.
What’s unfolded in the last seven days in Anaheim is flat out embarrassing.
“He’s a liar!”
“She’s a liar!”
“Tell the truth!”
“No, you tell the truth!”
It’s just insane. I can’t imagine discourse on the topic tonight will be anywhere near informative, so I’ll do my best (on short notice) below. This isn’t a perfect piece, but for $158 million bucks, the argument against it ought to be pretty bullet proof.
First, a short narrative on what’s happening:
A developer in Anaheim wants to build two four star hotels on the Gardenwalk parcel near Disneyland in the Anaheim resort district. The developer claims the market economics makes the project not feasible. To assist in making the project feasible, the city will provide economic assistance in the form of $158 million in rerouted tax proceeds after construction of the hotel(s). This equates to roughly $46.6 million in today’s dollars as the total assistance package is expected to run over twenty years (a dollar collected tomorrow isn’t as valuable as a dollar collected today.)
The city’s analysis claims the $46.6 million is roughly 16% of the development cost, which puts the capital required to execute the project at roughly $300 million. That’s quite a bit of money for the private sector to invest in the resort area. From the $300 million, construction jobs will create permanent hospitality jobs including chefs, housekeepers, waiters, valets, office staff, receptionists, engineers, craft persons, salespersons, and of course—management. The investment provides clear and demonstrative public benefit, including increased property tax and sales tax collections, which are all very good things.
The construction will also place additional burden on the public electric utility, the water system, create substantial traffic in and out of the resort district, increase pollution, place additional burden on emergency services, and divert land from alternative uses and taxation (i.e. if you build two hotels you can’t build a Walmart.) All of these items incur a public cost that must be covered by taxes.
Who defines project feasibility and how the term is used is something of an art. The city’s analysis states the project is $63.1 million (today’s dollars) short. The package proposed ($46.6MM) still leaves a gap of $16.5 million. There’s no mention as to how that $16.5 million will be closed.
There’s the first dose of stupidity, right there. Based on what the public has in front of us, we’re being told that someone wants to pony up almost $300 million for a project, even with public assistance, will return 18% below what’s acceptable.
Think about that for a second.
According to the city’s analysis, after construction, the two combined hotels will produce a profit of $27 million a year. Apparently, that’s not good enough.
Why it’s not good enough is a bit of a complicated question, but it has to do with alternative opportunities for capital. Based on a bunch of assumptions, the city’s consultant concludes that a reasonable investor would be willing to pony up $220 million to build this project . . . not the near $300 million our current estimate is. Our public assistance isn’t what’s required to break even . . . it’s what’s required for the investor to get his 13% return.
I don’t know about your 401k, but I’m not getting 13%.
Anyway, let’s get into what the $158 million really is.
Transit Occupancy Tax (TOT) is a relatively painless way for a government agency to make money. We tax people who come to the city to spend money because they can’t vote. If you’re a guest in our town, we’re gonna rake you over the coals as much as we can . . . so long as you don’t decide to go somewhere else instead.
In our case, we’ve got a pretty solid anchor in Disneyland. People are willing to come to Anaheim and spend large amounts of money, including at the gate, for a family friendly location. We can capitalize on their fun times by extracting additional tax revenue while providing temporary and limited government service. TOT has to be pretty high to chase them to a neighboring city to save a buck and even higher to chase them all the way to Florida to see that other magic kingdom.
So, the TOT is really a way of funding your libraries, fire and police, parks, and infrastructure while avoiding increases in sales and property tax. Less TOT means either higher taxes or less service.
What we have to be very careful with is how we’re using the term “less”.
There’s some confusion as to whose money the $158 million is. Today, it doesn’t exist, so it doesn’t belong to anyone. Well, that’s not true. It belongs to you, the taxpayer.
Any allocation of money from the General Fund ought to have the consent of the public. The idea being perpetrated by some that because this funding was never specifically assigned to police, fire, parks, or the library it doesn’t qualify as a diversion is absurd. It’s not “less” because it never was.
No, that’s not absurd. It’s stupid. Someone who tells you that we’re not taking books out of kids’ hands because that money isn’t coming out of the library’s budget thinks you’re pretty damn dumb. Handing a developer $158 million dollars to increase his profit margin is absolutely taking money away from fire, police, libraries, and parks. Don’t believe anyone who tells you otherwise.
Finally, let’s talk about public incentive for private projects and a third kind of stupid.
The idea behind a tax is that everyone pays their fair share in exchange for equal access to public benefit. Reality often helps us define what “fair” means, and for most of us our exposure to this is in terms of progressive income brackets. Other taxes are uniformly applied, like sales and property tax. Everyone pays the same rate, which can go up and down based upon how much one spends.
TOT is that second type of tax. Every guest who comes into Anaheim is supposed to pay the same percentage of their bill directly to the city in exchange for the right to temporarily rent space, pollute the air, drive on the streets, tap into the public water supply, use our electric generators, and to fill our landfills and wastewater plants. You come, you stay; you pay.
Unless you’re well off and staying in a brand new four star hotel! In that case, you come, you stay; you still pay — but you pay someone else. In exchange for the public disposing of all your crap, your tax dollars will instead go to line the pockets of a wealthy developer who has the right connections on the city council.
A poor family staying down at the Motel 6 that was built 30 years ago? Yeah, THEY pay their fair share. The owner of the Motel 6? He can’t afford to improve his facilities because he doesn’t have the right connections on the council . . . so he just gets stuck helping to pay for our library, our fire and police, our parks, and our infrastructure . . . so the rich guy next door can make a couple million bucks.
The city of Anaheim already lost a bet on the Gardenwalk. Now they want to triple down on stupid to make up for it. They want to enrich a wealthy developer, screw over local small business by creating a regressive tax structure to make the market unfairly biased with regard to competition, and they want to do it all while the math says it still doesn’t make good economic sense to do it.
Why? Because they think you’re stupid, too.
What we have in front of us is nothing short of white collar welfare. There’s no penalty for delaying construction, there’s no cap on how much the developer can make before returning unjust public assistance, there’s no guarantee cost estimates and feasibility studies are true and factual, there’s no analysis as to the next six uses of the parcel—including the NPV of the taxes incurred, the resistance of the revenue stream to economic disruption, a study of the city’s revenue stream and its dependence on TOT and tourism, how this project addresses the city’s revenue risks, or even more basically—a simple and frank discussion about how much money the developer is going to make from this project. The only remedy the city has available is to stop cutting assistance checks if the developer screws up. Who thinks that’s likely to happen? No refund for any prior payments. No penalty for lost time. No penalty for deferred opportunity.
According to the city’s analysis (see table 5), the developer is looking at half a billion dollars of investment return over 20 years. Apparently, half a billion dollars isn’t enough and we need to toss in a hundred million or so of public tax rebate.
There are two reasonable solutions to this problem: Let the market decide it for us or let the people vote. If this project really benefits the greater good, then either will push it forward.
Well done, Juicer! Smart analysis. Armed with arguments such as these, we will surely be able to shame them into responsible action tonight, and by “we will surely” I mean “unfortunately we probably won’t.” But, increasingly, voters are watching — and eventually they will be ready to reach for the new broom that sweeps clean.
Voters were watching …when Brandman was endorsed by the OCDP. His actions confirm that he owes his allegiances to Curt Pringle. Is the OCDP ready to reach for the new broom…?
Amen. Can we please clear the Council chambers of all of the OCCORD automatons who’ll be stumbling through their sets of second-hand talking points during tonight’s comments period and just have this read instead?
Anyone who’s trying to convince you that this deal won’t take any money away from future city services (or that this is somehow ephemeral fairy-money, or that the deal isn’t really worth $158 million) thinks you’re pretty damn stupid, indeed.
Or anyone else who’s reading this and is coming?
It shall be done. Even if I have to put together a relay team.
Hey, we haven’t met, but if you’re gonna be at the meeting, could you print out the article and get it to me, the guy in the gray fedora? I’m stuck here without a printer.
Excellent write-up, dude.
I second it. Unfortunately, no arguments could have swayed the council’s decision .The Chamber of Commerce and the Resort’s lobbying group were very pleased with this giveaway.
GREG GREG GREG GREG!
The reason shame will not work on these candidates is that all these “Democratic” “Liberal” leaning candidates have to do is say that they support “Gay Rights” “The Democratic Party” “Immigration Reform” , “Corporate Obama Care” and bingo! SHNNNOOOOOOOze.
Everything will just be fine! Go back to work! Enjoy your Anderson Cooper.
Peace. Love And Happiness.
Why do they keep getting away with us ripping off? There re already a couple of hotels around Disney that are empty and have been for years. And why are they building more? Refurbish the empty ones.
Inge. Why did we go to Iraq and Afghanistan instead of refurbishing the USA?
Maybe Orange County is too dependent on the corrupt Ana-Dollar. or Disney Dollar?
This is all bullshit -!!
You would be fine with the “taxpayer giveaway” if there was a requirement in the agreement that the workers be unionized.
All bullshit!!
What the hell does this stupid comment have to do with Ryan’s story? You’re really calling conservative Ryan a union hack, just because SOME unions agree with his conclusions?
You want to take ONE of Ryan’s many arguments, and address it? Or not up to it, old man?
It comes down to trust Vern – and so far Anaheim has a damn good track record – with Disney and Angels, just to name a couple.
One of the stupider parts of skally’s bad Cunningham impersonation is that unions were hardly involved in this at all. There were a lot of UNITE-HERE people at the meeting, but they were mostly complaining about the fact they’re about to lose their jobs at the Honda Center – a FEW of them added something about the Gardenwalk Giveaway at the end of their talks – mostly against, but a few cautiously for.
There was zero showing from the dread OCEA, who were (apparently) bought off from fighting the Giveaway by an obscene unaffordable deal the council majority made with them last summer.
And some of the more corrupt or stupid building trades unions (I say stupid because their jobs are not guaranteed under the agreement) have actually SUPPORTED the giveaway since last year – who knows why?
Gabriel San Roman actually laments the absence of organized labor from this debate, here today: http://donpalabraz.com/?p=10610
So, BAD Cunningham impersonation. Not even the mighty Jerbal is blaming Gardenwalk opposition on his favorite whipping boy the unions, as far as I’ve seen.
Actually, no. That’s what San Onofre and the 405 toll roads controversies are about.
Have you guys become a 501c3 now and are accepting “contributions” from the unions?
If you haven’t you should – because you are doing their work for free – which would not be a smart thing to do.
Lame. Just because some unions agree with our conclusions.
You obviously think you’re Matt Cunningham now. Skally, I know Matt Cunningham. Skally, you’re no Matt Cunningham. And that’s a BIG insult.
Now stop posting the same dumb comments on different stories.
I just want to go on record as opposing any multimillion dollar government giveaways that don’t include me!
Nice article Ryan…a few points:
• “I don’t know about your 401k, but I’m not getting 13%.”…the S&P 500’s 25 year historical return (1992 to 2012) is at about 10% which is also about the same since 1926. It seems that the developer is seeking just over a 2% premium compared to what a lot of investors would seek. The S&P 500 is up over 13% YTD for 2013. Although, maybe your 401K portfolio is not keeping up, but I am not sure that is a reason to not allow an investor to hit their target. What do you think an adequate return would be? Is it less than the historical S&P 500 average or another figure…remember, risk takers usually want to make more “here” than they can get “there” and a lot of investors use some sort of stock market index as the “there”.
• Yes, TOT is used to pay for an exchange of services (disposing of your crap, pollute the air, drive on the streets, water supply, electricity, landfills, etc…), but does someone staying at the 30-year old Motel 6 use less than someone staying at the 4 Start Hotel? They still travel to/from the airport to the hotel and to/from the DL Park, etc…they still flush the same amount of #1 & #2 down the toilet…they in theory use the same amount of H2O for personal hygiene (on average)…use same for electricity (debatable I suppose although new hotels are generally much more energy efficient than a 30-year old one)…use emergency services (presumably about the same, but maybe not). Even if they pay a less %, they very well may be paying more into the system (i.e. $400/nt x 10% = $40 vs $150/nt x 20% = $30) thereby still allowing the city to take care of their crap. Since the concept of the TOT is to have the out of towner pay for their share of local public services usage, are you saying that the net TOT would in fact not pay for their usage?
• I am not following the “less” argument although I am truly trying. The $158MM does not exist now, it is not included in revenue anywhere…it truly does not exist for the City to spend. It is not currently available. The $158MM would come from future incremental revenue (i.e. taxes). The City would get a larger amount, gross, and then rebate back the $158MM leaving the difference as incremental revenue to fund public services. They would at the end of the day have more in revenue even though they would be subsidizing the project.
I have had a few clients who have had sales tax agreements with Cities that have used them to entice a company to relocate…it often works out as a win-win for both the City and the Company. The loser is the City that the Company is leaving…often because they were unwilling or unable to offer some sort of concession- they generally would not have had to match, but instead just provided something. In this case, the loser would be other hotels in the area in that some existing hotels may lose customers. This would definitely depend on if the new hotels would be bringing in new tourists/travelers who would not otherwise have come or if they will just take from existing customer base. Depending on the economy and many other factors, that could be the case or if as everyone with an optimistic view would say…there would be a lot of new customers and the other hotels actually will probably be able to increase prices slightly because they will look like that much of a better “deal” when compared to the new guy.
Re 13% Return…you used that figure to indicate that it was unreasonable for an investor to have that as a goal. My point is that, 13% is not all that uncommon to shoot for. Yes, I know that 401K reference was sarcasm. I am all in favor of letting the market bear what it will btw, however a developing shooting for 13% is not outrageous which is how I took your point. If the economics don’t hit the investors hurdle rate, then they either don’t do the deal or look for ways to decrease investment, increase revenue, or cut expenses.
I am not suggesting a TOF, but I am responding to your 2nd argument that the TOT is to fund for public services used by the hotel occupant and that they are not paying their share. The occupant still pays the exact same…it is just that the city does not keep it all. It seemed that you were indicating that the occupant was not paying their fair share, which they would be b/c they are still paying out of their pocket the same % as anyone else.
We are probably pretty much in agreement on the Monte Carlo simulations and millions of possibilities and if they are choosing to represent an unlikely result and hiding more likely results…well, that seems shameful. I am not as up to speed on this as others for sure, but #1 and #2 above don’t seem to be as strong of arguments as #3 which is essentially forecasting.
I guess the bigger indicator of whether this will bring just move the same # of travelers away from existing hotels into the proposed ones would be to look where the owners of the other hotels are on the matter. Do they support it or are they crying bloody murder? There are times when rising tides do rise all boats…this could be one of them- I am not sure it is, but curious what the other hotel operators feel.
BTW, my clients definitely are not parlaying cities against each other, but when they are looking at costs of space and moving, it sure can help if the city is able to show that they are going to assist with some of the costs in order to bring in more sales tax revenue overall to the city. Again, it is a win-win. I don’t believe that there is anything illegal about asking for a rebate in order to offset increased costs.
Darn it…I just deleted my prior draft post…ugh- it was better than the below I am sure.
Well, I am not sure if it is ethical or not, but it happens all the time and that comes into play of ethics (like it or not- normal, recurring, and accepted is often deemed to be ethical if it is not illegal). For example…Taxpayers pay income tax to the IRS to cover expenses of gov’t yet there are people who get rebated back some of that money. Same with sales tax (tax rebate programs for example) and state income tax (enterprise zone for example). I actually doubt the hotel has any choice but to label it as a tax on the bill…it may be unethical to do anything but that.
Most consumers do not know what the TOT is supposed to go for…it is just another tax that they are forced into paying if they want to stay in a hotel. The consumer knows what they are going to pay for the stay- base rate plus all taxes plus resort fees. That is what the consumer cares about from my experience. Maybe they should put a “thank you sign” up in the lobby to the great people of Anaheim thanking them for the TOT rebate letting the consumer know that without the rebate, they would not be able to stay in that hotel (yes, that is a bit tongue in cheek).
Hence, the tongue in cheek disclosure…that would only be the disclosure to satisfy the possible ethical dilemma of not allowing the consumer to know where their TOT, or at least a portion of it, was going.
The duality dilemma is in the details and the Monte Carlo simulations. Are the developers lining up saying that they can build? I don’t know the answer to that question, so it was not in jest, and if there is an answer, would love to know. If so, they should be kicking and screaming wanting a chance and bringing their proposals to the forefront. The problem with it now, is that any developer stepping forward will try to get at least something in the form of incentives since the City Leadership has shown such a willingness to go down that road.
So, are other developers lining up? If there is profit to be made, with or without incentives, they should be saying, forget that guy, I will do it even better with less incentives.
You’re probably right about the unions Vern – oh well, if you don’t have the unions you’ve already lost.
I would be in favor of ELIMINATING or reducing the “bed tax” regardless of who gets it: wealthy developers or spendthrift public entities.
The oldest argument on this is of course: “the visitor’s pay, not the residents”. I haven’t seen a lot of discussion (or any) on whether a exorbitant tax is bed tax is fundamentally fair, just who gets it.
Nor have I seen tremendous union influence here, which is representative of the weakening impact labor has (non-public employee) had locally. In another time this would NEVER have been done without a nod from the unions. TRANSLATION: WEAK LEADERSHIP.
Back on point, the $150M “giveaway won’t negatively impact society in Anaheim any more than community disinterest does. The big man wins another one, that sucks, but the big man also provides the jobs…………….Be careful what you wish for .
Ryan wanted to know how public comments went — now we have Jason’s video of what HE considers to be the high points….
As I wrote to Ryan…
Public comments were great. Most were on Gardenwalk, but a lot on the Honda Center layoffs, the district elections decision, the usual unpunished police brutality, and lotsa people mixed them all together. A FEW people spoke in favor of the Giveaway, but Cynthia says every one of them was someone who stood to gain directly from it.
My comment went over well. Cynthia spoke against the Enterprise Zone which she used to support (“as a conservative” – she apologized “as a conservative” because tax credits used to seem to her to be a conservative thing) – because she now realizes they’re structured to encourage businesses – like the Honda Center – to hire temporary workers every year, and keep getting credits for it.
I really tried to have (ryan’s) piece read – I got a printed copy of it and tried to find 2 or 3 speakers who could read it in a relay team… but everyone who wanted to speak already knew what they wanted to say.
Donna Acevedo, made her point by wearing this striking outfit, in which you can also see the ongoing immortality of Diamond’s Gail-Eastman-stabbing-democracy photoshop:
Duane Roberts, Amin David, Ricardo Toro, so many more characters spoke. What was that TV channel whose motto is “Characters Welcome?” That should be the motto of Anaheim Council meetings too.
Not that any of it made a bit of difference to the Council.
Boutwell
“So, are other developers lining up? If there is profit to be made, with or without incentives, they should be saying, forget that guy, I will do it even better with less incentives.”
Ryan Cantor
“Three guesses why we dont know . . .”
That’s the whole thing in a nutshell – !! Much unlike the bloviating epistles you two have made us suffer through. Actually, probably not many have read those diatribes.
If there were other developers lining up to give the City a better deal they would make themselves known – it’s not that difficult.
Welcome to the real world.
From Jason’s Handy FAQs which I reprinted the other day: http://www.orangejuiceblog.com/2013/05/handy-faq-sheet-for-speaking-out-against-tomorrows-gardenwalk-giveaway/
If bankers are lending for the 3-star hotels currently about to break ground – which they ARE – but won’t lend on 4-star hotels, they may be telling us there isn’t a market for those high-end lodgings. Why should we as taxpayers give money for an investment that bankers won’t lend on?
O’Connell says that even WITH this subsidy he won’t be able to break ground for at least a year or two. A leading hotel expert has argued that, by waiting an additional year, no subsidy would be needed, as the lending market will be friendlier. Jack Corgell, a Professor at Cornell University of Hotel Administration, has stated:
“The value of waiting an extra year could be substantial to the city. Why would you do this now? What’s the urgency?”
In addition, one of Orange County’s top hotel real estate consultants, Alan Reay, states:
“The hotel market has recovered, and revenues continue to climb. Lenders have already stepped back into the market.”
Q: Why doesn’t the developer just wait a year and secure traditional financing?
A: By waiting a year he wouldn’t benefit from free tax money, which makes the deal more lucrative for him and his investors. The developer appears to owe more than the land is worth. Many of us find ourselves “upside down” on our homes; why should one developer expect us to bail out his bad investment?
And:
Mayor Tom Tait rejected the argument that without subsidy the land would sit empty and unproductive, stating that, “…if you don’t build it, something will be built there, and all that tax revenue would come to the city.” Indeed we already see other sites being developed without taxpayers underwriting the costs.
In short, why would anyone be lining up right now, while O’Connell has the green light to do it? If O’Connell did give up though, someone else would eventually do it, get the financing whether it was 3 or 4 star, and eventually be giving all their TOT to the city which needs it.
And:
Can you boil this down to a couple of short paragraphs?
Good grief…what a douche.
skip to the final paragraph if you’re suffering from old man ADHD.
“.. why would anyone be lining up right now, while O’Connell has the green light to do it?”
Easy – if someone credible had offered to do the deal without subsidy, and made that known, the City would have had to deal with them – or give a damn good explanation of why not.
??
It’s not clear what you’re trying to prove. Eventually someone would have built a hotel there, subsidy or not. But O’Connell, with his high-powered lobbyist Curt Pringle, who tells 4 of the councilmembers to jump and they say “How High?” knew he could get this sweetheart deal, and he got it.
“Eventually someone would have built a hotel there ..”
Naivete exemplified.
Not at all.