Quick Take
A new California bill, AB 1869, could change how hotel investment companies are taxed and regulated. Jon Bortz, CEO of Pebblebrook Hotel Trust, which owns Chaminade Resort & Spa in Santa Cruz, says the measure – designed to ensure companies that get the tax advantages of being “passive property owners” are just owners, and are not also running them behind the scenes – could force significant changes at the well-known local resort if it becomes law. Bortz warns that it could lead to higher taxes, declining property values and potential impacts on retirement investments tied to hotel real estate. Critics of the bill argue it could also discourage long-term owners from investing in California’s hospitality industry. The bill is scheduled to be heard by the Assembly Appropriations Committee on Thursday.
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My company has been honored to own the Chaminade Resort & Spa for almost six years, and through a predecessor company since 2004, so almost 22 years. We have dedicated ourselves to Santa Cruz, and we have invested in a significant number of renovations over the years, including one now.
We have been deeply committed to community service and local charities and are proud ambassadors for our guests – which I know includes many of you who have enjoyed Chaminade’s spectacular sunsets and genuine hospitality.
We believe we’ve been great partners with Santa Cruz, always delivering on the promises we make and fulfilling – hopefully exceeding – our role as a community steward and major employer and taxpayer.
Unfortunately, we’ve learned recently that our investment – both financial and as a valued community member – is at significant risk through proposed legislation in California. Assembly Bill 1869 would undermine decadeslong federal law that allows 401(k) owners to invest together in real estate properties they otherwise couldn’t afford, including hotels. Specifically, AB 1869, which right now is still in committee and has not passed the legislature, would let the state review whether investment owners are just passively owning hotels or actively helping run them. This affects whether they keep certain tax benefits or face higher taxes.
And even more unfortunate, this risk is being imposed on us and similar hotel owners by Santa Cruz native son Assemblymember Matt Haney.
It pains me to call out Mr. Haney, who represents the eastern portion of San Francisco. His proposed legislation has left us no choice, however, as it will gut our company’s ability to own hotels in California and, by extension, negatively affect the retirement investments of millions of Californians.
Pebblebrook Hotel Trust is a real estate investment trust, or REIT, that owns a portfolio of about 44 upscale hotels across the United States, including Chaminade Resort. We don’t run the hotels ourselves. REITs pool money from investors (including pension funds and retirement accounts) and buy hotel properties in cities such as San Francisco and Santa Cruz and then contract day-to-day hotel operations to hotel brands or managers.
We are governed by federal tax law and historically have provided stable, long-term capital for hotel development and renovations. The majority of Californians – 56% of all California households – participate in a REIT investment through retirement funds, pension funds, index funds and ETF (exchange-traded fund) accounts.
Mr. Haney wants to rewrite federal law governing hotel ownership, impose unprecedented special-interest mandates and, effectively, remove from the majority of California families a tried-and-true investment that has supported their retirements, education and communities for decades.
He seeks to:
- Rewrite and undermine long-standing federal statutes that, just like any business owner, allow REITs to ensure their hotels are operating safely and retaining, if not increasing value.
- Retroactively impose his law so hotels and family investors would face years of back taxes, penalties and fees despite complying with existing law. It’s unclear whether family 401(k)s and pensions would be liable for these back taxes and what it would mean for their retirements.
- Lower property values, which would immediately translate directly into reduced tax revenues for cities and counties, many of which already are cutting services and increasing taxes because of deficits.
Mr. Haney inaccurately claims that some REITs are pushing beyond the line of ownership to influence staffing levels, wages and workplace policies at hotels while benefiting from the tax breaks. As has been the case since the federal law was enacted, hotel owners – just like homeowners – have a responsibility to ensure their properties are safe, well-maintained and meet guests’ expectations.
Should his legislation become law, we likely will be forced to sell Chaminade and many of our other California hotels because we would no longer be allowed to have any say regarding the quality of the resort’s experience or operating expenses in the way you’ve seen us do so well for over two decades.
I suspect many of the major REIT hotel owners would do the same.
Potential buyers would be cautious about purchasing hotels that have special-interest mandates and would very likely end up being bought by private equity investors without experience with hotels, looking to make a quick buck, and with less or no focus on community engagement and long-term commitment.
I’m not one to “cry wolf” easily or without reason.
I’m saying that Mr. Haney’s proposed law will not just hurt my company, but it will hurt Santa Cruz, hurt family investors and undermine the city and the county’s hospitality sector.
Mr. Haney will be no one’s favorite son should his proposal become law.
Jon Bortz is CEO and chair of Pebblebrook Hotel Trust, owner of 44 hotels, including Chaminade Resort & Spa in Santa Cruz.