovation of existing hotels. The Council’s intent was to enhance the City’s tourism appeal by supporting quality hotel facilities, maximizing use of the Convention Center, and expanding the local economy. Under the original program, qualifying projects entered into Hotel Operations Covenants with the City to receive a rebate of a portion of TOT generated by the hotel. Generally, new hotels could receive up to 50% of the TOT they generated for a set period (depending on the hotel’s size/quality), while renovated existing hotels could receive a share of TOT above their pre-renovation “base” TOT levels. The program proved extraordinarily successful in spurring hotel improvements citywide: by the end of 2012 (the program’s initial sunset), it had catalyzed over $180 million in hotel renovations, upgrading more than 1,600 hotel rooms in Palm Springs. This investment helped boost tourism, with spillover economic benefits, and significantly increased the City’s TOT revenues (which fund general City services). Notably, the City partnered with projects ranging from small boutique hotels to large conference style hotels under this program.

The original program was designed with sunset clauses, so no new applications for incentives were accepted after certain dates (e.g. new hotel projects had to start construction by December 31, 2017, and existing-hotel renovations had to be completed by December 31, 2015). The Council extended some deadlines on a case-by-case basis (for example, the Dream Hotel and Orchid Tree Hotel projects were granted program extensions). In February 2013, Chapter 5.26 was amended to refine program terms (Ord. 1821). However, by late 2012, as the initial program expiration neared, the City had largely paused the blanket program and handled incentives by individual agreements for critical projects.

In early 2019, responding to renewed interest in renovating several smaller hotels, the City revived the Hotel Incentive Program as “Phase II” (Ord. 1972, adopted February 6, 2019). This update re-established incentives for existing hotels only (the program for new hotel construction remained closed). Key terms of the Phase II program included: a minimum $5,000 per room investment in renovations; a 50% rebate of the annual TOT increment (i.e. the increase in TOT above the hotel’s prior 36-month average baseline) City Council Staff Report
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1 for a 10-year period; a requirement that renovations be completed by December 31, 2023; and a prohibition on new hotel projects participating. These criteria were intended to jump- start reinvestment in aging hotels and indeed succeeded in attracting participants – for example, the Yara Hotel (10 rooms) undertook an $857,000 renovation in 2024 and was approved under the program to receive a 50% TOT rebate over 10 years (capped at $857,122, equal to its investment). The Phase II program also required that participating hotels have a track record of operations (at least five years in the last 15, with three years of TOT payment history) to ensure incentives went to established operators. (See Attachment B for historic and current participation.)
Over time, staff identified that the narrow parameters of the 2019 “Phase II” program were limiting its usefulness. The fixed sunset of 2023 meant no projects starting after that date could apply, and the strict operating history requirement excluded some newly reopened or rebranded hotels from qualifying. Additionally, the program’s inapplicability to new hotel construction left the City with no active incentive tool to attract new hotel development during a period of robust tourism growth. In July 2023, the City Council discussed extending and refining the program. The Council gave direction (on July 24, 2023) to extend the program to December 31, 2028, to relax the five-year continuous operation rule (allowing non-consecutive operation over 15 years), and to accommodate hotels with limited TOT history by offering them a shorter 5-year incentive term at up to 50% TOT (or 75% for hotels in Class 1 historic buildings). The Council also directed the elimination of the annual CPI adjustment to the TOT baseline, suggesting instead a one-time adjustment mid-way through the incentive period. An ordinance reflecting some of these changes (Ord. 2087) was adopted on September 14, 2023, amending Chapter 5.26 to implement the extended sunset (through 2028) and other tweaks. Even with those amendments, the core structure of the program remained as a single-tier, 50%-for-10- years incentive geared mainly to small renovations. Despite these changes, larger projects found the incentive unable to overcome the prevailing wage requirement, and as a result, either have delayed improvement, or simply not participated in the program. (Paying prevailing wage is required by state law for incentives over $600,000; increases in construction costs estimate anywhere from 130% to 150% of non-prevailing wage costs resulting in a “negative” incentive; in other words, the incentive costs now outweigh the benefits.)
In late 2025, as part of a comprehensive economic development strategy, the Council called for a more fundamental overhaul of the Hotel Incentive Program. The City Attorney’s office and staff have drafted the new Chapter 5.27 as a wholesale restructured program rather than simply amending Chapter 5.26 further. (Chapter 5.26 will effectively be superseded; no new agreements will be made under the old chapter, though existing covenants under 5.26 will remain honored.)
The policy shifts focus away from classifying types of hotels and categorizing projects as renovation vs. new construction, but rather simply incents the amount of investment made “per key” (i.e., per room) by the owner/developer. In this way, the City focuses its incentive on the amount of the investment, rather than on type of construction project. As a result, City Council Staff Report
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1 the new ordinance broadens eligibility and introduces multiple incentive “tiers” to better calibrate the incentive to the size of the hotel investment. This approach acknowledges that larger, higher-end hotel projects may require a greater and longer incentive to be financially viable (as evidenced by previous Council-approved deals for major projects, which granted up to 75% TOT rebates over 20-30 years). At the same time, the restructured program continues to support smaller hotel renovations with a more modest incentive, and it retains safeguards to ensure public benefits – such as capping rebates at the amount of the private investment and requiring participating hotels to remain in operation as hotels.

In summary, the existing program’s limitations (tied to specific construction periods and one-size-fits-all terms) are addressed by this new Chapter 5.27, which provides a flexible but accountable framework to encourage ongoing hotel investment in Palm Springs.

STAFF ANALYSIS:

The proposed Chapter 5.27 (Palm Springs Hotel Operations Incentive Program) creates a tiered incentive structure and updates the application process, eligibility criteria, and agreement requirements. Attached Ordinance No. _____ contains the full text; key provisions are summarized below:
Program Eligibility:

The program is open to hotel operators citywide for projects involving substantial new construction or renovation of hotel facilities. Unlike the prior program, there is no minimum hotel size (number of rooms) requirement – even a small boutique hotel can apply, as long as it meets the investment threshold. However, the operator must devote at least 90% of the property’s floor area to hotel use (to prevent misuse of the incentive for predominantly non-hotel projects). Each participating hotelier must enter an Operating Covenant committing to operate and maintain the improvements as a hotel for the duration of the incentive term.

Applications must be submitted and approved before the hotel project is entitled (i.e., prior to issuance of any City discretionary permits for construction). This ensures the incentive is a factor in the project’s planning and is not granted retroactively. Hotels that have already received full entitlements or begun construction are not eligible to apply after the fact.
Investment Threshold & Use of Funds:

To qualify, a project must involve a minimum investment of $10,000 per hotel guest room. This is double the previous $5,000/room requirement, reflecting increased construction costs and the City’s desire for more meaningful upgrades. The “Actual Documented Investment” (ADI) is defined as the total verifiable project cost spent on tangible improvements including construction, furniture, fixtures, and equipment (FF&E), and soft goods (e.g. linens), but excluding soft costs like design and legal fees (those are not reimbursable). To ensure the incentive primarily supports City Council Staff Report
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1 substantial physical improvements, the ordinance requires that at least 80% of the project cost be spent on construction and FF&E, with no more than 20% on soft goods (i.e., towels, drapery, bedding).
oFor example, if a hotel plans $125,000 in total upgrades, at least $100,000 of that must be in hard construction/FF&E costs for the project to qualify for incentives on the full amount; soft goods expenses (e.g. new linens, TVs) beyond the 20% cap would not count toward the ADI or be reimbursed. This focus directs the City’s subsidy toward long-term capital improvements that enhance the property’s quality and guest experience.
Incentive Tiers:

The ordinance establishes five levels of incentives based on the per-room investment in the project. All tiers provide a rebate of a percentage of the Transient Occupancy Tax increment generated by the hotel, for a defined term of years, or until the operator has recouped an amount equal to their investment (ADI), whichever occurs first. Importantly, the City will never rebate more than the documented investment in any case – this cap ensures the public funds (foregone TOT revenue) directly leverage at least an equal private investment dollar-for- dollar. The tiers are:
oBase Tier: Investment of $10,000+ per room. Eligible for a 50% TOT increment rebate (City/Operator share TOT 50/50) for a term of 10 years (from the hotel’s covenant recordation). This essentially mirrors the incentive level under the prior program (50% for 10 years), but with the updated cost threshold and other new program conditions. oTier 1: Investment of $100,000+ per room. Eligible for a 55% TOT increment rebate (Operator receives 55%, City 45%) for 10 years. This tier gives a modest increase in the rebate percentage to reward more significant renovations or upscale improvements.
oTier 2: Investment of $225,000+ per room. Eligible for a 90% TOT increment rebate for the first 5 years, and 60% TOT increment rebate for the next 15 years, for a total term of 20 years. In this tier, the City’s share of new TOT is 10% during years 1–5 and 40% in years 6–20. This structure front-loads the benefit to the hotel in the early years when financing gaps are often greatest, then gradually increases the City’s share.
oTier 3: Investment of $350,000+ per room. Eligible for a 90% TOT rebate for the first 5 years, and 65% TOT increment for the next 20 years, for a total term of 25 years. Here the City collects 10% of the increment in years 1–5 and 35% in years 6–25.
oTier 4: Investment of $650,000+ per room. Eligible for a 90% TOT rebate for the first 5 years, and 75% for the next 25 years, for a total term of 30 years. The City’s share is 10% in years 1–5 and 25% in years 6–30. This City Council Staff Report
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1 highest tier is aimed at major, transformative projects – for instance, a large luxury resort development or a comprehensive redevelopment of a historic hotel property – which often require substantial incentives to be financially feasible. Notably, Palm Springs has previously approved incentives in this magnitude range (75% of TOT for 30 years) for significant hotel projects to fill financing gaps so this is not without precedence. Tier 4 effectively codifies a similar incentive level, with even greater initial relief (90% in early years) to assist projects through the critical ramp-up period.

Table 1.1 below summarizes the Tiers and their correlative values:

Previous Program Owner/Developer City Term
Renovation 50% 50% 10 years or cost
Historic Property 75% 25% 10 years or cost
New Program ($/key) Owner/Developer City Term
Base Tier ($10,000+) 50% 50% 10 years or cost
Tier 1 ($100,000+) 55% 45% 15 years or cost
Tier 2 ($225,000+) 90% 10% Years 1-5
60% 40% Years 6-20
Tier 3 ($350,000+) 90% 10% Years 1-5
65% 35% Years 6-25
Tier 4 ($600,000+) 90% 10% Years 1-5
75% 25% Years 6-30
Bonus (pick one)
Convention Center +10% -10% Year 6 – Term
Historic +5% -5% Year 6 – Term
Table 1.1
All tiers above Base build upon the principle that greater private investment merits a greater public incentive, within limits. Regardless of tier, no incentive agreement will exceed the amount of TOT equivalent to the operator’s actual investment – for example, if a Tier 4 project invests $20 million, their TOT rebate will cease once $20 million in rebate has been paid out, even if the term has not fully elapsed. In this way, the City ensures that the program’s benefit to the operator is proportional and capped. Furthermore, for existing hotels, the “TOT increment” is calculated as the TOT above the hotel’s historical baseline (the average annual TOT paid in the 36 months prior to the project). This means the City continues to receive all the base TOT it was already collecting from that hotel, and only the new growth in TOT as a result of the renovation is subject to sharing. (In the case of a new hotel on a vacant site, the TOT base is effectively $0, so all TOT is new increment – but since without the project that revenue wouldn’t exist, the rebate still City Council Staff Report
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1 represents no loss of existing revenues.) After the incentive term concludes (or the investment is fully repaid), the City will collect 100% of the TOT generated going forward. Bonus Incentives:

To advance specific City policy goals, the ordinance provides two bonus TOT rebate opportunities that can augment the above tier benefits, starting in year 6 of an agreement (after the initial 5-year period):

1. Historic Hotel Bonus: If the hotel property is designated as a Class 1 or Class 2 Historic Resource (per Palm Springs Municipal Code Chapter 8.05), the operator may receive an additional 5% TOT increment rebate beginning in year 6 and for the remainder of the term. This bonus recognizes the higher costs and public benefits of historic preservation. Historic hotels are often smaller or require specialized restoration, so this extra 5% helps offset those challenges. Example: A qualifying historic hotel in Tier 1 would go from a 55% rebate to 60% from year 6 onward; if in Tier 4, the rebate would become 80% for years 6–30 (instead of 90%/75% blend without the bonus).

2. Convention Center Hotel Bonus: If the hotel is larger than 125 keys and has onsite food and beverage and participates in Tier 1 investment or higher, the operator may receive an additional 10% TOT rebate beginning in year 6 for the rest of the term. The intent is to encourage high-quality hotel development near the Convention Center, which will support convention business and tourism. This bonus could apply, for instance, to a new hotel project in the downtown/convention center vicinity.

Only one bonus can be applied per project – they cannot be “stacked.” If a hotel qualifies for both (e.g. a historic hotel with 125 rooms or more), it would choose the single bonus that is more advantageous (likely the 10% Convention Center bonus in that scenario).

These bonuses are incorporated to further the City’s economic development objectives of preserving historic assets and strengthening the Convention Center area hospitality offerings. Therefore, in no case would a benefit exceed 85% share to the owner starting in Year 6 of the agreed upon Tier.
Application & Approval Process:

The ordinance outlines a clear process for application, analysis, and approval of incentive agreements:
oAn interested hotel operator must submit a Hotel Incentive Program application to the City Manager’s Office prior to receiving any entitlements for their project. The application will include a description of the project (scope, location, timeline, estimated costs), an identification of which tier the project’s investment qualifies it for, and any additional information required by the City. City staff will verify that the application is complete and the project meets basic eligibility.

City Council Staff Report
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1 oUpon a complete application, the City Manager will direct staff to conduct a fiscal analysis of the proposal. This analysis will evaluate the projected TOT that the renovated/new hotel would generate, the potential rebate amount and duration, and the net fiscal impact to the City over time. Factors like the hotel’s expected increase in occupancy or average daily rate (ADR) post- improvement may be considered. The analysis helps ensure the incentive is justified by a need to close a “financial gap” in the project and that the City will still benefit (this approach is consistent with practices in other cities that require demonstrating a funding gap for TOT rebate). oCity staff (Economic Development, Finance, City Attorney) will then negotiate a proposed incentive package with the operator, based on the applicable Tier and any bonus, and draft the hotel operating covenant agreement reflecting the terms. The draft agreement, along with the project’s related entitlements (e.g., Planned Development permits, if any), will be brought forward for approval. Smaller incentives – those valued at less than $100,000 total – may be approved administratively by the City Manager under the ordinance’s delegated authority. This delegation is designed to streamline assistance for minor projects (though in practice, most hotel projects meeting the minimum $10k/room will likely exceed $100k in rebate value over the term). Larger incentives (≥ $100,000) must be approved by the City Council at a noticed public hearing, in compliance with Government Code §53083 (AB 562). This Council approval is the case for virtually all multi-year TOT rebate agreements and ensures transparency and public input on significant economic development subsidies. oOnce an incentive agreement is approved, it will specify the tier, term, percentage of TOT to be rebated, the ADI cap, and any bonus applied. It will also incorporate the standard Operating Covenant to be recorded against the property prior to issuance of the Certificate of Occupancy for the project. The Operating Covenant will run with the land and bind future operators for the duration of the incentive term, ensuring that if the property is sold, the new owner must continue to operate the hotel and honor the agreement (or the incentive can be terminated if the hotel use ceases). The term of the Operating Covenant is equal to the incentive period (ending once the agreed years pass or ADI is reached).
Operating Covenant Requirements:

Each participating hotelier will sign an Operating Covenant agreement with key conditions to protect the City’s interests and policy goals. Two notable requirements are:
oPrevailing Wage for Construction: If the City’s total contribution (i.e. the total estimated rebate value) exceeds $600,000 and 2% of the total project cost, the project will be required to pay prevailing wages for the labor on the construction work. This threshold aligns with state law triggers for public City Council Staff Report
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1 subsidies. It ensures that larger projects benefiting from substantial public incentives provide good wages to construction workers, consistent with California Labor Code and the City’s prevailing wage ordinance. For example, if a hotel project costs $10 million and the City incentive is $1 million (10% of cost), prevailing wage would be mandated (since $1M > $600k and =10% > 2%). This requirement does not typically affect smaller rehabs but will apply to the larger tier projects.
oIndemnification: The operator must agree to indemnify and hold the City harmless from any claims arising from the hotel’s participation in the program. This means, for instance, if there were any legal challenges related to the hotel’s participation in the incentive program, the hotel operator would defend and cover the City. This provision protects the City’s taxpayers from liability associated with the private project. In no case can this be waived.
oIn addition, the covenant will reiterate the operational commitments (e.g. the hotel must remain available for short-term/transient occupancy use and, if applicable, participate in the Convention Center Hotel Program, as was required in earlier covenants). The Council retains discretion to impose other conditions in an Operating Covenant as needed to ensure the program’s intent is met. For example, the City could require a certain quality standard or brand level be maintained if that was a factor in approving the incentive. Another example is the City can mandate the development meet a certain time line.
Reimbursement (Payment) Process:

The ordinance specifies several conditions the operator must continually meet to receive incentive payments:
oThe operator must complete the construction/renovation and obtain a Certificate of Occupancy (for new construction or final inspection sign-off for renovations) before any rebate is paid. No upfront funding is given; the incentive is performance-based. This protects the City – the hotel must actually deliver the promised improvements and open for business to start earning the subsidy.
oThe operator must provide documentation such as building permits, contractor licenses, receipts and invoices to verify the costs incurred (i.e. proof of the ADI). City staff will review these to certify the actual investment.

This audit step prevents any “inflated” cost claims and sets the exact dollar cap for the rebate (the certified ADI).
oThe hotel must maintain a valid City business license and remain current on all TOT payments and other City fees throughout the incentive term. If a hotel falls behind on remitting its monthly TOT (which is required by Chapter

3.24 of the Code) or, for example, on utility payments or code compliance City Council Staff Report
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1 fines, the City can withhold the rebate until the operator cures the issues. Essentially, a hotel can’t benefit from a TOT rebate if it isn’t fully paying the TOT or obeying City laws. oThe operator must provide any additional forms or records requested by the City to ensure compliance. This could include annual statements of room revenues for verification, etc.
oThe City explicitly reserves the right to withhold or cancel incentive payments if the operator violates the program requirements or the Operating Covenant. The operator would be given notice and 30 days to cure any default. For example, if a hotel stopped operating as a hotel (converted to apartments or closed without City approval) during the covenant period, the City would cease TOT rebate payments and could terminate the agreement. This provision ensures accountability – the subsidy is conditional on delivering the public benefits (an operating hotel, increased TOT, etc.).
Program Sunset:

The new Chapter 5.27 program is not open-ended. It includes a sunset clause: no new applications will be accepted after December 31, 2030. This gives roughly a five-year window (2026–2030) for hotel projects to come forward under the program. The sunset ensures the Council can reassess the program’s effectiveness and fiscal impact in the future rather than creating a perpetual obligation. (By comparison, the previous program was set to sunset end of 2028 after the 2023 extension; this ordinance extends it two additional years to capture planned projects in the pipeline.) Any agreements executed on or before the sunset date will of course be honored through their terms, but no new incentive agreements will be initiated beyond 2030 unless the Council later extends the program by ordinance.

Comparison to Other Cities:

It is worth noting that TOT incentive programs are a fairly common economic development tool among destination cities, though specific terms vary. Palm Springs’ new tiered program is competitive with, and in some aspects more generous than, other California cities, reflecting the City’s strong commitment to tourism development. For example, the City of Dublin, CA offers TOT rebates up to 50% of increment for renovated hotels (for up to 10 years), and up to 70% for 4-star new hotels (for up to 20 years) – percentages and durations in line with Palm Springs’ middle tiers. The City of Morgan Hill recently adopted a program rebating 50% of TOT above baseline for 10 years for qualifying new or improved hotels. Santa Ana and other cities have targeted programs primarily for new luxury hotels (often 50%–100% TOT for 5–20 years depending on project specifics). Palm Springs’ program now spans both new and existing hotels and provides up to 90% TOT sharing for up to 30 years in the most significant cases, which is a notable incentive level.

However, the built-in cap (rebate ≤ investment cost), and the fact that Palm Springs’ TOT City Council Staff Report
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1 rate (12.5%) remains in place, ensure that the City will still receive a share of revenue and eventually the full tax. The City’s approach balances attractiveness to developers (especially for large projects that might not proceed without assistance) with protection for the City’s fiscal interests, and continues a tradition of Palm Springs using TOT incentives to shape its resort economy. As seen in the past, such incentives can be instrumental. The new program provides a transparent, criteria-based framework for considering similar large investments going forward, rather than on an ad hoc basis.

Overall, policy rationale for this ordinance is strong: it will help Palm Springs remain a competitive destination by encouraging the renovation of aging hotels and development of new hotel products that meet modern traveler expectations. It also offers a tool to support the preservation of historic hotel properties, which are integral to the City’s mid- century modern heritage and tourism appeal. By tying incentives to actual performance (increased TOT generation) and capping the City’s contribution, the program is essentially self-financing – it leverages new tax revenue that would not exist but for the hotel improvements. The ordinance contains safeguards (e.g. required investment levels, compliance monitoring, and the sunset provision) to ensure the Program can be managed responsibly.

Public Hearing Required Information (GOV. CODE §53083):

Future approvals by the Council require the City obey Gov. Code 53083 which is described in detail, below and will be customized to the individual incentive proposed at the time of review for approval:

Pursuant to Government Code §53083, the City must provide a written report and summary of certain information whenever approving an economic development subsidy of $100,000 or more. This ordinance establishes a citywide program under which individual agreements will constitute economic development subsidies exceeding that threshold. The required information is provided as follows (and in the attached Economic Development Subsidy Report on file):
Beneficiary Names and Addresses:

The Program is not specific to a single business or developer. Rather, it is available to any hotel operator in the City of Palm Springs who meets the program criteria and enters an incentive agreement. Thus, the potential beneficiaries are owners/operators of hotel properties citywide (within Palm Springs jurisdiction) that undertake qualifying hotel development or renovation projects. Each future agreement will identify the specific entity receiving the subsidy (for example, “ABC Hotel LLC, operator of the XYZ Hotel at [address]”). That information will be disclosed publicly with each agreement brought to Council.

City Council Staff Report
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1 City Council Staff Report
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1 Start and End Dates of Subsidy:

The Program itself will accept new applications through December 31, 2030 (the program sunset). Any approved Hotel Operations Incentive agreements will have defined start and end dates. The start date of an incentive agreement is typically the date the Operating Covenant is recorded and the first TOT increment is generated. The end date for each agreement will depend on the tier: generally 10 years from start for Base or Tier 1 projects, 20 years for Tier 2, 25 years for Tier 3, or 30 years for Tier 4 – or earlier if the total rebate paid reaches the investment cap. For example, if a covenant is approved for a Tier 1 hotel project, the subsidy period would commence upon the recordation of the Covenant (expected in, say, 2027) and end in 2037 (10 years later), unless the operator receives their full certified investment back sooner. In no event will a subsidy under this program continue beyond 30 years for any single project. After the end date, the City will receive the full 100% of TOT from the hotel.
Description of the Subsidy & Estimated Total Amount:

The subsidy is in the form of a rebate of transient occupancy tax (hotel bed tax) revenues that the City would otherwise collect, up to a percentage of the increment in TOT attributable to the hotel project, as defined by the program tiers. The TOT rate in Palm Springs is 11.5% for “small hotels” and 13.5% for “larger hotels” applied to gross room revenue (unchanged by this ordinance). For an existing hotel renovation, the City will continue to collect the “base” TOT (the hotel’s pre-project average) in full; the TOT increment (increased revenue) generated by the improved hotel will be split with the operator. For a new hotel, all TOT generated is new revenue and subject to the sharing split. Depending on the project’s investment tier, the City will rebate between 50% and 90% of the TOT increment to the operator for a set term, with the City retaining the remaining 10% to 50% of the TOT increment during that term. In addition, a small number of projects may receive a bonus 5–10% share (reducing the City’s portion correspondingly), from year 6 onward, if they meet the historic or location bonus criteria. Importantly, each agreement will specify a maximum dollar amount equal to the operator’s certified investment – once that amount in TOT has been rebated, the subsidy ends (even if the full term of years has not elapsed). Therefore, the estimated total amount of each subsidy will be tied to the project’s cost. For example, if a hotel invests $5,000,000 in a renovation, the maximum subsidy (public revenue “loss”) is $5,000,000 (rebated over the term from new TOT generated). In practice, not all projects will earn the full eligible rebate if their TOT ramp-up is slower than projected or if they reach the term limit first. By way of illustration, under the Base Tier (50% for 10 years), if a hotel’s TOT revenue increases such that it pays a total of $1,714,245 in new TOT over ten years, the City would rebate $857,122 (50%) to the operator and retain $857,122 – that $857k rebate figure represents the subsidy amount. Under a higher tier, say Tier 4 (90%/75% for 30 years), a large new resort might generate on the order of $150 million in TOT over 30 years; the program would allow up to perhaps $120 million of that to be rebated (90% early, City Council Staff Report
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1 75% later) if needed to recoup the investment, with the City still netting at least $30 million in that scenario. Each agreement’s total subsidy and the schedule of payments will be detailed in the Council staff report at time of approval. It is noted that no upfront City monies are paid out – the subsidy is a sharing of future tax revenue streams, contingent on performance. If a project does not perform as expected (lower occupancy, etc.), the actual rebate paid will be lower since it’s a percentage of actual TOT generated.
Public Purpose of Subsidy:

The public purposes and goals of this Program are to stimulate economic development in Palm Springs by encouraging the operation, maintenance, and expansion of high-quality hotel facilities. The City Council has determined that attracting and retaining first-class hotels yields significant public benefits: (1) The general welfare and material well-being of Palm Springs residents depend largely on the vitality of the tourism and travel industry. (2) Expanding and upgrading the City’s inventory of hotel rooms creates desirable visitor accommodations, increases tourism and convention business, provides employment opportunities for local residents, and strengthens the City’s economy. (3) But for these incentives, certain hotel projects (especially renovations of older properties or new luxury hotels with high development costs) might not proceed; by inducing such projects that “would not otherwise exist,” the City ultimately generates new tax revenues for the General Fund (TOT, sales taxes from visitor spending, property taxes, etc.) that support public services. (4) The use of public resources in this manner is for a properly public purpose – namely, the enhancement of tourism infrastructure – and the City Council has deemed this objective to be of paramount importance to the City’s long-term prosperity. Additionally, specific policy objectives include revitalizing blighted or underutilized hotel properties, preserving historic buildings (by providing a financial incentive to restore and continue operating them as hotels), and bolstering the Convention Center’s success (by increasing nearby room inventory and requiring participants to support convention housing needs). In summary, the subsidies are given in exchange for clear public benefits: upgraded hotels that improve the City’s image and visitor experience, greater TOT and other tax revenues after the incentive period, temporary and permanent job creation, and the preservation of important community assets. Projected Tax Revenue Effects:

It is challenging to precisely project tax revenue impacts of the program in aggregate, as it will depend on which hotels participate and their performance.

However, the structure ensures that the City retains a share of each dollar of new TOT revenue and all of the base TOT. During the term of an agreement, the City will receive between 10% and 50% of the incremental TOT from the project, as noted above, which is revenue the City would not have if the project hadn’t occurred. After the incentive term, the City receives 100% of TOT revenues going forward. For context, the City’s TOT revenue has grown substantially due in part to prior hotel incentive projects – e.g., TOT receipts climbed from $12.5M to $22M City Council Staff Report
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1 annually in the six years following the original program’s launch, indicating that even while sharing TOT with hotels, the City’s tax base expanded. Each individual agreement brought under this program will include a fiscal impact analysis. The City will ensure that the long-term projected TOT gain meets or exceeds the short- term subsidy. Because the incentive is performance-based, if a hotel under- performs, the City isn’t outlaying funds beyond what comes in. In sum, while the program forgoes a portion of new TOT revenue in the short-to-medium term, it should result in net positive revenue in the long term by enabling projects that increase overall TOT generation. (Additionally, improved hotels may raise surrounding property values and generate more sales tax and employment, yielding indirect revenue benefits not captured in TOT figures.). Estimated Employment Creation:

The incentive program is expected to lead to both construction jobs (short-term) and permanent jobs in hospitality (long-term). Every hotel rehabilitation or development will employ contractors and construction workers during the build- out. Upon opening or reopening, hotels typically hire additional staff for operations (front desk, housekeeping, maintenance, food/beverage service, management, etc.). The number of jobs varies by hotel size and class. For example, a small 10- room hotel renovation under the program recently reported creating 4 new full-time and 2 part-time positions (approximately 4 full-time-equivalent jobs) after improvements. Larger full-service hotels can employ dozens to hundreds of staff.

While we cannot precisely predict job numbers without knowing specific projects, we anticipate that each participating project will contribute to job growth. The program’s broader aim is to boost year-round employment in the tourism sector by increasing hotel occupancy and visitor spending. Each subsidy agreement under Gov. Code §53083 will enumerate the estimated jobs created by that particular project (broken down by full-time, part-time, temporary). In general, renovated and newly opened hotels lead to more staffing than shuttered or underutilized properties, so the program should have a positive impact on local employment and wages (especially when prevailing wage provisions apply for construction workers).

ENVIRONMENTAL ASSESSMENT:

Approval of the ordinance and incentive program does not constitute a “Project” under the California Environmental Quality Act (CEQA), as it can be seen with certainty that there is no possibility for it to cause a direct physical change in the environment (CEQA Guidelines §15061(b)(3)). The ordinance involves the creation of an economic assistance program (a governmental financing mechanism) and does not directly authorize any specific development or construction activity. Each hotel development or renovation project that may utilize this program will undergo its own discretionary review and environmental assessment, as applicable, at the time of its entitlement. This action is an organizational/administrative activity of the City in furtherance of its economic City Council Staff Report
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1 development goals and thus is not a “project” as defined in CEQA Guidelines §15378(b)(5).

ALIGNMENT WITH STRATEGIC PLANNING:

This initiative aligns with the City’s Strategic Plan focus on “Quality of Life” and “Advancing Economic Development.” The initiative also follows B2.2 of the recently approved Palm Springs Economic Development Strategic Framework (B2.2 “Update the Hotel Operations Incentive”). By stimulating private investment in hotel improvements, the City encourages job creation (both construction and hospitality jobs with living wages) and enhances the overall livability and prosperity of the community. A robust tourism economy supports better services and amenities for residents and visitors alike. Furthermore, preserving historic hotels and improving the built environment contribute to community pride and cultural enrichment, key aspects of quality of life in Palm Springs.

FISCAL IMPACT:

Adoption of the ordinance has no immediate fiscal impact, as it does not appropriate funds or approve a specific subsidy. However, implementation of the Hotel Incentive Program will affect the City’s collection of Transient Occupancy Tax revenues regarding incremental TOT collected from hotels undergoing investment in the community.

Under each incentive agreement, the City will temporarily forgo a portion of new TOT revenue generated by the participating hotel, rebating that portion to the operator, subject to the limits described. The City will continue to collect all existing baseline TOT (for renovations of existing hotels) and will collect a share of incremental TOT during the agreement term, plus full TOT thereafter. In essence, the program leverages future revenue growth – there is no out-of-pocket cost to the City’s current General Fund, only an opportunity cost against future tax receipts. Each agreement will be structured so that the City retains at least 10–50% of the increment in the interim and enjoys 100% of the revenue once the hotel’s investment is reimbursed or the term ends.

Because the incentives are performance-based, the City’s General Fund is protected: if a hotel does not increase its TOT as projected, the City simply pays a smaller rebate (since it’s a percentage of actual TOT). If the hotel succeeds, the City gains additional TOT revenue even while sharing (for example, under a 50% rebate, the City nets $1 for every $1 rebated).
As an illustration, a hotel approved last year shows how the fiscal impact is computed: the hotel’s TOT baseline was $102,481 per year; with renovations, it is expected to generate substantially more TOT. The City agreed to rebate 50% of the incremental TOT over that $102,481 base for up to 10 years, with a maximum rebate of $857,122 (which corresponds to $1.714 million in new TOT over the period). In that scenario, the City also retains $857,000 in new City Council Staff Report
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1 revenue over the same period, and after year 10 will receive all (base and increment) TOT going forward.

For larger projects in higher tiers, the City’s share initially may be smaller (e.g. 10%), but those projects are anticipated to produce much larger gross TOT. Even a 10% share of a major resort’s TOT can equal or exceed a 50% share of a small hotel’s TOT in dollar terms. Moreover, the long-term fiscal outlook is strongly positive: once each agreement concludes, the City’s revenue from that hotel jumps to 100% of TOT – essentially a windfall of tax growth that the incentive only delayed partially. History suggests that the program will encourage projects that significantly expand the tax base. For instance, after the initial program spurred widespread hotel upgrades, the City’s annual TOT revenue grew by nearly 75% in six years.

There are some administrative costs to note: City staff time will be required to process applications, monitor compliance, and handle the annual rebate calculations and payments. These can be absorbed by existing staff in the Finance and Economic Development departments, and are justified by the substantial private investment leveraged (historically, every $1 of TOT rebated under the program has leveraged about $1 of private investment and yielded another $1 for the City. Additionally, to comply with State reporting (AB 562), staff will prepare the necessary subsidy reports and post them online, which is a minor cost. Any consulting costs for fiscal analyses of proposals will be covered by application fees or existing economic development funds.

In summary, while the exact fiscal impact will depend on which hotels participate, the program is structured to minimize negative impact on the General Fund. The City is effectively investing a portion of future tax revenue to stimulate projects that provide broader economic and fiscal benefits. Over the long term, the City should realize net new TOT revenue, increased property values, and job growth as a result of the incentivized projects, which will outweigh the temporary sharing of tax revenue. Each agreement will be scrutinized to ensure it is fiscally prudent before Council approval. Staff will also report periodically on the program’s overall outcomes (e.g. amount of TOT rebated vs. retained, private investment generated, etc.) to maintain transparency.

REVIEWED BY:

Department Director: Wayne Olson
City Attorney: Jeffrey S. Ballinger
City Manager: Scott Stiles

ATTACHMENTS:

A. Ordinance No. 5.27 – An Ordinance of the City of Palm Springs, California, Adding Chapter 5.27 to the Municipal Code “The Palm Springs Hotel Incentive Program” B. Historic and current participation in Hotel Incentive programs