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).

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.