Garden Grove City Council Backs Subsidy for New Water Park Hotel

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Garden Grove City Council members recently paved the way for construction of a new hotel with an indoor water park, with officials set to devote at least $69 million in public funds and land to subsidizing the private project.

The Great Wolf Lodge is set to house 600 hotel rooms and 18,000 square feet of retail space in addition to an indoor water park and play area. The hotel would be built along Harbor Boulevard, about a 10-minute drive south of Disneyland in good traffic.

“It’s basically a way for us to get on the map” and bring tax revenue to the city, said Councilman Chris Phan.

“This would be the first type of this hotel [on] the whole West Coast,” he added. Anyone living west of the Mississippi River “who wants to experience something like this, Garden Grove would be their only destination,” he added.

As part of a 2010 deal, city leaders agreed to advance $5 million to Colorado-based developer McWhinney Enterprises, then pay another $42 million soon after the hotel opens. Officials also plan to give McWhinney public land worth about $22 million.

Council members approved its “implementation agreement” last week, setting the stage for construction to start in December. It was passed without discussion.

Taxpayer advocates often criticize such one-time subsidy deals, saying they create an unfair advantage for politically-connected businesses and rarely pencil out for taxpayers.

“In general we find that taxpayers believe that government should not be in the business of picking winners and losers in the business community,” said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association.

Cities “should concentrate on making the business climate friendly to all, and that’s the way to bring about prosperity — not picking certain businesses for subsidies, which means that if one business gets” a subsidy, others don’t, Vosburgh added.

City officials, meanwhile, have said this deal is a smart investment for taxpayers.

“It’s a return on investment. It would propose to yield about $8 million a year in terms of bed taxes,” said Phan. “So over the period and the lifetime of the water park, I think we will make much more than we will spend out initially.”

As for government staying out of the free market, Phan said that experience didn’t work for the city.

“It was really bad hotels, seedy hotels, that existed there for so long,” said Phan. “And without government getting in there, what you see now as the Marriott, the Sheraton and the Embassy Suites, that may never have happened if Garden Grove officials didn’t step in to force the issue and make it happen.”

The basis of the $8-million revenue figure isn’t explained in this week’s staff report nor in the 2010 staff report for the financial deal.

City staff said the estimate is based on a $350 average daily rate for rooms at the hotel, with 70 percent occupancy across a given year.

After the hotel is built, a second phase of the project could route 50 percent of tax revenues from the 200 extra rooms back to the developer, according to city consultant Horwath Hospitality and Leisure.

If the city’s $8-million projection pans out, taxpayers would break even on their investment after 8½ years.

Asked for a copy of their study on projected revenues, staff pointed to a one-page breakdown of projected hotel revenues to the developer, which does not include the projected tax revenues to the city.

Vosburgh said that at the very least, city leaders should have commissioned a study that explained how they arrived at their revenue projection.

“One would think that their due diligence would be to have some kind of a forecast of the economic impact,” said Vosburgh. “By becoming a bank for the developer, is there any return for the average taxpayer down the line either through better services for the community or lower taxes?”

For most of the $47-million subsidy, the city is set to issue bonds and then pay the debt with leftover money for redevelopment projects.

City Finance Director Kingsley Okereke said the bond payments will come from the county’s tax trust fund, where officials are holding all of the property tax increment money that previously went to redevelopment agencies before the state dissolved them in early 2012.

He also took issue with calling the deal a subsidy.

“The hotel deal, the way it’s done, we don’t think about that as subsidy. It’s a question of how you structure the deal,” he said.

The finance director said there are normally two ways to go about a hotel deal: Either the government gives part of the tax revenue back to the developer or it directly contributes to the construction costs.

According to city records, the city didn’t conduct an environmental impact study specifically for the project, which would analyze impacts like traffic, noise and construction emissions.

A council resolution states the project falls under the environmental impact reports for the 2002 redevelopment plan amendment and 2008 general plan update.

“No subsequent environmental impact report is required for implementation of individual components of the General Plan and/or Redevelopment Plan,” the resolution states.

Vosburgh pointed out that council members across California often award lucrative subsidy deals to their campaign contributors.

In Garden Grove’s case, a quick review of campaign reports shows that the developer contributed at least $8,000 to council campaigns.

McWhinney and its subsidiary gave $5,500 to Mayor Bruce Broadwater’s campaign fund, $1,000 each to Councilman Steve Jones and former Mayor William Dalton and $500 to Councilman Kris Beard.

And much of the money in those campaigns — at least $15,000 — was transferred among the candidates.

Construction of the hotel is scheduled to start in December and be completed by June 2015.

Phan said that while there are risks, he expects the project to be a success.

“In all investments, you never know when the market will go belly-up, but when you do do investments, you hope for the best, and so far based on what you see with the current existing hotels, they made the right call then,” said Phan. “I don’t foresee why it wouldn’t be the right call now.”

Please contact Nick Gerda directly at ngerda@gmail.com  and follow him on Twitter: @nicholasgerda.

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