Can a planned Convention Center Annex more than 1,000 feet from the City of Arlington's existing convention center still make a nearby hotel project eligible for the state hotel-project tax rebate, and does a ground lease to a private developer break the required city-ownership link?

Plain-English summary

The City of Arlington, a developer, its managing member, and the City's nonprofit local government corporation planned a project combining a hotel, an ancillary "Entertainment Complex" (restaurants and entertainment facilities), and a new Convention Center Annex to expand the City's existing convention center. The City sought advance guidance (to share with lenders financing the project) on three structural questions under Section 351.102.

Question 1 — does a separately located annex count as a "convention center facility"? The Hotel and Entertainment Complex would be located more than 1,000 feet from the City's existing convention center, but within 1,000 feet of the new Annex once built. The Comptroller ruled the Annex will qualify as a "convention center facility" and make the Hotel a rebate-eligible "hotel project," provided: the Hotel sits within 1,000 feet of the Annex once it's operational and City-owned; the Hotel is owned by or on land owned by the City or its nonprofit government corporation; the Entertainment Complex is likewise owned by or on land owned by the City or the corporation; and the Entertainment Complex sits within 1,000 feet of the Annex or Hotel. A confidentiality waiver is also needed to let the Comptroller disclose sales/mixed-beverage tax data for ancillary restaurants and businesses (that information is otherwise confidential under Sections 151.027 and 183.043).

Question 2 — does a ground lease to the developer break city ownership? The land under the project would be owned by the City's nonprofit government corporation and leased to the developer under a ground lease. The Comptroller ruled this still satisfies Section 351.102(b)'s "owned by the municipality or on land owned by the municipality or by a nonprofit corporation" requirement, as long as the lease doesn't transfer title or ownership away from the corporation.

Question 3 — does building the Entertainment Complex first, before the Hotel and Annex, disqualify it? The Comptroller ruled the Entertainment Complex may still qualify as an "ancillary facility" and share in the rebate once the full hotel project (Hotel + operational Annex) opens for initial occupancy — but tax revenue the Entertainment Complex generates before that combined opening does not qualify for rebate. In other words, phased construction is fine, but the rebate clock and revenue-counting only start once every piece of the project (including the Annex) is up and running together.

Overall, the Comptroller found the City eligible under Section 351.102(b) as an eligible central municipality (per the population/county criteria in Section 351.001(7)(A)) and confirmed the state hasn't identified anything precluding the City from later requesting the rebate, once the project actually opens.

What this means for you

Cities planning phased hotel/convention-center developments

You don't need the hotel and any expanded convention center facilities to be built simultaneously or in one location — a new annex built separately from (and later than) an existing convention center can still anchor rebate eligibility, as long as the final proximity and ownership requirements are met once everything is finished.

Developers using ground leases and nonprofit development corporations

A ground lease of city or nonprofit-corporation-owned land to a private developer does not, by itself, disqualify a hotel project from rebate eligibility — the key is that the lease must not transfer title or ownership of the land itself.

Accountants and tax professionals advising on financing

Note the revenue-timing rule buried in Question 3: rebate-eligible tax revenue only starts accruing once the entire qualifying project (not just the first-built component) is operational and open for initial occupancy — model financing projections accordingly if a project is being built in phases.

Common questions

Q: Does the hotel need to be within 1,000 feet of the city's ORIGINAL convention center?
A: No — proximity to a newly built, City-owned annex can satisfy the requirement instead, once that annex is operational.

Q: Does leasing the land to a private developer disqualify a city-owned-land hotel project?
A: No, as long as the lease doesn't transfer title to or ownership of the land away from the city or its nonprofit corporation.

Q: If the entertainment complex opens years before the hotel and annex, does it lose its rebate eligibility?
A: No, but it doesn't generate rebate-eligible revenue until the full hotel project (hotel plus the operational annex, meeting all requirements) opens for initial occupancy — revenue from before that combined opening doesn't count.

Q: Can another Texas city use this ruling for a similar phased project?
A: No. This is a private letter ruling binding only on the Comptroller as to the City of Arlington and these specific facts, and cannot be relied upon by any other municipality.

Citations and references

Statutes and rules:

• Tex. Tax Code § 351.001(2) (convention center facility definition)
• Tex. Tax Code § 351.001(7)(A) (eligible central municipality definition)
• Tex. Tax Code §§ 151.027, 183.043 (confidentiality of sales/mixed-beverage tax information; waiver required for ancillary-business disclosure)
• Tex. Tax Code § 351.102(b), (c) (hotel project eligibility; State HOT/SUT refund)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201603752L

Original ruling text

This document is also available as a Hotel Tax document at STAR 201603746L

March 16, 2016

Re: Private Letter Ruling #160600648

Dear *****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter

Rulings and General Information Letters [ENDNOTE 1], in response to your request,

which we received on February 29, 2016. Detrimental reliance relief is provided in

accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance regarding the application of Section 351.102(c) and

Government Code Section 2303.5055 to a hotel project proposed in the City of

Arlington. You intend to rely on this letter and provide copies of the letter

to lenders financing the hotel project.

Your request included a copy of the City of Arlington’s Capital Improvement

Plan, which provides for the expansion of the City’s convention center

facilities by building a Convention Center Annex, and a conceptual plan of the

proposed hotel project and Convention Center Annex.

Relevant Facts

The City of Arlington (City), ***** (Developer), its managing member,

***** (Managing Member), and the City’s nonprofit local government

corporation, ***** (Government Corporation), entered into an agreement to

develop a hotel project. The hotel project includes a hotel (Hotel), ancillary

restaurants and entertainment facilities (Entertainment Complex) and an annex

to the City’s existing convention center (Convention Center Annex).

The City is an eligible central municipality as defined in Section 351.001(7)(A) [ENDNOTE 2].

Your request describes the hotel project as follows:

• the Hotel and Entertainment Complex (together, the Project) will be located

more than 1,000 feet from the City’s existing convention center, but will be

within 1,000 feet of the Convention Center Annex when the Annex is constructed;

• the Project will be located on land owned by Government Corporation and

leased to Developer pursuant to a ground lease;

• the Convention Center Annex building will be owned by and located on land

owned by the City and leased to Developer;

• the City will own the Convention City Annex once it is completed;

• the Entertainment Complex will be built first and the Convention Center Annex

and Hotel will be built later.

Rulings and Analysis

The rulings specifically requested are shown below, followed by responses and

analysis.

Request #1. The City, Developer and Managing Member wish to confirm that the

expansion of the City’s Convention Center facilities with the construction of

the Convention Center Annex, pursuant to the Development Agreement, in a

location separate and more than 1,000 feet from the existing Convention Center

would qualify under Section 351.001(2) as “construction or expansion of a

convention center facility;” would enable the Hotel constructed as a part of

the Project to be a “hotel project” under Section 351.102; and would entitle

the City to receive all revenues referenced in Section 351.102(c) generated at

the Project.

Response: The construction of the Convention Center Annex will be considered a

“convention center facility” and will enable the Hotel to be a hotel project if

the following occur:

• The Hotel must be located within 1,000 feet of an operational convention

center that is owned by the City (i.e., Convention Center Annex);

• The Hotel must be owned by or located on land owned by the City or Government

Corporation;

• The Entertainment Complex must be owned by or located on land owned by the

City or Government Corporation; and

• The Entertainment Complex must be located within 1,000 feet of the Convention

Center Annex or the Hotel.

Additionally, a waiver of confidentiality is required to allow the Comptroller

to disclose the sales tax or, if applicable, mixed beverage sales tax

information of restaurants or other businesses ancillary to the hotel [ENDNOTE 3].

Request #2. The City, Developer and Managing Member wish to confirm that if the

land upon which the Project is constructed is owned by Government Corporation

and leased to a lessee or lessees pursuant to a ground lease, that the

ownership structure would still qualify under Section 351.102 as a project

being “owned by the municipality or on land owned by the municipality or by a

nonprofit corporation acting on behalf of an eligible central municipality”

under that section.

Response: The Project will qualify under Section 351.102(b) as a hotel project

“owned by the municipality or on land owned by [Government Corporation]” even

if the land owned by Government Corporation is leased to a third party, as long

as the lease does not transfer title to or ownership of the land from

Government Corporation.

Request #3. With respect to the Project, if the Entertainment Complex is

constructed first and then the Hotel and Convention Center Annex are

constructed at a later date, the City, Developer and Managing Member wish to

confirm that the previously constructed ancillary facilities (i.e., the

Entertainment Complex) would qualify as “ancillary facilities” to the hotel

project under Section 351.102(b) and would be included in the tax rebates

received pursuant to Section 351.102(c) upon initial occupancy of the Hotel and

the Convention Center Annex, whenever it is constructed.

Response: The Entertainment Complex may qualify as a facility ancillary to the

Hotel and may be included in the tax rebates received pursuant to Section

351.102(c) once the hotel project has opened for initial occupancy. The

Entertainment Center must be located within 1,000 feet of the Convention Center

Annex or the Hotel and be owned by or located on land owned by the City or

Government Corporation. The Hotel and Entertainment Center will not become a

hotel project and will not be considered open for initial occupancy until the

Convention Center Annex is operational and each of the requirements described

in Response 1 is also satisfied. Tax revenue generated at the Entertainment

Complex prior to the initial opening of the Project does not qualify for rebate.

Conclusion: The City is an eligible central municipality described by Section

351.102(b) and is eligible to receive the tax rebates provided in Section

351.102(c) for a hotel project described in Section 351.102(b).

The Comptroller does not have the statutory authority to approve a hotel

project for tax rebates until the project is open for initial occupancy. The

Comptroller at this time does not find anything that would preclude the City

from being eligible to request a refund of taxes generated at its hotel project

under the applicable statutes.

If you have any questions about this response, please email us through our

website at https://www.comptroller.texas.gov/taxhelp/ and reference Private

Letter Ruling #160560004.

Sincerely,

Tax Policy Division – Indirect Taxes

ENDNOTES:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax

Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

2. The City has a 2010 decennial census population of more than 140,000 but less

than 1.5 million, is located in a county with a population of one million or

more, and has adopted a capital improvement plan for the construction or

expansion of a convention center facility.

3. A waiver of confidentiality is required because sales tax and mixed beverage

sales tax information is confidential pursuant to Sections 151.027 and 183.043.