Submitted By
Emily A. Egan, Development Services Department Director
Reviewed By
LKS
Agenda Item Title
Title
An Ordinance Amending Chapter 12 (“Housing”), Article 7 (“Housing Trust Fund”), Section 12-7-8 (“Source of Funds”) and Chapter 23A (“Taxes”), Article 4 (“Hotel/Motel and Transient Occupancy Rental Unit Tax”) of the Oak Park Village Code to Adopt a Transient Occupancy Rental Unit Tax Surcharge
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Overview
Overview
At the Village Board meeting on October 30, 2023, the Village Board directed staff to prepare an ordinance for consideration to increase the Village’s Hotel/Motel and Transient Occupancy Rental Unit Tax from its current rate of 4% to 7.5%. Further, the Village Board gave direction to dedicate the revenue generated by any increase over the existing 4% rate, to the Village’s Housing Trust Fund to support affordable housing goals.
At the Village Board meeting on February 6, 2024, the Village Board approved a motion directing staff to prepare for Village Board consideration an ordinance amending the Village Code to adopt a Transient Occupancy Rental Unit Surcharge Tax in the Amount of 3.5% to be allocated to the Housing Trust Fund to support affordable housing goals. Additionally, the Village Board asked that multiple options related to a potential adjustment to the Village’s Hotel/Motel and Transient Occupancy Rental Unit Tax be presented including a Diversity Equity and Inclusion (DEI) assessment. A proposed ordinance creating a surcharge tax of 3.5% and alternative tax adjustment options are presented in this agenda item for Village Board consideration.
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Recommendation
Recommendation
Staff recommend Village Board adoption of the proposed ordinance. The proposed ordinance creates an additional 3.5% surcharge tax paid only by the Village’s licensed short-term rentals. Revenue generated by the proposed increase would be allocated to the Village’s Housing Trust Fund to support affordable housing goals. The staff supported option is shown as Option “A” below. Additional options are detailed under Options “B1” through “B6.”
Background
The Village’s Hotel/Motel tax was established in January 1995 at the rate of 2%. In 2004 the rate was adjusted to 4% and has remained at 4% since then. In 2022, the Village’s 4% tax generated approximately $225,000. In 2023, the 4% tax generated approximately $258,000. In 2023, more than 50% of the total tax collected was paid by users of licensed short-term rentals (largely secured via apps like AirBnB and VRBO). The Village currently has one full-service hotel establishment, one bed and breakfast establishment, and 120 licensed short-term rentals. The 120 short-term rental licenses were reviewed by staff. Twenty (20) operators have two (2) or more short-term rentals. One operator holds fifteen (15) licenses.
Although data are incomplete and staff are unable to definitively determine if an operator lives at their short-term rental site or not, of the 120 active sites, eighty-thee (83) provide an Oak Park mailing address. Thirty-seven (37) indicate an address outside of Oak Park.
Historically, the Village has dedicated most of the existing 4% Hotel/Motel and Transient Occupancy Rental Unit Tax to tourism initiatives through the non-profit organization, Visit Oak Park. In the FY2024 budget, the Village Board approved funding for Visit Oak Park in the amount of $209,042. The Village Board makes an annual decision on the amount of funding provided to Visit Oak Park as part of the annual budget process. Estimated revenues generated from each tax option depicted in the attached spreadsheets assume an annual funding contribution to Visit Oak Park of $209,042, the amount most recently approved by the Village Board.
Based on Village Board direction on October 30, 2023 and most recently on February 6, 2024, staff is presenting the Village Board with two (2) options to consider. The first option, labeled Option “A” models only the Transient Occupancy Rental Unit (Short-Term Rental) Surcharge Tax, not including Hotel/Motel existing or future. Option “A” is staff’s recommended option.
The second option including six different scenarios, and, labeled Options “B-1” through “B-6”, models an increase to the Village’s current 4% Hotel/Motel and Transient Occupancy Rental Unit Tax. This tax would be paid by all operational hotels, bed and breakfasts, and licensed short-term rentals. In each of these scenarios, the existing 4% Hotel/Motel tax receipts would continue to remain in the General Fund. Any revenue generated by an adjustment above the existing 4% tax would be allocated to the village’s Housing Trust Fund.
A table summarizing these options and the estimated Housing Trust Fund support over a ten (10) year period is below.
Narratives of Option “A” and Options “B-1” through “B-6” are provided below.
Option “A” - Staff Recommendation
In this option, the Hotel/Motel tax would not be adjusted. Instead, a new 3.5% surcharge tax would be enacted only upon the Village’s licensed short-term rental providers, of which there are currently 120. If this new surcharge were instituted and made effective May 1, 2024, based on conservative projections from past receipts, the Option “A” is estimated to raise $1,287,417 in additional revenue over the ten-year period. This additional revenue would be allocated to the Village’s Housing Trust Fund.
Option “B-1”
The Hotel/Motel tax immediately increases to 7.5% effective May 1, 2024. By increasing the tax to 7.5%, This new tax would affect all existing Village hotels, bed and breakfasts, and licensed short-term rentals. This financial analysis does not include funds that may be realized from any additional hotels, bed and breakfasts, or short-term rentals. Over a ten-year period, Option “B-1” is estimated to raise $2,164,794 in additional revenue to support the Village’s Housing Trust Fund.
Option “B-2”
The Hotel/Motel tax immediately increases to 7.5% effective May 1, 2024. By increasing the tax to 7.5%, 47% of the overall tax collected (reflecting the 3.5% increase) would be allocated to the Housing Trust Fund and 53% of the overall tax collected (representing the existing 4% tax) would remain in the village’s General Fund. This new tax would affect all existing village hotels, bed and breakfasts, and licensed short-term rentals. This financial analysis includes funds that may be realized from one (1) additional hotel and assumes an anticipated opening date of January 2026. Over a ten-year period, Option “B-2” is estimated to raise $2,854,058 in additional revenue to support the Village’s Housing Trust Fund.
Option “B-3”
The Hotel/Motel tax would increase annually, beginning at 4% in 2023, to 4.5% in 2024, 5% in 2025, 5.5% in 2026, 6% in 2027, 6.5% in 2028, 7% in 2029, and 7.5% in 2030. Revenue from the existing 4% Hotel/Motel tax would remain in the Village’s General Fund and the new tax income generated from the increases would be allocated to the Housing Trust Fund. This new tax would affect all existing village hotels, bed and breakfasts, and licensed short-term rentals. This financial analysis does not include funds that may be realized from any additional hotels, bed and breakfasts, or short-term rentals. Over a ten-year period, Option “B-3” is estimated to raise $981,391 in additional revenue to support the Village’s Housing Trust Fund.
Option “B-4”.
The Hotel/Motel tax would increase annually, beginning at 4% in 2023, to 4.5% in 2024, 5% in 2025, 5.5% in 2026, 6% in 2027, 6.5% in 2028, 7% in 2029, and 7.5% in 2030. Revenue from the existing 4% Hotel/Motel tax would remain in the Village’s General Fund and the new tax income generated from the gradual increases would be allocated to the Housing Trust Fund. This new tax would affect all existing Village hotels, bed and breakfasts, and licensed short-term rentals. This financial analysis includes funds that may be realized from one (1) additional hotel and assumes an anticipated opening date of January 2026. Over a ten-year period, Option “B-4” is estimated to raise $1,304,492 in additional revenue to support the Village’s Housing Trust Fund.
Option “B-5”
The Hotel/Motel tax would increase biennially, beginning at 4% in 2023, to 4.5% in 2024, remain at 4.5% in 2025, move to 5% in 2026, remain at 5% in 2027, move to 6.5% in 2028, remain at 6.5% in 2029, move to 7% in 2030, remain at 7% in 2031, and move to 7.5% for 2032 and 2033. Revenue from the existing 4% Hotel/Motel tax would remain in the village’s General Fund and the tax income generated from the increases would be allocated to the Housing Trust Fund. The new tax would affect the one existing Village hotel, one existing Village bed and breakfast, and all licensed short-term rentals. This financial analysis does not include funds that may be realized from the proposed new hotel on Lake Street. Over a ten-year period, Option “B-5” is estimated to raise $901,276 in additional revenue to support the village’s Housing Trust Fund.
Option “B-6”
The Hotel/Motel tax would increase biennially, beginning at 4% in 2023, to 4.5% in 2024, remain at 4.5% in 2025, move to 5% in 2026, remain at 5% in 2027, move to 6.5% in 2028, remain at 6.5% in 2029, move to 7% in 2030, remain at 7% in 2031, and move to 7.5% for 2032 and 2033. Revenue from the existing 4% Hotel/Motel tax would remain in the Village’s General Fund and the tax income generated from the increases would be allocated to the Housing Trust Fund. This new tax would affect all existing Village hotels, bed and breakfasts, and licensed short-term rentals. This financial analysis includes funds that may be realized from one (1) additional hotel and assumes an anticipated opening date of January 2026. Over a ten-year period, Option “B-6” is estimated to raise $1,160,428 in additional revenue to support the Village’s Housing Trust Fund.
Fiscal Impact of Option “A” - Staff Recommendation
As reflected in the attached “2024.02.20 ORD-108 HotelMotel_STR” excel workbook under the “Option ‘A’ Model” tab, a conservative estimate indicates that maintaining the existing 4% rate, in addition to the adoption of the proposed 3.5% short-term rental surcharge, results in approximately $4,271,660 in revenue generated by short-term rental exclusively over the next ten (10) years. A conservative estimate of the funds allocated to the Housing Trust Fund over a ten (10) year period is $1,287,417. As has been the case in the past, regular financial updates about the amount of taxation being collected will be communicated out through the Village Manager’s weekly report.
The following chart and associated table again illustrate the options over a 10-year period.
DEI Impact
The Village Board may wish to consider the equity impacts of the proposed ordinance prior to adoption.
Under Option “A,” independent owner-operators and small businesses investing in short-term rentals may experience financial loss stemming from the 3.5% surcharge enacted per the proposed ordinance. Conversely, independent owner-operators and small businesses investing in short-term rentals have reduced the supply of available homes for purchase or rent, adversely impacting housing stock and affordability in the Village. The reduction in available housing supply for either purchase or rent may disproportionally impact low to moderate income households and first-time homebuyers. Lastly, variability in terms of location may alter the character of neighborhoods where short-term rentals have clustered. This clustering may adversely affect the quality of life for existing residents due to higher concentrations of highly transient individuals. A map of these locations as of June 2023 is attached.
Under Options “B-1” through “B-6,” all existing and future hotels, bed and breakfasts, and short-term rentals may experience financial loss stemming from the 3.5% surcharge enacted per the proposed ordinance. These potential financial losses may be more acutely experienced by traditional hoteliers and bed and breakfast operators, potentially furthering any real or perceived competitive disadvantages. Further, the existence of dedicated, in-town hotels and bed and breakfasts better protects housing affordability in the Village by more efficiently preserving the existing supply of housing units while still providing lodging for tourists and business travelers.
Alternatives
1. Direct staff to prepare an ordinance for Village Board consideration reflecting any of the various six scenarios.
2. Direct staff to prepare an ordinance on an option not identified as an option with this Agenda item.
Previous Board Action
February 13, 2023 - At this meeting, the Village Board discussed potential sources of revenue to help assist funding the Village’s Housing Trust Fund. One of the potential revenue sources was a portion of collected Hotel/Motel Tax revenue.
October 30, 2023 - At this meeting, the Village Board heard a more detailed presentation on potential sources of revenue to help assist funding the Village’s Housing Trust Fund. The Board gave direction to increase the Village’s demolition permit fee and dedicate 100% of that permit fee to help fund the Trust Fund. Additionally, a majority of the Board directed staff to prepare an ordinance for consideration increasing the Hotel/Motel tax from 4% to 7.5% and then dedicate the revenue generated by the increase, or 3.5% of the overall 7.5%, to become an ongoing revenue stream to the Village’s Housing Trust Fund.
December 4, 2023 - As a part of the annual ordinance consideration for Building and Construction Permit Fees, the Village Board approved changing the demolition fees for single-family dwellings, multifamily dwellings, non-residential commercial buildings, mix-use buildings, and institutional buildings from the current $.35xSF to the new $5,000 for each structure or $.35xSF, whichever is greater. Accessory structures (Examples: Garages and Sheds) and Right-Of-Way obstructions will remain $.35xSF. By approving this ordinance, the Board ensured that the lowest amount paid for a demolition of single-family dwellings, multifamily dwellings, non-residential commercial buildings, mixed-use buildings, and institutional buildings will be $5,000 each. If a demolition involves a large structure and $.35xSF would result in an amount higher than $5,000, then this larger amount would be paid. It is understood that all demolition fees, beginning January 1, 2024, shall be deposited into the Village’s Housing Trust Fund to be used to that funds benefit.
February 6, 2024 - The Village Board approved a motion directing staff to prepare for Village Board consideration an ordinance amending the Village Code to adopt a Transient Occupancy Rental Unit Surcharge Tax in the Amount of 3.5% to be allocated to the Housing Trust Fund to support affordable housing goals. Additionally, the Village Board asked that multiple options related to a potential adjustment to the Village’s Hotel/Motel and Transient Occupancy Rental Unit Tax be presented including a Diversity Equity and Inclusion (DEI) assessment.
Citizen Advisory Commission Action
N/A
Anticipated Future Actions/Commitments
Regular updates will continue to be provided to the public and to the Village Board regarding the revenue collected by the Village’s Hotel/Motel tax. This information has been provided regularly for many years. Additionally, specific information will be provided during these updates regarding how much tax revenue is being transferred to the Housing Trust Fund and how much is being provided to help support local tourism.
Intergovernmental Cooperation Opportunities
N/A