Anyone who has read the agenda for Tuesday's Anaheim City Council meeting knows that a vote is expected on a controversial $158-million room tax subsidy for the developer of two planned four-star hotels at the GardenWalk outdoor mall.
But known to only a few is that in recent weeks the City Council quietly approved a legal settlement that in essence grants another large subsidy, this time to the owners of the mall.
The settlement, which the Council voted on in closed session, calls for the mall owners, Anaheim Capital Partners, to receive up to 50 percent of the city's portion of sales tax revenue generated by the mall for the next 25 years. This fiscal year, the owners get 30 percent, and going forward the subsidy could be worth tens of millions of dollars.
In exchange for the sales tax revenue, Anaheim Capital Partners dropped a claim on the room tax revenue generated by the hotels, effectively clearing the way for that money to be handed over to the developers of the hotel, which include hotelier Bill O'Connell.
The revelation about the sales tax subsidy is likely to further heighten tensions surrounding the room tax subsidy, which has been the subject of intense controversy since it was first brought before the council more than a year ago. In January 2012, the council approved the subsidy in a 3-2 vote over loud objections from community groups that insisted it was a giveaway to big business at the expense of neighborhoods.
A judge, however, nullified the vote because the council did not provide enough notice to the public, a violation of the state's open meetings law known as the Ralph M. Brown Act.
All along, one of the arguments of proponents of the hotel subsidy has been that while the city would be returning the room tax revenues back to the developer, hotel patrons would boost sales at the GardenWalk mall and provide at least some sales tax revenue to the city's general fund.
Now it is becoming apparent that the general fund will be splitting that revenue with another group of private owners.
Mayor Tom Tait, the only council member to vote against the settlement, said he is puzzled by the deal. He indicated that the legal accord had been rushed and that he learned of the issue only recently. Tait said the owners of the mall never filed a lawsuit or even articulated their claim to the tax revenue.
“I first heard about this claim Monday night before the [April 30] council meeting,” Tait said. “There's no reason to settle this. I'm not even sure what their claim is.”
Councilwoman Gail Eastman said she had no comment on the settlement. Council members Kris Murray, Jordan Brandman and Lucille Kring did not return phone calls seeking comment.
The settlement stems from a 2009 mall parking structure lease between the city and the mall's previous owner, Anaheim GW II. The lease had granted the sales tax and room tax subsidies to Anaheim GW II, but the mall struggled during the recession and ultimately the development's lender foreclosed on the property.
Katella Anaheim Retail — an entity owned and managed by the mall's financiers, CitiGroup Global Markets Realty Corp. — also attempted to pursue the sales tax and room tax revenue. But the city's position had been that, under state law, the parking lease terminated upon foreclosure.
Katella laid out various rebuttals to that argument in correspondence to the city. According to a 2010 letter from the entity's attorney, the mall's development agreement specifically refers to the parking lease and a sublease, stating they can only be terminated pursuant to the lease terms, notwithstanding a foreclosure.
The dispute was never resolved, and in late 2012 Katella sold the property to Anaheim Capital Partners. The group's partners include Arcturus Group, Avenue Capital Group and Elliot Management.
Why the current owners of the mall believe they have claim to city funds is unclear. Representatives of Arcturus Group, which is handling the day-to-day management of the property, did not respond to messages seeking comment.
Adding to the intrigue are clear indications that former Mayor Curt Pringle, who remains an influential lobbyist in the city, is close to the issue. It is widely known that Pringle has been the consultant to O'Connell on the hotel development subsidy. According to sources close to City Hall, there are signs that Pringle is a consultant for Arcturus Group.
Curt Pringle and Associates has also been a consultant to CitiBank, according to the consulting firm's website. CitiGroup Global Markets Realty Corp. is the financier of the GardenWalk mall loan and controlled Katella Anaheim Retail, which took ownership of the mall after the foreclosure.
Pringle, who maintains close relationships with council members, particularly Brandman and Murray, did not return a phone call seeking comment.
Regardless of the sales tax settlement, tonight's showdown over the hotels subsidy is likely to be contentious.
Tait recorded a robocall recently urging city residents to oppose the deal. And other activists who have opposed the subsidy are known to be mobilizing.
Under the terms of the new deal, the hotels partnership is to receive 70 percent of the room-tax revenue for 20 years, or until the revenue collected by the developer hits $158 million, according to a city staff report.
Another 20 percent of the room tax revenue would go toward paying off resort district bonds. The city would net 10 percent for the general fund, which pays for city services like public safety, libraries and parks.
Proponents of the subsidy say that it is necessary to secure financing of the hotels project, which city officials say will generate 3,000 temporary jobs and 1,300 jobs in the long term. They also argue that, while the subsidy won't yield much room tax revenue at first, it will ensure much more revenue after 20 years.
“Once those agreements sunset or reach their max, 100 percent TOT [room tax] comes into our coffers. To me that's an investment in our future that I'm willing to make,” Eastman said.
Yet hotel financing experts said that within as soon as a year the subsidy won't be necessary to kick-start construction of the hotels because the hotel market is rapidly improving. They argued that if the city would wait until then, the hotels could be built without the subsidy, and the city could keep $158 million of the room tax revenue.
“The value of waiting an extra year could be substantial to the city,” said Jack Corgel, professor at the Cornell University School of Hotel Administration, in a January interview. “Why would you do this now? What’s the urgency?”
Corgel said in an email last week that he stands behind that assertion.
“The hotel markets continue on a steady path of income growth, although the values are a bit sticky and no headwinds seem to be forming. Waiting still makes sense,” Corgel wrote.
O'Connell said the experts are wrong. According to O'Connell, hotel patrons will only pay the high prices of a four-star hotel in big-name cities like San Francisco, Chicago and New York.
By having the city subsidy, O'Connell's hotels would be able to lower their prices.
“It's difficult to even purchase a home today,” O'Connell said. “You're unable to get financing for this type of project, especially in the city of Anaheim. … You never have been and you're never going to get that in the future unless there is a public-private partnership.”
Regardless of those arguments, the subsidy remains controversial among conservative and liberal activists alike.
Jon Fleischman, publisher of the conservative FlashReport blog, argued that awarding a massive subsidy to one politically connected developer distorts the free market and hurts other hoteliers who don't receive favorable treatment form the city.
“The root of it is relationships. If you've got a friend on the City Council, then maybe you get a deal,” Fleischman said.