Luxury hotel with restaurant by Michelin-star chef to come to Morgan Hill after council approves tax rebate deal – The Mercury News

Morgan Hill City Council on Wednesday narrowly approved a deal to bring a 4-star luxury hotel and restaurant into the heart of its downtown, but not without some pushback.

Though proponents say the hotel will bring in revenue and attract tourism to the growing city, the deal offers millions in tax breaks to the incoming development, and some voiced concerns that the agreement was rushed before the city council.

“I firmly believe that getting (this project) in Morgan Hill will be transformational for downtown,” said Matthew Mahood, Economic Development Director for the city. “Deals in the private sector come together quickly and they also fall apart quickly … We are trying to be responsive to the market and the opportunity.”

Plans for Hotel MOHI began in 2016, when the city approved a permit for a hotel by local developer and restaurant owner Frank Leal. Since then the project has moved forward in fit and starts. While construction began in 2019, the COVID-19 pandemic halted construction in early 2020. In 2022, the project was approved for 13 more rooms and a fifth floor, and the project restarted construction in 2023.

In April of this year, Leal approached the city with chef and entrepreneur Charlie Palmer with a proposal to rebrand and upgrade the hotel into a luxury development with a restaurant. Palmer is credited with having earned over 20 Michelin stars and is a co-founder of Appellation Hotels, which runs luxury hotels along the west coast.

“We can make a difference in a town like Morgan Hill. We can be a part of the community and move things forward,” said Palmer at Wednesday’s meeting.

The upgraded design will be a four-star luxury hotel complete with 76 rooms, a restaurant by Palmer, a spa, a swimming pool, and space to host events. Leal also said he envisions a bakery and coffee shop, as well as a courtyard that could host farmers markets.

With the increased scope of the project, as well as the high cost of borrowing and inflated prices of materials, the price of the hotel has ballooned to $75 million, up from $16 million in 2016 and $40 million in 2022. With the added costs, the developers expect a gap of $6 million to $9.5 million in the available funding from loans.

To help pay for the shortfall, the proposed agreement lays out millions of dollars in rebates in sales tax and transient occupancy tax, which guests pay when staying at a hotel. Over 15 years, the hotel would pay a baseline amount of taxes to the city, then be reimbursed for what they pay beyond that baseline. The baseline would begin at $282,000 then go up by 3% every year. Once the hotel had received $6 million in rebates, they would have to pay 50% of the taxes above the baseline.

While councilmembers and the public were virtually unanimous in their support for the project, some worried that city staff had rushed into a deal that allowed the hotel too much leeway for tax breaks.

“I’m thrilled about what I hear about the (project). That doesn’t mean that we can just go with what is given to us,” said Councilmember Yvonne Martínez Beltrán, noting that she had just seen the agreement days ago and that this council meeting was the last before a two month recess. “I would like to look at this with more time.”

“I don’t know if that’s the fairest deal for our community and the taxpayers,” said Councilmember Rene Spring, asking the city staff to consider capping the tax rebates after $6 million dollars.