PATRICK TIERNEY PH.D.DEPT. OF RECREATION, PARKS, AND TOURISM

PTIERNEY@SFSU.EDU

Retention of Low Cost Visitor Lodging in the Coastal Zone

Major Factors Influencing Economics of Coastal Zone Lower Cost Visitor Lodging (CZLCL)

Focus in this presentation is on non-camping CZLCL. Not looking at ownership by nonprofits (hostels). Looking at inns, motels, lodges, B&Bs

CZLCL (under $130/night) when within 1-3 hours drive time of major urban centers Very high demand by visitors, can charge high prices, (some exceptions for area and season) Higher costs of real estate, and to operate: labor, maintenance, supplies and services Limited supply of formal tax-paying CZLCL

Low season= 5 in Monterey, 3 in Half Moon Bay, 8+ in Santa Cruz Difficult to get local community support for constructing new visitor CZLCL

Neighbors opposed to any new development Officials prefer high end development for maximum boost to tax base Individual investors want “cold bed” condos

CZLCL when more than 3 hours drive time from major urban centers Highly seasonal demand Slightly lower costs of real estate, maintenance and services

CZLCL is often aging, has deferred maintenance or is in need of updating

Common Financial Factors Impacting Retention of Existing CZLCL

Capital cost factors that favor retention Property was purchased and built prior to 1980Has been family owned and operated for many yearsHas not been sold more than once Have paid off mortgage

Financial Factors Influencing Retention and Profitability of Existing CZLCL

Many Have Much Lower Operating Costs Due To:Low Proposition 13 tax ratesFamily heavily involved in management and operationFamily currently/one-time lived on propertyHave substantial inheritance or family moneyWealthy family pays much of initial cost for them (BNB) or their childOnly need to cover operating expenses with fees chargedThere is a supplemental source of incomeFamily member has income from non-lodging source

Stocks, or on-site activities like ranching, art Without these financial factors it is very difficult to be profitable at CZLCL

rates

Other Significant Factors Influencing Retention of CZLCL

Some owners are interested in a “lifestyle” businessWilling to trade less financial return for a better lifestyleAllows them to live comfortably in a rural, beautiful, less stressful

area

Owners have a historic or family connection to propertyLand has been in family for yearsBuildings are unique/historic and owners want them protected

Without financial and other non-financial factors there is much less incentive to retain CZLCL Relatively low return on investment from operationsOwners can make a much larger financial return by other uses of

propertyLeads to demand for demolitions and conversions

Alternative Corporate Franchise Model of CZLCL

A great deal of the new CZLCL construction in last 20 years has been through national franchises inside city limits Can be profitable Often lacks character or uniqueness

Rectangular concrete box with a paved parking lot The “Motel 6” model can work

Keeps construction and operating costs low enough to be profitable Many consumers are willing to forgo amenities for lower cost Franchise branding, marketing, reservation system and lower supply costs are

large benefits Big financial question is the land/property costs

Impact of Land Costs on Opportunity for CZLCL

Extremely high demand for coastal zone land Residences for owners Investment properties for the wealthy

Houses sit empty for 355 days of the year Vacation rentals by private owners

Has driven up land/property prices beyond what allows CZLCL to be profitable- Lots selling from $180,000-$300,000; B&Bs selling for $895,000 to $4 million.

Just one sale of a CZLCL property at current market rates may mean the recovery of capital costs requires change to moderate or luxury pricing Monthly mortgage payment impact is huge on motel cost model

Will Emerging Shared Economy Lodging (VRBO and AirBNB) Open Up New CZLCL

Yes it can, and mid and lower range motels are worried in SF and elsewhere

One study concluded: “We find that Airbnb has negatively impacted the revenues of lower-tier hotels.” No longer same lack of lower cost lodging alternatives

- CZLCL owners will need to employ shared sites (AirBNB) to find more business, or they’ll have much less revenue in the future

Time Is Critical For Retention of Existing CZLCL with Character

Many factors are driving conversion of CZLCL and these will increase

So retention of existing CZLCL with character is criticalTime is of the essence

Many owners of CZLCL are nearing retirement and considering selling The lodging is their “retirement” fund Inheritance, family and financial factors encourage selling vs. retaining

Coastal Commission should be proactive in retention efforts Current in-lieu fees approach New approaches may be needed

New Strategies for Retention of CZLCL

Personal opinion- we will loose much of our unique, character-enhanced legal, private, non-shared CZLCL in the next 10 years if left to the market

Many similarities to retention of small farmer agriculture along the coast

Some similarities to efforts at protecting natural areas along the coastSimilar to people affording energy efficiency upgrades in their homesCan we use some successful retention approaches borrowed from ag

lands, retention of natural areas and financing energy efficiency?Some initial retention ideas….

Some Initial Retention Ideas- Direct Financial

Conservation (low cost lodging) easements -local district buys use/development right/limit, owners retain title

Property Assessed Clean Energy (value lodging) program- borrow money for upgrades and pay back over long time on their property tax bill. Debt with property, not owner

Low interest loans for needed upgrade or expansion in exchange for contracted rates

Conservation/mitigation banking- In exchange for permanently protecting habitat (value pricing), a mitigation bank operator is allowed to sell or transfer “habitat” (in-lieu value pricing) credits to project proponents who need to satisfy legal requirements for mitigating the environmental impacts of other projects.

Indirect Support For Retention

Non-direct financial incentives: “Value Coastal Housing” webpage - CCC creates a webpage and

promotes it (under Resources Page or Explore Your Coast) Funds used to hire business consultant to co-prepare business plan for

property upgrade/expansion Requirement to receive support

Thank you for listening