Will Anaheim’s Luxury Hotel Subsidies Work?

A rendering of the proposed Disney hotel (top) and of the proposed JW Marriott next to the GardenWalk outdoor mall (bottom).

A rendering of the proposed Disney hotel (top) and of the proposed JW Marriott next to the GardenWalk outdoor mall (bottom).

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When the Anaheim City Council approved $550 million in potential tax breaks for three luxury hotel projects in the Anaheim resort district earlier this month, those in favor of the project billed it as a win-win-win for taxpayers, labor and local business.

They argue that the luxury hotels built by Disneyland and other developers will attract higher-paying visitors to the resort, and more than pay for the public’s investments through job creation and new tax revenue.

“Hundreds of millions [of dollars toward] school, police, streets, roads, all because we’ve had these corporate partnerships for decades,” said councilwoman Kris Murray, a strong supporter of the hotel tax breaks, at a July 12 council meeting. “The alternative is going into the wallets of our residents, many who are low income.”

But others, including hotel industry experts, envision a possible win-lose-lose scenario in which the resort district won’t be able to sustain a luxury hotel market and the subsidized hotels will end up drawing visitors away from non-subsidized competitors and drain the city’s general fund budget.

“I can’t say enough that I don’t see Anaheim as a luxury market,” said Daniel Lesser, president and CEO of New York-based LW Hospitality Advisors, a hotel real estate firm.

Anaheim is just the latest city to offer generous subsidies to hotel developers. Cities nationwide are increasingly looking to convention center developments and incentive policies as an economic growth strategy, with the hope of attracting visitors – and their money – through tourism and hosting major events.

Some argue that the strategy, when done well, has helped cities upgrade their markets and generate new tax revenue that comes out of the pockets of tourists rather than their own residents.

Subsidy critics, meanwhile, deride them as just another brand of corporate welfare and point to examples where otherwise unsustainable projects went forward, or damaged a local hotel market’s competitive balance.

Anaheim’s subsidy program gives four-diamond hotel developers back 70 percent of the room tax they generate for 20 years. The program could result in a $250-million windfall for Disneyland, if it follows through on plans to build a new luxury hotel, and nearly $300 million in rebates for two hotels proposed by the Hong Kong-based Wincome Group.

The deals were approved on July 12 by members of the council majority, which includes Murray, Councilwoman Lucille Kring and Councilman Jordan Brandman. Councilman James Vanderbilt voted no, while Mayor Tom Tait — long a vocal critic of corporate subsidies – was absent for the vote.

The subsidies approved this month are in addition to a controversial $158-million subsidy granted in 2013 to hoteliers planning to build two four-diamond properties in the city’s GardenWalk development.

Greg Diamond, an Anaheim-based attorney/activist and frequent critic of the council majority, said the deal could give three-star hotels the grounds for an unfair competition lawsuit against the city for granting the hotel subsidies.

Diamond is member of a small citizen group called Coalition of Anaheim Taxpayers for Economic Responsibility that unsuccessfully sued the city in 2014 over its financing for an $180 million expansion of the Anaheim Convention center.

Diamond adheres to the argument that when the next economic downturn hits, the subsidies would give the four diamond projects an advantage over existing hotels that don’t have a financial cushion from the city.

“If there’s another terrorist attack, an economic collapse, the bond payments still need to be made, the banks still need to be paid, they will do whatever they can to cover the cost of it,” Diamond said. “They have a tremendous advantage…[and] can just drop rates without thinking twice.”

Tait echoed Diamond’s concerns during a presentation at the July 12 council meeting.

“If guests are choosing new hotels over existing hotels, they are cannibalizing bed tax revenues and giving that tax money back to the developers, not creating new revenue,” Tait said.

Those Who Fight Subsidy Deals Often Lose

Anaheim’s subsidy deals are hardly unprecedented. Hotels in Downtown Los Angeles, particularly those near LA Live, the centerpiece of downtown Los Angeles’ resurgence in recent decades, have been the beneficiaries of recent subsidies that allow them to keep half of new sales, property, utility and room taxes for 25 years.

And recent unfair competition lawsuits against hotel subsidies have been unsuccessful.

In 2013, 11 hotels in Aurora, Colorado filed an unfair competition suit against the $850 million Gaylord Rockies hotel development, which received $81.4 million in public subsidies, according to the Denver Post. A judge threw out the case. 

In 2005, the Westin Bonaventure Hotel sued the city of Los Angeles over $290 million in subsidies and loans for the construction of a 55-story Hilton hotel next to the L.A. Live entertainment complex and convention center, according to the Los Angeles Times.

The Bonaventure, after threatening to put a referendum on the ballot, ultimately agreed to drop their lawsuit, in exchange for the option of converting up to 400 of their 1,354 rooms into residential condominiums, according to the Times.

Lesser, the hotel industry consultant, said the problem facing the builders of luxury hotels in Anaheim is the reality that those who can afford four-diamond rooms are far more likely to stay in a seaside resort in nearby Newport Beach than Anaheim, even if their vacation plans include a trip to Disneyland.

“It’s a good market, and if there’s a need for hotel rooms that’s one thing,” said Lesser of Anaheim. “(But) one has to question whether there’s a need for luxury hotels and whether there’s a need for three of them at the same time.”

Lesser says he’s not anti-subsidy, and public support is worthwhile in certain markets. He points out, however, that hotels are riskier public investment than office space or apartments because rents fluctuate daily and are dependent on the strength of the economy.

“In a rising market, hotels are terrific forms of commercial real estate because you can raise rents immediately. In a down market, it’s an awful thing,” said Lesser.

Deals Not Always Done Well

Robert Nelson, an associate professor of hotel, restaurant and institutional management at the University of Delaware, joins many experts in arguing that hotel subsidies can be a positive force in a local economy, provided they are done well.

That, however, is the case in fewer situations than advertised, he says.

Nelson conducted a study published in 2015 which found that, with few exceptions, publicly-owned hotels harmed their competitors, with average daily room rates, occupancy and revenue per available room declining.

Most markets also became more volatile, meaning the publicly-owned hotels helped “attract enough visitors during peak season to absorb the additional inventory and created spillover business that benefited other hotels,” but during slow times of year, “the added inventory drove down occupancies and rates,” according to the study.

Nelson is also working on another paper, which has yet to be published, examining the effect of publicly subsidized hotel projects on competitors.

Most municipalities have a set of criteria for developers to prove they need the subsidy to complete a project, but the standards are inconsistent, Nelson said. Instead, he says the process tends to be one where political power and data tends to favor private developers over those negotiating on behalf of taxpayers.

“As a result the public sector sometimes provides incentives that are larger than what is needed to bridge the funding gap necessary to bring projects to market resulting in costly wastes of public money to the benefit of developers,” Nelson said.

To guard against this eventuality, the city of Los Angeles requires developers to pay for a study showing a gap in financing their projects without an incentive.

But Anaheim’s hotel incentive policy does not require developers to show economic need or submit a feasibility statement to take advantage of the policy, according to Anaheim spokesman Mike Lyster.

Being able to show the need is key, said Paul Breslin, head of the Americas division for Horwath HTL and an executive-in-residence at Georgia State University.

A general guideline to determine the feasibility of a project is to ask, the whether the phrase “but not for this incentive, the project will not go forward” applies, Breslin said.

Breslin says a well-designed subsidy will incentivize a company to spend money and build a project they otherwise wouldn’t want to build, without giving away too much to the developer. He said Anaheim’s tax rebate is structured to benefit taxpayers because the developer takes all the risk in building the project and the pay-off only comes after the hotel is open.

As for those who argue that companies like Disneyland don’t need any help building a hotel, Breslin says that’s the wrong question to ask.

“Those are people who believe that the guy who can afford a steak should pay more and the guy who can’t afford [it] should just pay less…that’s just not the way business works,” said Breslin. “Of course Disney has lots of money, but economic incentives are designed to attract big investors to do something in your community that you otherwise wouldn’t do.”

Disneyland officials have stated that they would not have proposed the four diamond hotel without the hotel incentive program.

At the July 12 council meeting, Tait asked Wincome Group CEO Mark Chan whether the company would have proposed its two, four-diamond hotels without a subsidy.

“I think that’s something that needs to be analyzed,” Chan replied, telling the council that he does not think a bank would finance a four-diamond hotel project.

Lyster said the hotel incentive policy is meant to create an “open playing field.”

“They do not need to submit a feasibility statement because the challenges of building high-end hotels in the resort are already known – high land, construction costs and extensive parking requirements,” said Lyster. “In 60 years as a visitor market only one four-diamond has ever been built, and it was part of a larger public-private partnership to expand the Anaheim Resort in the late 1990s.

Contact Thy Vo at tvo@voiceofoc.org. You can follow her on Twitter @thyanhvo or Facebook.com/reporterthy.

  • Jacki Livingston

    No.

    Any questions?

  • AJMintheOC

    Just received my upteenth mailer from the lobbying group called S.O.A.R. (Support Our Anaheim Resort Area). They claim that “5,000 construction and permanent jobs” will be created, but the only way that our residents will benefit if those jobs were guaranteed to go to Anaheim residents. There was NO such guarantee made in the corporate welfare giveaway. Moreover, Anaheim residents will NOT be staying in those luxury hotels. In the mailer from S.O.A.R., it thanks Kring, Murray and Brandman for their votes. These 3 member of our City Council do NOT represent the interest of the residents of Anaheim. They owe their souls to S.O.A.R. and the luxury hotels that will be built.

    • cynthia curran

      Construction jobs go by projects and while its good for them not so good for everyone else. Personality, the cheap gas has encouraged a lot of travel recently to Disneyland and Knott Berry Farm hence their desire to make money from tourism. If the gas prices go and the wages slightly rise each year because of the 15 an hour minium wage then I think they overestimated the success of the hotels.

  • kburgoyne

    I strongly suggest VofOC may wish to considering starting to ask in the future the rather obvious “normal business” question “Did the city try to negotiate a $275M subsidy? A $200M subsidy? A $100M subsidy?”

    There has been more than one occasion when a sales person has come to me to say s/he has some new customer who’ll buy from us if we just give them a 100% discount (I’m exaggerating, of course). To which the salesperson has generally received back from me the rather obvious question “Have you negotiated with them to pay a higher price, or did you just roll over and get your tummy scratched?”

  • Kevin Hogan

    Hundreds of millions [of dollars toward] school, police, streets, roads, all because we’ve had these corporate partnerships for decades,” said councilwoman Kris Murray

    Murray’s Powerpoint presentation during the Council meeting was beyond bizarre — the main thrust of her argument seemed to be that TOT was bringing in so much money, and Anaheim was doing so much better than other neighboring loser cities, that we could easily afford to throw half a billion dollars in newly-generated TOT down a rathole.

    Wouldn’t want to suffer from the problem of having too many parks, or police officers, or library books — a little privation and self-denial is good for the soul!

  • Paul Lucas

    This is the most insane thing I have seen a council ever do. I wish we could press charges against them for this.

  • Cynthia Ward

    Who is this Lyster? Only one 4 diamond hotel was built in 60 years and it was part of a public private partnership? What city does he think employs him? In Anaheim, the only public private partnership hotel is the Doubletree, nice, but NOT 4 star, costs taxpayers less than a million bucks a year, and was subsidized in desperation thanks to post 9-11 economy and taxpayers just were put on the hook for one and a half billion in bond payments. There ARE two 4 star hotels in Anaheim, both owned by DISNEY. So once again we see the astonishing lack of awareness by staff, who make absolute statements about issues they know nothing about. At some point incompetence becomes negligence.

    But the Disney hotel has been PLANNED to the point of entitled and cleared for environmental for decades! So don’t tell me Disney was not going to build another hotel, as their expansion plans developed. And why would Disney build anything other than 4 star, when the argument for off-property 4-stars is that the Disney hotels are at capacity and guests can’t get the 4 star rooms they want so they are going to the beach. Hint to the gullible. 4 star patrons pay top dollar to stay at the beach…because of the BEACH….every argument made by staff and their elected overlords takes such a horrific stretch of the imagination to believe that it is infuriating that these people are tasked with serving fiduciary duty for the taxpayers and choose instead to make up works of fiction that make Disney’s fairy tales seem like documentaries.

    We are being robbed. And we are Bing insulted by the ridiculous excuses they cook up to force these gifts of public funds on us.

    Oh no! Disney won’t build a 4 star hotel without our tax money! Brought to you by the SAME folks who pushed “Arte Moreno will pack up the Angels and move to Tustin!”

    • David Zenger

      “Arte Moreno will pack up the Angels and move to Tustin!”

      Don’t remind them. Another free 3 year extension is bound to make a pre-November re-appearance.

    • Cynthia Ward

      MARCH 23, 2015 Disney submitted letter of compliance for their annual review of Development Agreement from 1996, which outlines the deal they made for the $500MM gift that taxpayers will cover for one and a half BILLION in “investment” between now and 2037. That Finance Agreement and Development Agreement from 1006 gets recapped each year to see how Disney is doing for their end of the deal.

      http://local.anaheim.net/docs_agend/questys_pub/MG50308/AS50347/AS50350/AI50958/DO50960/DO_50960.pdf

      “Section 3.1.5
      PROJECT QUALITY – Disney to construct hotel rooms as part of the Opening Day Project (and the Supplemental Future Hotel Rooms) in a manner that is comparable to the general quality of the Wilderness Lodge located in The Walt Disney Resort in Florida.

      The City issued the first building permit for the Grand Californian in April 1999. A Certificate of Occupancy for the Grand Californian was issued by the City in September of 2001. A certificate of occupancy for the 274 hotel-key expansion of the Grand Californian Hotel was issued on December 7, 2009. Additional future hotel rooms will be constructed in a manner that is of comparable quality.”

      So Disney is obligated to build additional rooms as economics permit. (At the 1996 meeting the Disney President called it “Phase 3” to be built “sometime after 2010.” And they MUST BE of comparable quality to the Florida Wilderness Lodge or Anaheim’s GRAND CAL, readily recognized as one of the ONLY 4 star units in ANAHEIM!

      But please, tell us again how Disney will NOT build the hotel rooms they are already enviro cleared for and fully entitled, AND that they won’t build to the 4 star standard already obligated in their 1996 AGREEMENT. I would LOVE to see them try it. And then I would love to see the taxpayers of Anaheim declare them in DEFAULT for the 1996 agreement and begin recouping the ONE HUNDRED PERCENT of tax money we already forfeit from their property.

      At what point does staff conduct even BASIC DUE DILIGENCE?!

      • cynthia curran

        Disney is getting into 3-d printing. I think they think eventually theme parks will be dated. The only reason that they did the recent one in China since its a novelty there. Its possible that with virtual reality people would not need to go to theme parks as much. So, by 2037 Disneyland may laid off thousands of people due to lack of interest since Joe Blow can travel on a space plane instead of going to a theme park. Robotics could laid off thousands of people at the theme parks by that date since robots are now doing security and so forth.

  • David Zenger

    “I think that’s something that needs to be analyzed,” Chan replied, telling the council that he does not think a bank would finance a four-diamond hotel project.”

    So the bank won’t finance it but the taxpayers will.

    Case closed.

  • RyanCantor

    “Anaheim’s hotel incentive policy does not require developers to show economic need or submit a feasibility statement to take advantage of the policy,”

    Stupid.

    Stupid.

    Stupid.

    • kburgoyne

      “…but it may require developers to show economic ability to pay campaign contributions…” 🙂

      • RyanCantor

        Nicely done.

      • Deborah Pauly

        …well, played…