Anaheim Must Compete In Hotel Market Distorted by Garden Grove

Some of my Republican friends argue with me over my support for the GardenWalk project TOT rebate, pointing out that it isn’t free market economics and that government shouldn’t subsidize a business enterprise.

My response is that they’re right, but Anaheim isn’t working in a free market. I recognize that state government has gone too far on the regulation and taxation of business activity, and Anaheim itself is bordered by a city that has no compunctions about luring four-star hotels with not only TOT rebates, but free land.

Last week, the Garden Grove City Council unanimously voted to give a luxury hotel developer five-acres of city-owned land on Harbor Boulevard , adjacent to the Resort District. The council also voted to rebate back to the developer millions in TOT generated by the project for up to 20 years.

At the same meeting, the council unanimously approved a water park resort-and-hotel project, with the city putting up the land and issuing $42 million in revenue bonds to finance it.

Where was the outrage from Adam Elmahrek of the Voice of OC, or the OC Register editorial writers?

This is the market in which Anaheim is operating. For years, Garden Grove has pursued a deliberate strategy of benefitting from the expansion and improvement of the Resort District  — financed by the City of Anaheim bonds guaranteed by Disney) by luring high-end hotels with land and TOT rebates.

That’s why it has been many years since a four-star hotel has been built in Anaheim: we can’t compete with Garden Grove.

To be sure, Garden Grove’s free land-and-subsidies policy creates an artificial market, but that doesn’t make it any less real. Anaheim is heavily dependent on TOT revenue from the Resort District to fund city services. That’s what the whole battle with developer SunCal a few years ago was all about.  The Resort District is driven by tourism and convention business. The convention business is tremendously competitive, and four-star hotels make a destination that much more attractive for higher-end conventions, which in turn generate higher tax revenues for Anaheim.

The difference in the amount of TOT revenue generated by a four-star hotel versus a three-star hotel is very big, and is magnified over the course of many years.

If we were in Texas or Nevada or some state with a much-friendlier business climate, I would be as skeptical as my Republican friends. But given the reality of the situation, the City of Anaheim would be short-changing itself and its citizens by refusing to compete with Garden Grove by pursuing a more aggressive strategy for developing high-end hotels within the Resort District.

In the short-term , the GardenWalk project will create much-needed, good-paying construction jobs. In the long-term, it will generate much higher TOT revenues for the city than yet another three-star hotel. Garden Gove gets that, which is why they are playing the long game and reaping the benefits of Anaheim’s investment in the Resort District. The GardenWalk agreement is an example of our city waking up to this reality and refusing to cede high-end hotel development to its neighbor.

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  1. I agree that the spotlight should be focused on Garden Grove for totally outrageous policies. But adopting a “they do it so it justifies our doing it” is a flawed argument. The fundamental argument against the Anaheim Citywalk targeted subsidy is that is is immoral. It is wrong to target a “gift” of public money to one developer/project.

    We just saw this kind of flawed logic used to renew the Federal Import/Export bank, with the United States government guaranteeing massive loans for private businesses. The argument? Well we need to compete with countries, like France, who subsidize their businesses.

    Two wrongs don’t make a right. Let’s focus a public relations campaign against what Garden Grove is doing — and, yes, the Orange County Register, Voice of OC and others should be exposing what they are doing.

    • Jon, the problem with your Export-Import Bank analogy is that Anaheim does need to utilize polices like TOT rebates in order to compete with Garden Grove, while the US doesn’t need Ex-Im Bank loans to be internationally competitive.

  2. A gift of public money? If this is a gift of public money (delaying payment of some taxes by a taxpayer), then your deduction of home mortgage interest on your state and federal income tax returns is a gift of public money. It’s the same concept. Anaheim incentivized the building of a five star hotel; the feds incentivize homeownership. Both incentives come with tax breaks.

  3. Tax policy should be set broadly, not specifically. When you start to provide tax breaks down to the individual “deal” — then you foster crony capitalism. Where people engage in politics for profit. It Anaheim wants to lower it’s TOT tax, then it should be a blanket policy that effects every hotel. If free-market conditions don’t allow for a luxury hotel without subsidies (and a singled out tax break for one deal is a de facto subsidy) then one should consider whether it is a good idea — sounds like it might not be.

    Make no mistake, I am in favor of creating an environment for businesses to grow and thrive. But the idea that taxes are enacted, but then lowered or exempted for the well-connected — that just doesn’t sit right by me.

    Caio!

    • Thank you for your response, Jon. I don’t post often, but it’s rewarding to draw thoughtful comments.

      I suppose we’re coming at this differently. It’s difficult to disagree with you on the theoretical level, but I think what has worked for Anaheim over many years is a practical, bi-partisan approach to fostering business development, and not shying from public-private partnerships. That probably doesn’t appeal to your more ideological nature – and that isn’t a put-down. I admire your commitment to principle and public defense of them. I think that is critical in a state as politically lopsided as ours is in the other direction. On the other hand, I tend to be skeptical about ideological rigidity, especially within the party in power. The dominance of ideologues in my party, combine with the Democrats political domination of state government, leaves them unrestrained.

      Back to the point: if it weren’t for what Garden Grove is doing, Jon, I might agree with you.

  4. Excellent point. Thus, as I understand it (and I’m no expert, believe me), Anaheim council previously set a policy to attract a 5 star hotel developer–anyone could have applied–but only one did, met the criteria and got the deal. It wasn’t an “individual” deal at first. It became one after the council majority selected the developer.

  5. So if this policy were set citywide, would we all agree that it does not provide any one developer a tailored subsidy? The current hotels in Anaheim may not have received a direct tax rebate to build but they have all benefited from an array of city funded investments, including the overhaul of the resort district which cost the city millions in bond funds for decades and by the way, Tom Tait voted to support. They also benefited from the upgrades to the Convention Center over the years and the brand new $20M Convention Center Plaza conveniently centered between several of the largest hotels in Anaheim – and the Hilton which flanks the new plaza just received top honors for the highest occupancy levels this year (I believe statewide). All of these “city investments” could be twisted as direct subsidies. The underlying point is Anaheim is seeking to remain competive as a convention based city regionally and nationally and TOT is one of the last sources of revenue available to cities that cannot be diverted by Sacramento. If people outside of Anaheim – lead by the Register – are going to take swings at us for reducing the tax base of hoteliers to generate hotel development, they need to apply the same principles and pressures to all cities in Orange County.

  6. Stand for Anaheim

    John Fleischman- your arguments were clearly rebutted by these smart , well-informed folks. Do you research and stop blindly supporting Tom Tait because he was part of the Fuentes, Lincoln Club crowd. Have a brain for yourself…. GEEZ!

  7. I certainly see Jon’s point and I like the response from the other commentators about a possible city-wide TOT rebate. There are so many 2-3 star hold out hotels around the resort and elsewhere who could make the leap to the 20th century with a wider deal available to all.

    And, just throwing it out there, isn’t Tait’s company doing work for all the companies getting these white hot deals in Garden Grove?? Couldn’t that be construed as the ultimate conflict of interest violation but on a truly regional scope? Shut down TOT/5 Star Development in Anaheim so your partners, in Garden Grove thrive.

    Just saying…

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