The TOT Rebate

What is the purpose of the TOT rebate?

New hotels are one of the most difficult real estate assets to finance. Given real and perceived risks, private investors demand strong financial returns to compensate them for high risks. TOT rebates are a common practice for hotel developments.

In today's market, a new hotel in Cloverdale doesn't generate enough profit to be financed. Construction and labor costs in the Wine Country and greater Bay Area are among the highest in the country, and the hotel can't charge high enough room rates to generate enough profit to attract capital on its own. So we had to get creative to improve the economics.

Esmeralda Land Company (ELC) is internally subsidizing the hotel. ELC is contributing the entire finished 33-acre pad to the hotel for $1.00, including all trunk infrastructure. In addition, we're allocating 14 of our valuable single family residential units to the hotel site to further enhance the hotel’s returns. ELC would otherwise have sold these units to generate revenue. (ELC’s business is selling finished lots. Transferring them to the hotel is like a store giving away its merchandise. We're doing it because the hotel matters to Cloverdale, and we want it to succeed.)

Even with zero land cost, the hotel still fails to generate sufficient profit in its early years. The TOT rebate fills the financial gap by boosting the hotel’s Net Operating Income (NOI) in its early years, when it is most vulnerable and building its reputation and customer base. Even with a 66% TOT rebate, the hotel's business model is tight.

The City’s own independent expert confirmed this financial reality. Cities commonly commission independent analyses to confirm whether projects need financial incentives. To that end, the City hired EPS (Economic & Planning Systems), to do exactly that. ELC provided EPS full access to its books under a confidentiality agreement. EPS concluded that the hotel is unlikely to be financed without the proposed TOT Rebate. Their independent analysis is published on the City’s website and part of the public record.

The City carries $0 financial risk — only upside

ELC carries 100% of the financial risk for the entire project, not just the hotel. The scale of at-risk private investment by ELC is massive:

TOT revenue is just one of the ways Cloverdale benefits financially. Much of the public conversation has focused on the TOT, but the project also brings:

• New gross tax revenue to Cloverdale’s General Fund is projected at $8M per year at buildout when including property tax, sales tax, etc — 422 times what the site generates today. $10M more will go to other local agencies including Cloverdale Unified School District.
• $92 million in impact fees and in-kind public improvements, such as parks, recreation facilities, and infrastructure. The City does not have to maintain any of the new publicly accessible open space or circulation, despite all of these areas being permanently open to the public. ELC’s estimated cost to maintain these areas will be about $2.3 million annually.
• A net fiscal surplus of roughly $2+ million per year at build-out, after accounting for all added costs to the City, the EIFD, and the proposed 66% TOT Rebate. This surplus will further increase when the TOT Rebate expires after year 15 to $4.3-4.8 million, and to about $6.3 million per year once the EIFD term ends.

TOT stress test. The peer-reviewed FEIA tested an extreme fiscal scenario where the hotel is never built (and thus no TOT revenue materializes), but all 605 homes are completed and occupied. This scenario is legally impossible under the DA (Development Agreement), which requires the hotel to be built in Phase 1, but it's a useful way to stress test a worst case TOT scenario. Even with no TOT, the FEIA concluded that the City would still see a fiscal surplus, because new property tax from the homes more than covers the cost of added City services.

Why 66%?

The TOT rebate starting point was based on a regional precedent. When negotiations began, City staff (Kevin and Alex) asked Esmeralda Land Company (ELC) to find comparable TOT deals in Wine Country. The most recent local comparable was a high end hotel and residential project in Napa. It was approved in 2025 with a TOT rebate that started at 90% for the first 4 years, and then dropped to 70% and then 50% in years 9–10, ending after year 10, with a cap of $33 million.

City staff pushed back. City staff insisted that Cloverdale’s rebate needed to be lower than the City of Napa. We went back to our proforma and determined that 66.6% was the lowest rebate that would still keep the hotel financeable. Getting there was a real stretch, but we made it work.

The City pushed further. Going any lower on the percentage would jeopardize the hotel’s feasibility, so we looked for a different solution. ELC proposed a hard cap or “ceiling” on the total dollar rebate. The hotel still gets what it needs to be financed, but once the maximum dollar cap is reached, 100% of TOT flows to Cloverdale. Put differently, if revenue from the Hotel exceeds expectations, the City collects the windfall.

Putting it in perspective

The rebate applies to net new taxes generated by the future hotel, and is not a “subsidy” from existing General Fund revenues. The City isn't giving up any tax revenue it already collects. The rebate applies only to TOT generated by the future hotel if it gets financed and built. Cloverdale keeps 33.3% of all new tax revenue from day one. Once the hard cap is hit or the 15 years end, whichever comes first, Cloverdale keeps 100% of the TOT.

Comparable programs. TOT rebates like this are a common tool California cities use to incentivize the construction of new hotels. For a comparison of TOT rebate programs, including Wine Country examples, see the TOT Rebate Comparison Table at the bottom of this document.

Protections for Cloverdale

• The hotel must be built first. The DA Development Agreement requires the hotel to be built in Phase 1. If it isn't built, the DA terminates in year 9.
• A rebate ceiling. ELC has proposed adding a hard dollar ceiling to the agreement, so if the hotel outperforms expectations, the City captures the TOT upside.
• What if things go worse than expected? City service costs scale with the project: fewer homes and guests mean less demand for City services. And as the FEIA stress test shows, even a no-hotel scenario (a legal impossibility) produces a fiscal surplus for the City.

Why not a lower priced hotel?

The FEIA cites an Average Daily Rate (ADR) of $1,007. Some folks have expressed concern that it is so high. Some context on that number:

Actual hotel room rates are lower than the average suggests. The rate cited in the FEIA includes rental income from the resort residences, which have a very high daily rate because they are entire single-family homes, not your typical hotel room. Our business plan projects that the average rate for a standard room upon opening will be about $720/night. This is consistent with other high-end hotels in wine country.

Our original vision was an upper-mid-range hotel. But after a detailed feasibility study and extensive conversations with hospitality operators and investors, we learned that today’s market doesn't support that product type.

High construction costs squeeze out the middle market. In general the only new hotels that can be financed today are at the low end (low service budget boxes like Motel 6) or the high end, due to high construction and labor costs. Anything in between unfortunately doesn't pencil right now. Cloverdale already has several budget options, and a high-end hotel delivers far more amenities, sales taxes, and TOT revenue than a low-end budget hotel.

We'll keep watching the market. If conditions change and a more moderately priced hotel becomes financeable, we'd welcome the chance to explore it.

Hotel’s Impact on the rest of the Esmeralda Development. There has been much discussion about the need to maintain Cloverdale’s small town charm and Cloverdale’s community. Community to us is a gathering of a cross section of people from all walks of life. This is the very essence of what makes Cloverdale unique and what attracted Esmeralda to Cloverdale in the first place. It is antithetical for ELC to build a community geared to one small spectrum of society. We strive to build on Cloverdale’s uniqueness, not detract from it.

Acronyms

• ELC = Esmeralda Land Company
• DA = Development Agreement (contract between City & ELC)
• TOT = Transient Occupancy Tax (hotel tax)
• FEIA = Fiscal & Economic Impact Analysis
• ADR = Average Daily Rate (hotel room)

TOT Rebate Comparison Table