Orange County Register
07/17/16

5 Worrisome Things in Anaheim’s Hotel Deal
By Jonathan Lansner

http://www.ocregister.com/articles/hotel-722597-luxury-tax.html
The city of Anaheim is betting on luxury hotels.

Last week, city leaders approved a deal that will see Walt Disney Co. and developer Wincome Group get roughly a half-billion dollars in tax breaks over two decades to construct three, four-star-rated luxury hotels near Disneyland and the convention center. That comes on top of a previous deal to help build another luxury hotel in the resort area.

The timing night seem ideal. Empty hotel rooms are scarce, rates are rising. Disney’s spending big bucks on another Disneyland upgrade, Star Wars Land. But mistakes are often made when bets are placed amid a white-hot market.

Depending on your view, the planned rebates of hotel bed taxes on these luxury projects is seen as a corporate giveaway or a public-private partnership to boost the city’s outsized tourism industry. Deal supporters claim a shortage of top-flight lodging options in the city hurts its tourism and convention business. Gee, I didn’t know the coastal resorts were so far away!

“A huge win for the city’s hotel and visitor industry,” says Jay Burress, chief executive of the Visit Anaheim visitors bureau.

“These deals make no economic sense,” says local hotel consultant Alan Reay.

To me, the deal’s a bit of a head-scratcher, because if there’s such demand for high-end hotels why would the developers need the city’s help? Of course, who’d turn down a tax break?

Here are five things I think are worrisome about the gambit.

SHORT MEMORIES
The luxury hotel business is about as risky as it gets.

The underlying economic assumption of the tax deal is that luxury hotel rooms will stay in high demand. Will corporations continue to be generous with their expense account spending? Will wealthy tourists – domestic and foreign – be flush enough to travel extravagantly?

Has everyone in Anaheim forgotten the Great Recession?

I’m not saying that such a financial calamity will ever happen again. Nor does it look like we’ll have an economic downturn soon.

But in the last downturn, luxury hotel rooms went stunningly empty and you could barely give away a four-star property if an owner wanted to sell it.

Over the next 20 years it’s likely a luxury hotel project will pencil out. But don’t bet on smooth economic sailing considering the risks on tourism’s horizon. Cooling economic growth and terrorism may chill travel. Brisk hotel building in Anaheim for rooms at cheaper price points might look like overbuilding.

Be circumspect of projections suggesting this tax break is a guaranteed winner.

MARKET DISTORTIONS
I understand that Anaheim wants to support its valuable tourism industry.

But why only incentivize the developers who build luxury hotels? Will Anaheim nudge its market toward the higher end, with perhaps negative consequences to its tighter-budget visitors?

The argument is top-shelf hotels bring in so much additional tax revenues that the tax breaks will actually be a profitable gamble.

Well, if these properties were such slam dunks, why do the developers need this help? Why can’t they find lenders? Will this hurt the city’s image with other developers who are building, or who have recently built, less-than-luxury properties in Anaheim?

Almost as troubling is the possibility that these tax breaks could give the new four-star hotels a pricing advantage. Corporate travelers and foreign tourists price shop, too!

An unintended consequence could be challenges for higher quality three-star hotels in the area. That could lower tax receipts to the city from competing properties.

TAX WARS
Will other local cities jump heavily into this hotel tax-break game?

The competition amongst cities to attract businesses, visitors and workers is great for the economy. Well, until civic leaders start handing out too many tax dollars as enticements.

I don’t know a hotel developer – or builder of any business, for that matter – who turn down incentive to locate somewhere. But if too many aggressive tax breaks are handed out, we could see an overbuilding of hotels – a common tendency in the industry. Oversupply could depress room rates, put operators into financial distress, and possibly lower the countywide collection of hotel bed taxes.

Lowered taxes can be good … except when the idea is to raise tax revenues!

MYOPIC MARKETING
It may be factually true that Anaheim doesn’t have enough four-star hotels vs. its competition.

But that’s only if you take the narrow geographic definition of the city’s hotel inventory and compare it to broader definitions of other metropolitan areas.

It probably doesn’t take much more time for a visitor to travel from Anaheim to the four-star resorts on Orange County’s coast than it would take for a traveler in another city to fight midtown traffic from a convention center to those high-end hotels.

I can understand why Anaheim would like to keep the hotel taxes or convention business that could go elsewhere. But can any city be all things to all visitors?

There’s probably good reason why more luxury hotels overlook the Pacific Ocean.

LUXURY COP-OUT
It’s too easy for government leaders around this county to support high-end development – whether it be new hotels, housing, retail or commercial space.

The growing public pressure to slow growth plans of all sorts melts fastest when the project in question is spun as an upper-crust endeavor.

Skittish neighbors often drop objections when they are told a project down the street will contain fancy properties and polished amenities. Developers are frequently indifferent – profits are similar whether the approved project is luxury or affordable.

Look, Orange County is blessed with a slice of the populace – and out-of-town visitors – who can afford life’s finer things.

But in a county short on space and affordable properties – living, working and visiting – hopefully some year soon civic leaders will have the nerve to resist the luxury-by-default option.