GARAPAN Saipan — Hotels in the Northern Mariana Islands are investing tens of millions of dollars in overdue renovations.
But it could be so much more bitter hoteliers said if the Commonwealth Development Authority would only give them the same tax breaks they might offer new investors under a controversial qualifying-certificate program.
“The Q.C. is a dead issue. We don’t even consider applying again. It’s just an absolute joke ” said Michael von Siebenthal general manager of the Hyatt Regency Saipan.
Saipan Portopia Hotel Corp. owner of the Hyatt property in Garapan hoping to find government support for $20.5 million in renovations plopped down $10 000 in 2000 as an application fee for various tax breaks which can go up to 100% relief for a maximum 25 years. What Portopia Hotel Corp. received on Sept. 16 2002 was minimal and was attached with conditions that would have been costly.
“The tax benefits were peanuts — only on incremental revenue above the average for the past five years and they were our top years ” von Siebenthal said. Additional conditions would have forced Hyatt an independent power producer to hook up to the Commonwealth Utilities Commission power grid which was 3¢ per kilowatt-hour more expensive and to increase the percentage of local employees at the hotel which he said was already the highest among Saipan’s employers at 42%.
“It was an unacceptable proposal ” von Siebenthal said. “We sent a letter back to CDA asking to discuss the terms of the Q.C. We got a letter back saying there was nothing to negotiate. Later the governor asked us to reapply. That was when Dai-Ichi was applying for a Q.C. so we decided to wait. They got the same runaround. So we saw no reason why we should reapply.”
Asia Pacific Hotels Inc. owner of three hotels including Dai-Ichi Hotel Saipan Beach did not accept the qualifying certificate issued by CDA on March 4 2004. Tax rebates would not kick in until a threshold of $300 000 in business gross receipts taxes were paid and acceptance required 30% of the work force to be local residents.
Both hotels are undergoing major renovations nonetheless.
“Sure we’ve invested $1.5 million ” von Siebenthal said “but we were looking at investing more than $20 million. CDA doesn’t see the reason why the law is there — to stir up investment. They think if a company is making money it shouldn’t be helped.”
Lynn A. Knight general manager of the Century Hotel and president of the Hotel Association of the Northern Mariana Islands said the decisions by the association’s member hotels to renovate and expand at once has less to do with confidence than cheap deals for new owners. “These repairs and renovations have been needed for quite some time but nobody has had the money. It is not a reflection of confidence in the economy. It’s new owners bringing new dollars.” Any confidence felt by 71.8% occupancy for 2004 the best in seven years was tempered by average room rates among members of about $80 down by $50 from the peak in 1996.
Knight who this year began tracking investments in hotel properties with a regularly updated survey for members found a disturbing echo from many members —they would do much more if the tax-break program worked for them. “The government really missed the boat by not making the Q.C. program work. The level of commitment could be dramatically increased if the Q.C. program was working ” she said.
“The government should go back to these guys and say ‘What will it take to do more?’ With the loss of the garment industry we have to find ways to generate revenue. We see the hotel industry as the only source of replacement revenue for the loss of the garment industry. If we can create more by helping hotels with investments it will help the tourism industry and the overall economy.”
Since its enactment the Investment Incentive Act of 2000 has been amended twice to aid existing businesses. An amendment in 2001 added the language “new expansion resort hotel” to the act. Hotel applicants may also have had their expectations initially buoyed by the deal given to the program’s first Q.C. recipient —SandCastle Saipan a Las Vegas-style dinner show at the Hyatt which in 2002 received generous treatment. CDA awarded SandCastle a 100% tax holiday for a decade to 25 years on various taxes: excise business gross receipts owner’s income capital gains alcoholic beverage and developer infrastructure. The eight certificates issued since then have not come close. (See chart of CDA qualifying certificates issued on Page 28.)
Sixto K. Igisomar chairman of CDA and an insurance representative for AIUP Associated Insurance said the act was never intended to provide complete relief and existing businesses would only qualify for tax relief on additional revenues created by new investments. “With the garment industry leaving if all we are left with is hotels that are getting 100% tax free what are we left with? We’re afraid of giving up the tax base that might be left. If every hotel started remodeling and asking for Q.C.s the current tax base would be depleted. It was meant for new business. I’m willing to gamble but we can’t gamble everything away.”
The Saipan Chamber of Commerce supported the hotel industry by calling a meeting with CDA in November to push for better benefits for expansions and renovations but Alex A. Sablan marketing manager for Saipan Shipping Co. and president of the chamber admits that nothing positive has come of it and he wants a follow-up meeting. “CDA is being shortsighted. They are not looking at the multiplier effect of construction and what renovations and additions can do for the destination. The issue shouldn’t just be how can we bring in new businesses. We should be helping existing businesses with new investments.
“They said they are in the process of learning by doing and they have changed their minds over time ” Sablan said. “The current board said it recognizes the intent of the law but several hotel applications were failures under the previous board. It will be hard to entice them to apply again with the bad taste they have in their mouth.”
The Saipan chamber also took issue with the requirement for the governor’s final approval of all Q.C.’s. “It’s a problem that the governor signs off on all Q.C.’s ” Sablan said. “We’re saying leave the interests of economic development to the Department of Commerce and CDA. The board of CDA should have full authority to apply the law as written. We want politics out of the matter.”
Igisomar disagreed that the governor has interfered with the tax-break application process but said his involvement in approvals is not likely to go away. “They said that CDA’s decisions were compromised by the governor and his consultants. Not so.”
World Corp. which does business as World Resort Saipan received its qualifying certificate on Aug. 31 2004 with ambivalence. World Resort based its application on $14.73 million in renovations and expansion and may become the first applicant to plop down another nonrefundable $10 000 to reapply for a better deal. B.K. Park vice president and general manager of World Resort said “We are not satisfied with what we are getting. The things we need to go through are unreasonable.” Tax breaks above the current base of business are conditional on the full investment being made within nine months discounted rates being offered to senior citizen and residents and an apprenticeship program being implemented within a year.
Undaunted World Corp. is going full steam ahead with the largest water slide in Micronesia called the Master Blaster a 250-seat buffet restaurant a coffee shop a Korean restaurant a multicuisine restaurant a banquet room for 300 room renovations and an open-air lobby. In mid-March 80% of the renovations in the 265 rooms had been completed. Park said it all adds up to $20 million in improvements far more than in the original plans.
“Because our plans have changed slightly and we’ve added additional money we would like to resubmit to CDA. If CDA doesn’t give us a good deal; if we are not satisfied then some of this will not happen.” Park said the most important carrot for CDA to consider would be an additional 100 rooms in a second phase of construction that won’t happen without a better tax deal. MBJ