Two planned four-star hotels near Anaheim’s GardenWalk mall could be built without taxpayer subsidies in one to two years, according to hotel financing experts, calling into question subsidy supporters’ central argument that the hotels can’t be built without the controversial incentives.
Council members in a 3-2 vote last year approved a room-tax subsidy, which caused a contentious split on the City Council and within the community. For 15 years, the subsidy would have diverted 80 percent of the hotel's room-tax revenue back to a development partnership involving Bill O’Connell, a politically connected hotelier and frequent City Council campaign contributor. The room tax is the city's largest source of revenue.
The developer could have collected up to $158 million in diverted tax revenue under the agreement. It allowed the project’s investor to receive a 16 percent rate of return on the hotels, according to a city staff report.
City Council members favoring the deal said the subsidy would have kick-started construction of the hotels and generated thousands of much needed jobs.
Last month, an Orange County Superior Court judge voided the subsidy on grounds that it violated the state's open meetings law, known as the Ralph M. Brown Act. Judge Steven L. Perk ruled that the subsidy approval was not adequately described as a possibility on the council meeting agenda.
For O'Connell to get his subsidy, City Council members must approve it again. He requested that the subsidy be placed on the Jan. 29 council meeting agenda, but that didn’t happen.
Supporters often argue that the subsidy costs nothing to taxpayers because the money for the subsidy can’t be generated unless the hotels are built and trigger new revenues.
But that argument now has a major flaw, argue experts.
The hotel market is rapidly improving, and a subsidy soon won’t be necessary to secure investment for the project, said one of Orange County’s top hotel real estate consultants and a professor at the country’s top hotel financing school.
“The hotel market has recovered, and revenues are continuing to climb. Lenders have already stepped back into the market and with values of existing older hotels rising rapidly,” wrote Alan Reay, president of Atlas Hospitality Group, in an email to Voice of OC.
Jack Corgell, professor at Cornell University of Hotel Administration, said that subsidies don’t make sense when they won’t be necessary to begin construction.
By waiting an additional year, $158 million in potential room-tax revenue would go to the city’s general fund, Corgell argued.
“The value of waiting an extra year could be substantial to the city,” he said. “Why would you do this now? What’s the urgency?”
Anaheim Chamber of Commerce President Todd Ament, a strong supporter of the subsidy, did not return a phone call seeking comment.
Corgell’s argument was also echoed by Mayor Tom Tait, the subsidy’s most vocal opponent, who said that subsidies in general discourage market competition by giving an unfair advantage to one business owner.
“In addition to those arguments, why wouldn’t you wait for the market to come around to support a deal like that, or support the hotels, … and then the city would make its revenue as it should,” Tait said.
Councilwoman Kris Murray declined to comment on the issue through her senior policy aide, Arianna Barrios.
Barrios said that Murray hasn’t taken a position because City Manager Bob Wingenroth, who had opposed the previous subsidy deal, is still evaluating a possible agreement, which, she said, could have different terms than what was previously approved.
Barrios acknowledged that there is a “slightly different economic environment” than a year ago and that Wingenroth "is going to be looking at all options to see if anything needs to change in the deal.”
Anaheim’s controversy over corporate subsidies sharpened after a mostly Latino riot in the downtown last year sparked by a string of fatal police shootings.
Latino activists argued that subsidy approval was an insult to working-class communities that have faced cutbacks in basic city services. Some argued that the riot was the result of Latinos’ overall political disenfranchisement.
The city’s politics have been dominated by a group of well-heeled business lobbyists, and O’Connell is a well-known member.
The developer has sat on the board of directors for the Support Our Anaheim Resort Political Action Committee. The group, which former Mayor Curt Pringle described as “critical” to electing candidates, spent tens of thousands of dollars in recent elections on campaigns to elect council members.
According to sources, Pringle is also widely believed to be O’Connell’s paid consultant on the hotel deal.
O’Connell’s campaign contributions landed him in hot water with the district attorney’s office, which opened an inquiry into whether the developer made thousands of dollars in illegal contributions to former Councilman Harry Sidhu, who voted for the subsidy.
O’Connell didn’t return a phone call seeking comment. Councilwoman Gail Eastman, who had previously voted for the subsidy, did not return phone calls for comment. Newly elected Councilman Jordan Brandman, who has expressed support for the subsidy during campaign events, also did not return phone calls seeking comment.