How does a Texas city with special-population hotel-project authority qualify, measure the 1,000-foot ancillary-facility radius, and pledge project taxes — and which facilities count as ancillary?

Notes from the STAR record: This ruling replaces the Comptroller's earlier Private Letter Ruling No. 2017010126 (Oct. 13, 2017) to the same taxpayer, adding the Rule 3.12 definitions of "shop," "convention center entertainment-related facility," and the requirement that existing nearby facilities be built or remodeled as part of the project. It is also indexed as a sales-tax document under accession 201903025L.

Subject

Hotel Projects And Qualified Hotel Projects — Tax Rebates

Plain-English summary

A Texas city — authorized to run a Chapter 351 hotel project not as an "eligible central municipality" but by a special population/geography category (a municipality of 96,000 or more located in a county that contains the headwaters of the San Gabriel River) — planned a hotel, convention center, and surrounding facilities on ~351 acres. A developer would deed the land to the city, which would keep fee-simple title and grant a ground lease (with a purchase option) to a developer affiliate that owns the hotel; the city owns the convention center. The Comptroller answered nine questions. This letter replaces an earlier 2017 ruling to the same taxpayer, incorporating the Rule 3.12 definitions.

Key holdings:

• Eligibility (Q1): The city does not need to be an "eligible central municipality" (Section 351.001(7)) or adopt a capital improvement plan; it qualifies under Section 351.102(b) through its special population/geography category.
• "Hotel project" ≠ "qualified hotel project" (Q2): A Section 351.102(b) "hotel project" is not a "qualified hotel project" under Government Code Section 2303.003(8) — that term applies only to a city of 1.5 million or more. (The city still reaches the same Section 151.429(h) and Section 2303.5055 benefits through Section 351.102.)
• Ownership under a ground lease (Q3): The city keeps fee-simple ownership of the land under the ground lease unless and until the ground tenant exercises its option to purchase.
• Location of ancillary facilities (Q4–Q6): Ancillary facilities need not be inside, attached to, or on the same platted lot as the hotel — but they must sit within 1,000 feet of the hotel or the convention center building itself, measured wall-to-wall (single-tenant: closest exterior wall; multi-tenant: closest demising wall), not to a lot boundary. And the hotel must be within 1,000 feet of the convention center.
• Which facilities qualify (Q7): Hotel office space, food-and-beverage operations, shops that exclusively sell tangible personal property (Rule 3.12(a)(1)(J)), and convention-center entertainment-related facilities (performance halls, stages, amphitheaters, pavilions — Rule 3.12(a)(1)(A)) qualify. Spa/fitness centers do NOT (they don't exclusively sell TPP), and museums, zoos, waterparks, amusement parks, and sporting venues do NOT (they aren't convention-center entertainment-related facilities). Existing facilities not built or remodeled as part of the project don't count (Rule 3.12(a)(1)(E)(iii)(II)).
• Pledgeable taxes (Q8): The city may pledge state sales/use and state hotel occupancy taxes (Section 151.429(h)) and — by written agreement — local ad valorem, hotel, sales/use, and mixed beverage taxes (Government Code Section 2303.5055) generated at the hotel and ancillary facilities, but not at the convention center (it's only a measuring point, not part of the project for rebate purposes).
• Use of the money (Q9): No restriction on how the owner uses the rebated funds — but Section 351.102(d) requires the city to keep spending at least its prior 36-month average percentage of hotel occupancy tax revenue on tourism/convention advertising and promotion.

What this means for you

Cities outside the "central municipality" box

Several Texas cities are authorized for hotel projects by special population/geography brackets rather than the general "eligible central municipality" definition. If that's you, you can skip the central-municipality and capital-improvement-plan requirements — but every other rule (ownership, the 1,000-foot radius, the qualifying-facility list, the advertising set-aside) still applies.

Developers and ground-lease structures

The city can satisfy the ownership requirement by holding fee-simple title and leasing to your affiliate; a purchase option is fine so long as it isn't exercised. Note that the convention center generates no rebate — only the hotel and its ancillary facilities do — so model your revenue on the hotel side.

Retail, restaurants, and amenities near the project

A store qualifies only if it exclusively sells tangible personal property and is built or remodeled as part of the project; pre-existing, untouched stores within the radius don't count. Service and recreation amenities (spas, gyms, museums, zoos, waterparks, sports venues) are outside the program even if they're on-site.

Common questions

Q: Does the city have to be an "eligible central municipality"?
A: No. This city qualifies under a special bracket — 96,000+ population in the county containing the San Gabriel River headwaters — and does not need a capital improvement plan.

Q: Is a Section 351.102(b) "hotel project" a "qualified hotel project"?
A: No. "Qualified hotel project" under Government Code Section 2303.003(8) is limited to cities of 1.5 million or more. The city still reaches the Section 151.429(h)/2303.5055 benefits through Section 351.102.

Q: How is the 1,000 feet measured?
A: To the hotel or convention center building (closest exterior wall, or the closest demising wall for a multi-tenant ancillary space) — not to a lot boundary. Being within 1,000 feet of the lot line is not enough.

Q: Which nearby businesses can be ancillary facilities?
A: Hotel office space, food-and-beverage operations, shops that exclusively sell tangible personal property, and convention-center entertainment-related facilities. Spas/fitness centers, museums, zoos, waterparks, and sporting venues cannot.

Q: Can the city pledge taxes from the convention center?
A: No. The convention center is only a measuring point; its tax revenue does not qualify for rebate. Only the hotel and ancillary facilities generate pledgeable revenue.

Q: Can the owner spend the rebated money however it wants?
A: Yes, there's no restriction on the owner's use — but the city must keep funding tourism advertising at least at its prior 36-month average percentage (Section 351.102(d)).

Q: Can another city rely on this ruling?
A: No. A private letter ruling binds the Comptroller only as to the requesting taxpayer and its facts, is subject to verification by the Audit Division, and the Comptroller may audit, rescind, and collect under Tax Code Chapter 111 if the representations prove inaccurate.

Citations and references

• Tex. Tax Code § 351.102(b) — a city's "hotel project": the hotel plus ancillary facilities within 1,000 feet, on city-owned (or city-land) property.
• Tex. Tax Code § 351.102(c) — pledge of the project's state/local tax revenue for bonds.
• Tex. Tax Code § 351.102(d) — the advertising/promotion spending floor (prior 36-month average).
• Tex. Tax Code § 351.001(7) — "eligible central municipality," which this city need not satisfy.
• Tex. Gov't Code § 2303.003(8) — defines "qualified hotel project" (1.5 million-plus cities only).
• Tex. Gov't Code § 2303.5055 — the local "eligible taxable proceeds" (ad valorem, hotel, sales/use, mixed beverage) a governmental body may agree to rebate.
• Tex. Tax Code § 151.429(h) — the state sales/use and state hotel occupancy tax refund.
• 34 Tex. Admin. Code Rule 3.12 — hotel-project rules: (a)(1)(A) convention-center entertainment-related facility, (a)(1)(E) the 1,000-foot measurement and existing-facility rule, (a)(1)(J) "shop."
• Tex. Tax Code ch. 111 — the Comptroller's authority to collect if a rescinded ruling's representations prove inaccurate.
• 34 Tex. Admin. Code Rules 3.1 and 3.10 — authority for the private letter ruling and detrimental-reliance relief.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/201903026L

Original ruling text

Note: This document is also indexed as a Sales Tax document at STAR 201903025L.

March 13, 2019

Re: Private Letter Ruling No. 20180612155721

Dear **:

This letter replaces Private Letter Ruling No. 2017010126 we issued to you, dated Oct. 13, 2017. We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Nov. 18, 2016, and supplemental submissions dated Dec. 16, 2016, and Jan. 24, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the proposed development and construction of a hotel project and convention center facility, including facilities ancillary to the hotel.

This letter incorporates the provisions in 3.12 (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects) regarding the rebate of taxes. The letter on Oct. 13, 2017, did not define the term “shop.” Rule 3.12(a)(1)(J) defines “shop” to mean a retail store that exclusively sells tangible personal property. Spa/fitness facilities do not exclusively sell tangible personal property and therefore are not facilities ancillary to the hotel eligible for tax rebates under Section 351.102(c).

Additionally, this letter clarifies that Rule 3.12(a)(1)(A) provides the definition of “convention center entertainment-related facility.” This new letter also clarifies that pursuant to Rule 3.12(a)(1)(E)(iii)(II), existing facilities within 1,000 feet of the hotel or convention center facility must be constructed, developed, or remodeled as part of the hotel project to be considered facilities ancillary to the hotel.

Facts Presented

The following facts are based on information contained in your request and additional information you provided in our subsequent email correspondence and telephone conversations.

The Comptroller previously concluded the ** (City) “is a municipality described in Section 351.102(b), (Pledge for Bonds) and is entitled to the benefits under Tax Code Section 151.429(h) (Tax Refunds for Enterprise Projects) or Government Code Section 2303.5055 (Refund, Rebate, or Payment of Tax Proceeds to Qualified Hotel Project), as they relate to a hotel project under Section 351.102(b).…” See STAR Accession No. 201606833L (June 7, 2016).

COMPANY A is proposing to develop and construct a hotel and ancillary facilities (hotel project) and convention center facility on 351.7 acres of land located within the corporate limits of the City (Land). COMPANY A currently owns the Land. COMPANY A will transfer the Land to the City prior to development and construction of the hotel project.

The City will have fee simple title ownership to the Land. The City will enter into a ground lease with an affiliate of COMPANY A (Ground Tenant) to develop the hotel project and a convention center facility. The Ground Tenant will have a leasehold interest in the Land with an option to purchase the Land. The Ground Tenant will also own the hotel project. The City will own the convention center facility. The City will execute an operating lease with the Ground Tenant for the convention center facility.

If the hotel project is located on the same platted lot as the convention center facility (Consolidated Lot), the Ground Tenant will build the hotel project within 1,000 feet of the closest exterior walls of the convention center building. If the hotel project is located on a separate platted lot (Hotel Lot), the Ground Tenant will build the hotel project within 1,000 feet of the boundary of the platted lot on which the convention center facility is located (the Convention Center Lot).

The facilities that the Ground Tenant will construct as part of the hotel project include the following:

Office space facilities used by hotel, convention center, and related staff;

Food and beverage operations, retail outlets, and spa/fitness facilities;

Performance venues (e.g., permanent and temporary stages, amphitheaters, pavilions and theaters); and

Entertainment and recreation facilities (e.g., indoor-outdoor waterpark, tennis and basketball courts, game room, virtual reality room, driving range, rock-climbing wall, ropes course, and museum or zoo facilities).

These facilities will be located within 1,000 feet of the boundary of the Consolidated Lot, the Hotel Lot, or the Convention Center Lot, depending on the platting of the lots.

Questions, Rulings, and Analysis

Our restatement of your questions are shown below, followed by our responses and analysis.

Question One: Is the City required to meet the definition of an “eligible central municipality” under Section 351.001(7) including the requirement to adopt a capital improvement plan in order to pledge revenue from a hotel project under Section 351.102(b)?

Ruling One: The City is not required to meet the definition of an “eligible central municipality” in Section 351.001(7) and is not required to adopt a capital improvement plan in order to pledge revenue under Section 351.102(b). The City qualifies to pledge revenue from a hotel project because the City is a municipality with a population of 96,000 or more that is located in a county that contains the headwaters of the San Gabriel River.

Question Two: For purposes of applying Government Code Section 2303.5055 and Section 151.429(h), is a “hotel project” referenced in Section 351.102(b) a “qualified hotel project” under Government Code Section 2303.003(8) (Definitions)?

Ruling Two: No, a “hotel project” referenced in Section 351.102(b) is not a “qualified hotel project” under Government Code Section 2303.003(8). The term “qualified hotel project” only applies to a city with a population of 1.5 million or more.

Question Three: Will the City “own” the Land following acquisition of the Land by the City, and continue to “own” the Land under the terms of the Ground Lease?

Ruling Three: The City will retain its fee simple ownership of the Land under the terms of the Ground Lease so long as the Ground Tenant does not exercise its option to purchase all or any portion of the land on which the hotel project or convention center facility is located.

Question Four: May the City’s “hotel project” include facilities that are not located within, or attached to, the hotel or located on the same platted lot as the hotel?

Ruling Four: Yes, the City’s hotel project may include facilities that are not located within the hotel, attached to the hotel, or located on the same platted lot as the hotel. The facilities must be located within 1,000 feet of the convention center facility or the hotel and be constructed, developed, or remodeled as part of the hotel project.

Question Five: If the facilities are located within 1,000 feet of the boundary of the Hotel Lot or the Consolidated Lot, must the facilities also be within 1,000 feet of the convention center facility to be “facilities ancillary to the hotel?”

Ruling Five: To be “facilities ancillary to the hotel” under Section 351.102(b), the facilities must be located within 1,000 feet of the convention center facility or the hotel, even if the facilities are located within 1,000 feet of the Hotel Lot or the Consolidated Lot.

Question Six: Are the 1,000-foot distances for the Project measured as follows: (a) the hotel project must be located within 1,000 feet of the boundary of the Convention Center Lot, or if the hotel project and the convention center facility are developed on the Consolidated Lot, not more than 1,000-foot distance will exist between the closest exterior wall of the hotel building and the convention center building; and (b) “facilities ancillary to the hotel” must be located within 1,000 feet of the boundary of the Consolidated Lot, the Hotel Lot, or the Convention Center Lot, depending on the platting of the Project?

Ruling Six: No, this is not how the 1,000 foot distances for the hotel project are measured. The hotel must be located within 1,000 feet of the convention center facility. The “facilities ancillary to the hotel” must be located within 1,000 feet of the hotel or the convention center facility.

Question Seven: For purposes of Section 351.102(b), may the facilities ancillary to the hotel include food and beverage operations, retail outlets (“shops”), entertainment and recreation facilities, spa/fitness facilities, museum/zoo facilities, performance and sporting venues, and office space facilities?

Ruling Seven: For purposes of Section 351.102(b), facilities ancillary to the hotel may include office space facilities used by hotel, food and beverage operations, shops that exclusively sell tangible personal property, and convention center entertainment-related facilities that are owned by or located on land owned by the City. Spa/fitness facilities do not exclusively sell tangible personal property and therefore do not qualify as facilities ancillary to the hotel. See Rule 3.12(a)(1)(J). Convention center entertainment-related facilities are facilities designed and primarily used for convention center events, activities, and performances. Rule 3.12(a)(1)(A). Other entertainment and recreation facilities such as museums, zoos, and sporting venues are not convention center entertainment-related facilities and cannot qualify as facilities ancillary to the hotel.

Question Eight: Pursuant to Section 151.429(h), Section 351.102(c), and Government Code Section 2303.5055, may the City pledge revenue from hotel occupancy taxes, ad valorem taxes, sales and use taxes, and mixed beverage taxes collected from the hotel project, the convention center facility, and the facilities ancillary to the hotel?

Ruling Eight: Under Section 351.102(b), the City may pledge state and local tax revenue generated at its hotel project, which includes the hotel and facilities ancillary to the hotel, but not the convention center facility. Specifically, the City may pledge: (1) state sales and use taxes and state hotel occupancy taxes that it receives under Section 151.429(h); and (2) ad valorem taxes, local hotel occupancy taxes, local sales and use taxes, and local mixed beverage taxes that a governmental body agrees to rebate under Government Code Section 2303.5055.

Question Nine: Regarding the funds rebated, refunded, or paid to the owner of a qualified hotel project pursuant to Government Code Section 2303.5055 or Section 151.429(h), is there a restriction on the purpose for which the owner may use the funds?

Ruling Nine: No, there is no restriction on the owner’s use of the funds.

Analysis: Section 351.102(b) separately identifies the City as eligible for a hotel project. The City is not required to be or meet the definition of an eligible central municipality.

A hotel project for the City under Section 351.102(b) is:

a hotel that is owned by, or located on land owned by, the City and located within 1,000 feet of an operational convention center facility owned by the City; and

any facilities ancillary to the hotel that are owned by, or located on land owned by, the City, including convention center entertainment-related facilities, meeting spaces, restaurants, shops, street and water and sewer infrastructure necessary for the operation of the hotel or ancillary facilities, and parking facilities located within 1,000 feet of the hotel or convention center facility.

The statute requires the City to either own the hotel or own the land on which the hotel is located, and to either own the facilities ancillary to the hotel or own the land on which these facilities are located. The City will meet these ownership requirements because it will own the Land on which the hotel project is located. Under the proposed terms of the Ground Lease, the City will maintain fee simple title of the Land indefinitely unless the Ground Tenant exercises its option to purchase any or part of the Land on which the hotel project is located. See STAR Accession No. 201603746L (March 16, 2016).

The statute also requires facilities ancillary to the hotel to be located within 1,000 feet of the hotel or convention center facility. The statute does not require the ancillary facilities to be located within, attached to, or located on the same platted lot as the hotel.

Rule 3.12(a)(1)(E) gives the measurement requirement for facilities ancillary to the hotel as:

if the facility ancillary to the hotel is located in a single-tenant building, the closest exterior wall of the ancillary facility must be within 1,000 feet of the closest exterior wall of the convention center facility or hotel; or

if the facility ancillary to the hotel is located in a multi-tenant building, the closest demising wall of the ancillary facility must be within 1,000 feet of the closest exterior wall of the convention center facility or the hotel.

Facilities ancillary to the hotel include convention center entertainment-related facilities, meeting spaces, restaurants, shops, street and water and sewer infrastructure necessary for the operation of the hotel or ancillary facilities, and parking facilities. Rule 3.12(a)(1)(E)(iii).

Finally, the area of a hotel project may encompass existing facilities within 1,000 feet of the hotel or convention center facility. Because existing facilities, such as restaurants and shops, may have been built prior to and independent of the development of a hotel project, existing facilities located within 1,000 feet of the hotel or convention center facility that are not constructed, developed, or remodeled as part of the hotel project are not considered facilities ancillary to the hotel. See Rule 3.12(a)(1)(E)(iii)(II).

The City’s facilities that include office spaces used by staff to provide necessary support for the operation and function of the hotel qualify as facilities ancillary to a hotel pursuant to Section 351.102(b).

Rule 3.12(a)(1)(J) defines “shop” as a retail store that exclusively sells tangible personal property. Food and beverage operations and shops that exclusively sell tangible personal property qualify as restaurants and shops respectively, and therefore, qualify as facilities ancillary to a hotel pursuant to Section 351.102(b) if constructed, developed, or remodeled as part of the hotel project.

Section 351.102(b) further provides that facilities ancillary to the hotel includes “convention center entertainment-related facilities.” Rule 3.12(a)(1)(A) defines convention center entertainment-related facilities as facilities owned by or located on land owned by the City and designed and primarily used for convention center events, activities, and performances. Examples of this term are a performance hall, permanent or temporary stage, amphitheater, and pavilion. The term does not include facilities designed for a specific use. Examples of facilities that do not meet this definition include an amusement park, fitness or sports center, museum, sports venue, waterpark, or zoo.

The City is entitled to receive from its hotel project the funds that the owner of a qualified hotel project receives under Section 151.429(h), or under Government Code Section 2303.5055, and the City may pledge those funds for its hotel project under Section 351.102. Under Section 151.429(h), the City is entitled to receive state sales and use taxes and state hotel occupancy taxes. Under Government Code Section 2303.5055(a), the City is entitled to receive “eligible taxable proceeds,” which are local ad valorem taxes, local hotel occupancy taxes, local sales and use taxes, and local mixed beverage taxes that a governmental body agrees to rebate.

Under Section 351.102(b), the City-owned convention center facility is not part of the hotel project for tax rebate purposes, but is a measuring point for the hotel and the facilities ancillary to the hotel. Therefore, any tax revenue received from the convention center facility does not qualify for rebates under Section 351.102(c).

The statutory provisions do not provide restrictions on how the City, as the owner of the hotel project and convention center facility, may use the rebated funds, but it does require the City to spend a certain amount of the funds to promote the hotel project. Specifically, Section 351.102(d) provides that if the City uses its hotel occupancy tax revenue or funds pursuant to Section 351.102(c) for a hotel project, it must allocate at least the same average percentage amount of its hotel occupancy tax revenue on advertising and promotional programs to attract tourists and convention participants that the City spent during the 36-month period prior to using the revenue for a hotel project.

The Comptroller’s office does not have statutory authority to approve a hotel project for any benefits until the project is completed and an application for benefits has been submitted and verified. Although the Comptroller at this time does not find facts that would preclude the City from being eligible to request a refund related to the hotel project under the applicable statutory provisions, the Comptroller will have to verify all relevant facts after receiving a request for refund of the taxes described in Section 151.429(h) and Government Code Section 2303.5055. We base this response on the facts presented, which are subject to verification by the Comptroller’s Audit Division. Different facts may yield different conclusions.

Comptroller reserves the right to audit and investigate Taxpayer to confirm the accuracy of the representations made by Taxpayer. If Taxpayer’s representations are inaccurate, the Comptroller shall have the right to rescind this private letter ruling and may collect the amounts due from Taxpayer by any method allowed by Tax Code, Chapter 111, or any other applicable law.

STAR documents are available on the Comptroller’s State Tax Automated Research (STAR) system. The Tax Code, Government Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help and reference Private Letter Ruling No. 20180612155721.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

[1] Unless otherwise indicated, all references to “Government Code” are to the Texas Government Code, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.