Anaheim Considers $158-Million Subsidy for Hotel Builder

The Anaheim City Council is scheduled Tuesday night to consider granting a subsidy that could go as high as $158 million to a hotel developer to build two, four-star hotels at the Anaheim GardenWalk, a retail and nightlife center in the city's resort district.

The proposal calls for hotel developer GardenWalk Hotel I to receive 80 percent of the bed tax revenue generated by the hotels during the first 15 years the hotels are open.

City staff is recommending that the council vote no on the proposal, and Councilwoman Lorri Galloway has already voiced strong opposition to the subsidy, saying it sets an unsustainable precedent and takes money from core city services already facing cuts because of lagging revenues.

"This is money that would pay for police and fire." Galloway said. "This is money that would pay for the city's infrastructure. This is money that would pay for the business that government should be into — city services."

Business leaders, meanwhile, are in favor of the incentive, arguing that the project will create thousands of jobs and boost city revenues by enhancing economic activity.

Council members voted in 2009 to grant up to $76 million in bed tax subsidies to the project. The developer is requesting the additional subsidies to entice investors, according to the report. The cost of the project jumped from $242.4 million in 2008 to an estimated $283 million, the staff report says.

If council members grant the developer's request, the city's general fund won't receive any bed tax revenue for at least 15 years after the hotels open. Revenue not retained by the developer would go toward resort district bonds, Galloway said.

The union that represents Disney hotel workers — Unite Here Local 11 — opposed the tax incentive in 2009 because of the possibility that Disney would operate the new hotels. A hotel operator has not been chosen yet.

With its proposed contribution, the city would foot more than 25 percent of the project's construction bill, and the investor would realize a nearly 16 percent rate of return on the project, according to the report.

Jan deRoos, associate professor at the Cornell University School of Hotel Administration, called the city-subsidized rate of return "extremely high." A normal return, deRoos said, would be about 10 percent.

He also said that the generous tax incentive may give an unfair competitive advantage to the hotels. "The real issue is are there 27 other hotels in the jurisdiction that are stuck with paying it [bed tax] while there are two free riders? Is that fair?" deRoos said.

But Todd Ament, president of the Anaheim Chamber of Commerce, contends that the benefits to the city amount to millions of dollars in new revenue.

The increase in property and sales tax revenues that would come from GardenWalk — which has been suffering from a slump in retail sales — would grow to $6.5 million over the first 15 years the hotels are open. After the tax incentive expires, the city would realize more than $20 million in new revenue, Ament said.

The project is also expected to generate 3,200 jobs during construction and 1,300 jobs while the hotels are open, Ament said. He added that the new hotels will be key to keeping Anaheim competitive in the market for large conventions.

"Right now you've got a piece of dirt that's not generating any economic activity for the city," Ament said.

Regarding the argument that GardenWalk properties will have an advantage over other hotels, Ament said, "Most of them see as you keep rising the tide, all boats rise in that tide."

Tefere Gebre, leader of the Orange County Labor Federation, argues that the city shouldn't unconditionally give away public money. He points to the Figueroa Street Corridor in Los Angeles, where council members granted hotel developmeners hundreds of millions in tax breaks over 30 years. 

Gebre says such large tax breaks were given only with certain conditions, like a requirement to pay living wages. "For a city to lay off its workers, to contract out workers, and then to give more than $100 million to a developer, that's insane," he said.

Partners William O'Connell and Ajesh Patel, winners of the Hilton Developer of The Year award in 2004 for the Doubletree hotel in Anaheim, would be developing the hotels.

O'Connell, Patel and firms connected to the developers have contributed more than $32,000 to various election campaigns for Councilman Harry Sidhu, according to campaign documents. Some of the contributions came from hotel businesses owned by O'Connell, including Stovall's Inn and Best Western Pavillions.

Sidhu lost bids for the state Senate in 2008 and for county supervisor in 2010. He was a forceful proponent of the first GardenWalk hotel subsidy the City Council approved in 2009, lecturing residents from the council dais. "What are we doing here?" he said. "We're going to lose jobs. We're going to lose the hotels that we have to a next door city."

The City Council campaigns for Kris Murray and Gail Eastman in 2010 also received donations from businesses that are connected to, or would benefit from, the development, including Anaheim GW and Stovall's Inn. Tom Tait's mayoral campaign in 2010 also received $1,000 from Stovall's Inn.

The Support Our Anaheim Resort (SOAR) political action committee, which is heavily financed by Disney, also spent tens of thousands of dollars on independent expenditures on behalf of Tait, Eastman and Murray during the 2010 council campaigns. The SOAR committee, which includes Eastman, Murray and O'Connell as members, unanimously supports the tax incentive.

O'Connell, Patel, Eastman, Murray, Sidhu and Tait did not return phone calls seeking comment.

Correction: Do to an editing error, a previous version of this story incorrectly stated that the Orange County Labor Federation is against the proposal to grant a subsidy to Anaheim GardenWalk. Labor Federation Executive Director Tefere Gebre spoke out against the proposal, but the organization has not taken an official position.

Please contact Adam Elmahrek directly at aelmahrek@voiceofoc.org and follow him on Twitter: twitter.com/adamelmahrek. And add your voice with a letter to the editor.

 

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