We find our industry and nation amidst surging economic growth and new business development opportunities, and two major advances late last year are pushing development forward. First, the National Labor Relations Board (NLRB) returned to the historical definition of “joint employer” and brought certainty back to franchising. Second, a once-in-a-generation tax overhaul—in addition to tax cuts—contains two small, yet very important, provisions; the preservation of federal historic tax credits and the creation of Opportunity Zones to promote investment in economically distressed areas. These provisions encourage long-term investment and development in older areas of our cities and counties, as well as in areas that were left behind as the nation rebounded from the Great Recession.
The franchise business model is one of the quickest pathways to success in the hotel industry, and many AAHOA members used it to start and grow their businesses. The NLRB’s 2015 Browning-Ferris decision plunged the franchisor-franchisee relationship into uncertainty by changing the joint employer definition and upending decades of precedent. The Board reversed this decision in 2017, but that is not enough to prevent a similar situation in the future. Because of the 2015 decision, the House passed the Save Local Business Act, which would create a statutory definition of joint employer. I am optimistic that a forward-thinking senator will step up and sponsor this legislation to prevent future administrations from repeating this mistake. In the meantime, with the lines of control and responsibility for employees clear as day, brands are more inclined to lean into franchise expansion.
The restoration of the conditions that allow the franchise business model to prosper coincided nicely with the passage of the Tax Cuts and Jobs Act, which leaves hoteliers with greater access to capital for business development. There are many provisions in the new tax law that will spur economic growth, such as the 20 percent deduction for pass-throughs, the reduction of the corporate rate from 35 percent to 21 percent, and the elimination of the AMT. The estate tax allowance is doubled, making it easier to keep the family business in the family. The bill slashed the top marginal tax rate by 2.6 percent. Like-Kind Exchanges for businesses are preserved. The last time we saw real tax reform, under President Reagan, a period of robust growth followed. Today, we’re witnessing the beginning of similar prosperity.
The bill also preserved the federal historic preservation tax credit (HTC), which allows developers to recoup 20 percent of the costs associated with renovating historic buildings. Returning historic buildings to commerce can rejuvenate local economies through avenues such as construction, the hiring of employees, and the generation of property and sales tax. For hoteliers looking to expand into older urban areas on the cusp of revival, a 20 percent tax credit can make a huge difference.
To incentivize additional investment in low-income, high-poverty urban and rural communities, the bill allows state executive officers to designate Opportunity Zones in which Qualified Opportunity Funds can be used to support redevelopment projects. Opportunity Funds allow investors to defer, and in some instances, largely reduce federal taxes on capital gains by using them to create these funds. As state executives designate these zones, hoteliers will identify opportunities and markets where new development may take hold in older communities. With more investment in distressed areas may come more guests and opportunities for growth.
In the past year, we’ve seen historic tax cuts, a return to the historical definition of joint employer, and development incentives to rebuild areas that fell on hard times. We’re not seeing history repeat itself, for these changes are unique to our time and place, but in creating the conditions for economic revitalization and prolonged growth, we’re set to enter a new era of opportunity and prosperity that is awfully similar to those in the past that made our nation great.
About the Author
Chip Rogers is the CEO of the Asian American Hotel Owners Association (AAHOA).
This article originally appeared in the March 2018 issue of LODGING.
