Hotels: how tall?

After reading that Kill Devil Hills is floating some proposals to consider allowing an increase in height restrictions, my first instinct was that this is a trial balloon. Float an idea, gauge public response, and act accordingly.

My second reaction was that it takes a severe economic crisis to convince local governments to re-evaluate whether their existence is hindering economic development.

Across the board, we are seeing challenges to regulation on things small — food kiosks, flea markets, sale of seafood at open air markets — and large — taller hotel structures.

So what about taller hotels? The arguments offered in early discussions revolve around two economic arguments — rental homes and condos “no longer work” (they aren’t selling), so let’s try hotels; and a closely related idea that land owners should be able to maximize their revenue stream.

It is true that neither condominium units nor rental houses are selling. However, I suspect this has more to do with the lack of financing options, as well as skittish buyers still licking their wounds from the recession. I sincerely doubt we’ll see a line of banks willing to lend on a new high-rise hotel if banks won’t lend on rental houses and condo units, including those with solid rental histories.

Regarding the latter, the libertarian in me endorses this concept. But economically, this is a chicken and egg argument. The price of land is directly related to the potential revenue, or cash flow, it can generate. From this standpoint, we have to dismiss the land and home prices of the past boom. They were supported by pure, short-term speculation on value appreciation, which does not reflect typical rational investment decision-making.

Thus, if regulations allow only a 42-foot-high structure, it follows that the land price would adjust to the revenue a 42-foot structure would generate. Raise that height to 100 feet, one can generate more revenue and spread start up costs over a larger unit.

The problem is, the more revenue that land can potentially generate, the higher the cost of the land, and absent speculation, an equilibrium will be struck. Your $900,000 lot is now a $1,800,000 lot. This provides a windfall to existing landowners who purchased at the older height restrictions, and creates a new obstacle for potential buyers. Also, once such a rule is passed, it will once more skew the market in favor of one type of development over another.

Think back two or three decades. Outer Banks local governments wanted to avoid the “Virginia Beach” look of high-rise hotels while promoting a family beach atmosphere (hotels attract young, party-going types; houses attract families). As a result, they lumped all hotels into a category that included even traditional mom and pops.

In general, the amount of improvements a motel could undertake was restricted to 50 percent or less of tax value of the structure at any one time, which made it difficult for a one-story hotel to add a floor or upgrade. Thus, homes, suffering from no such restrictions, took the place of motels when the owners decided to sell. As land values increased, so did the size of houses, until we ended up with a beach full of mansions and a dwindling number of hotels.

The results? Short-term visitors became rarer, and families wishing to visit three places on vacation — the OBX, Williamsburg, Washington, D.C., for example, — dropped our area from their itinerary. More disconcerting, families shelling out thousands of dollars in McMansion rentals re-allocated their spending. No dinners out, no trips to the putt-putt course, no T-shirts and souvenirs. Besides, why leave a house with a big gourmet kitchen, media room with theater seating and a pool? Hotel visitors almost have to get out of the building. Not so with rental houses.

So will taller hotels — and, I suspect, condos since we won’t find a legal way to favor one over the other — help? Probably. It will certainly create more options for development.

But we don’t need to go overboard. Houses and condos will sell again as buyers and lenders eventually return to the market. Profit potential abhors a vacuum. And adding one or two stories to existing hotels is not likely to drown the beach in shade or ruin the view any more than it does today. But officials need to walk a fine line.

A definite height limit needs to be set, and it should be smaller rather than larger, 50 feet on the ocean, 60 on the west side, for example. No case-by-case exceptions or openings for a 10- or 12-story behemoth to appear on the beach.

Overlay districts, if legal, should be implemented to ensure most of the beach remains at the current 40- to 45- foot limits. And government needs to remember that while larger structures generate more tax revenue, they also create even more pressure to preserve beaches from damage as the economic value of the property insinuates itself into government coffers.

What we want to avoid is a time, in the future, when we find ourselves pining for the good old days when the Outer Banks sported large McMansions instead of 30-story high-rises.

Related story: KDH panel looks at easing hotel height restrictions »

Related commentary: Outer Banks irony »

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