I posted last week about the city’s report regarding the distribution of city services – a critical issue because a central contention of single-member council district advocates is that the flatlands are short-changed, an alleged situation that single-member districts will supposedly remedy (see the Magic Single-Member District Unicorn). Radical community group OCCORD has been the chief proponent of this view, even putting out a study purporting to rove this disparity.
Here’s a video clip from that August 13 council meeting in which Councilwoman Kris Murray engages staff in an illuminating exchange comparing the city’s study with the problematic OCCORD document:
Anaheim Blog 
23 comments
Comments feed for this article
August 27, 2013 at 9:25 am
Jason Young
Matt the city left the Resort out of the report. Don’t you think they should have factored in the cities investment in the Grand Plaza, GardenWalk Hotel, ARTIC, etc. . .?
August 27, 2013 at 2:08 pm
James Robert Reade
And Jason don’t forget the millions paid to Mexico in the Treaty of Hidalgo! Factor that in too!
August 27, 2013 at 6:28 pm
Matthew Cunningham
No, Jason. If the city inserted those costs it would show disproportionate spending in the south of Anaheim, which would distort the reality that Resort costs are self-funded through assessments.
Furthermore, the GardenWalk does not put a drain on the city’s general fund. Oppose or support GardenWalk, the claim that it is diverting revenues from city services is patently false, no matter how many times your or other GW opponents repeat it. Like it or not, it will increase revenues to the city, no matter how you slice it. I understand people opposing the subsidy itself, but the claims you and others make regarding GardenWalk are just dishonest.
August 27, 2013 at 7:11 pm
Ryan Cantor
That’s not true, Matt. That’s an over simplification of the issue. The Gardenwalk ABSOLUTELY costs taxpayers money.
August 27, 2013 at 10:22 pm
Lifelong Anaheim Resident
Who is this Cantor and where does he get off commenting on Anaheim issues? If Matt is wrong prove it – show in your response how Garden Walk costs taxpayers money. I’m tired of my city being cannon fodder for these political hacks.
August 28, 2013 at 5:58 am
Ryan Cantor
I’m sorry, do you need a permit to comment on Anaheim? I wasn’t aware there were preconditions.
Tell you what, you drop your cloak of anonymity, and we’ll talk facts about Gardenwalk.
August 27, 2013 at 9:44 am
Sick of politics
Kris Murray rocks.
August 27, 2013 at 7:35 pm
nojordanbrandman
Are you telling me that no general fund money has been spent on ARTIC of the Grand Plaza?
The GardenWalk Hotel deal takes money that otherwise would have come into the general fund and deposits it in a developers pocket. How is that not an indirect drain on the general fund? O’Connell simply couldn’t make the numbers work so he got his lobbyist pal Curt Pringle to make his council puppets giveaway $158 million of future revenue. Shameful.
August 30, 2013 at 8:38 am
G
The Economic Assistance Agreement for the GardenWalk hotels does not “[take] money that otherwise would have come into the general fund and [deposit] it in a developers pocket.” What it does is helps the City increase its tax revenue sooner in exchange for decreasing the total amount of tax revenue. This can be a perfectly reasonable investment strategy. It is only because many people don’t understand the concept of the time-value of money that this is even a real debate.
The concept behind the time-value of money is that money is worth more today than it will be tomorrow. Here’s a quick thought experiment to illustrate the point. Let’s say I offer to give you $100 today, or a $100 a year from now, which would you choose? Most people would take the $100 today because, if invested, it could be $105 a year from now.
Now let’s say that I offer you $100 today or $110 a year from now. The “correct” answer is to take the $110 a year from now, because it is worth more than the $100 today, which will only be $105 a year from now. If I offered you $100 today or $105 a year from now, both options would have the same value and be equally correct.
What the GardenWalk Economic Assistance Agreement attempts to do is make it so Anaheim starts receiving tax revenue sooner (taking the $100 today) instead of taking the larger sum of money ($105) in the future. If Anaheim simply invested the earlier tax revenue it should end up with more money than it would have without the Economic Assistance Agreement.
Admittedly, there are a lot of assumptions made when determining if it’s a better value to enter into the any Economic Assistance Agreement. Assumptions need to be made for when construction will start, both with and without the Agreement. Assumptions need to be made about how much tax revenue the City will take in, both with and without the Agreement. And assumptions need to be made about the return on the City’s investment (called the discount rate). These are all assumptions where reasonable people can differ and come to different conclusions about the value of the Economic Assistance Agreement for the City.
However, an argument that is simply wrong is that the City is giving the hotel developer $158 million. That’s an argument that shows a fundamental ignorance of the economics behind these types of deals, specifically the time-value of money.
Personally, I don’t think the GardenWalk Economic Assistance Agreement is a great deal for the City. Nor is it a terrible deal. It’s an OK deal. The 2013 deal is better than the 2012 deal, but still not great. What is clear to me is that the City of Anaheim has lost a lot more in future tax revenue by having this huge fight over GardenWalk and the uncertainty and unrest that it has caused. While Anaheim is a great city, it isn’t showing itself to be a great investment. Capital likes certainty, uncertainty is equated to risk, and capital tends to be risk adverse unless there are high enough returns to justify it. That puts investments in Anaheim at a severe disadvantage because they need to provide higher returns for the same amount of investment.
The simple fact is that those howling that the City is giving away the General Fund are wrong, and by doing so have actually hurt the General Fund. By their actions, they have caused what they are so vocally opposing.
August 30, 2013 at 10:17 am
Ryan Cantor
Good, but not quite right. The “give” part of the equation has more to do with lost opportunity cost vs. the NPV of the tax revenue. The base case and alternative case studies were either nonexistent or flawed.
Interesting note on the discount rate. Care to guess what interest rate they used to calculate what was used in the analysis?
8%. EIGHT FREAKING PERCENT. Average rates are less than 5%. Long story short, Anaheim gets to subsidize someone else’s less than stellar loan.
It is absolutely a giveaway from the general fund. A big fat sloppy give away full of fuzzy math, poor assumptions, and shady hand shakes.
August 30, 2013 at 10:51 am
granthenninger
I’m not sure what opportunities the City of Anaheim is giving up through the Economic Assistance Agreement. Can you explain what you mean a bit more fully?
Regarding the discount rate, 8% is a fairly normal rate for these types of analyses. But, as I mentioned, it is one of the places where reasonable people can disagree. This is especially true because the City of Anaheim isn’t going to invest the money, they are going to spend it on city services. In a very real way, the discount rate is subjective and different people can place differing values on getting less money now or more money later which are all perfectly valid.
And yes, the City of Anaheim is subsidizing the GardenWalk hotels. The City is doing so because it is mutually beneficial to the City and the hotel developer. This is an appropriate role of government. There are many things that the government subsidizes that benefit both the public and industry. This is no different than the Anaheim Public Utilities providing rebates, subsidies and tax credits for homeowners who want to make energy efficient upgrades to their homes, or the Federal government providing discounted loans for students or first-time home buyers.
August 30, 2013 at 11:39 am
Ryan Cantor
8% is the base interest rate used to calculate the discount rate. The discount rate varies between 8 and 13% depending upon which part of the city’s analysis you’re viewing. While I think that neither an 8 or 13% discount rate is abnormal, a loan with 8% interest when the going rate is 5 or less is ridiculous considering that interest cost constitutes the bulk of what the city is subsidizing. Set that 8 to 5 and POOF– the justification for the subsidy magically vanishes into thin air.
It is absolutely not the role of government to pick winners and losers in private enterprise. The two examples you cited (energy and loans) have a demonstrable public benefit that justifies the public subsidy. There are NO public intangibles associated with this giveaway– just private profit. Reasonable people will disagree on this, but ask a given voter in Anaheim on the role of government picking winners and losers . . . I don’t think you’ll hear (in general) something positive. But to get to the point . . .
Re: Opportunities. Here’s a short list.
1a) Impact of doing nothing. Does the market climate in the next 5-15 years challenge the assumption that private equity has no stomach for a hotel investment? For example, does the impact of the city’s proposed rail line from the high speed depot directly to this location alter the fundamentals associated with both real estate value, projected returns, as well as suitable investment quality (STUDY NOT PRESENTED.) If the market does support private investment, what benefit does the city gain by starting the project now with a subsidy vs delaying to when the private sector supports such investment. Does is actually lose money instead?
1b) Impact of doing nothing. Assuming the market does not support a 4-star hotel now or any time in the next decade or so, what alternative use for the land exists and what revenue would be provided to the city (3-star case presented (not like for like on size/revenue, etc. based on documented assumptions. This actually was pretty decent, but not perfect), no other case presented.) How does this use fit within the overall economic climate of Anaheim? Does this use diversity the city’s income stream and isolate the general fund from projected risk and disruptions?
2) (My personal favorite) What other investors were offered similar subsidies? If none– why? It’s realistic that an investor with better access to higher quality capital would have accepted terms much more amenable to the city. Every dollar lost here should be viewed as a lost dollar from the general fund based on an NPV to NPV comparison. (STUDY NOT PRESENTED.) In other words, why JUST this developer? For $158MM, you’d expect a line out the door if this was advertised as an open option for anyone wanting to invest in Anaheim.
3) Based on existing construction and the proposed construction connected to the subsidy, what is the net impact on TOT, occupancy, and rate based on projected supply and demand? (STUDY NOT PRESENTED. The sole investment case assumes no change in either supply or demand.) Any delta here ought to be incorporated into any substantive option in 1a or 1b.
Finally, there is absolutely nothing in the subsidy that protects the city from a developer windfall, delay, or complete collapse. This is simply inexcusable. The opportunity lost here, from either getting to eliminate the subsidy completely because the market actually did support the investment or worse– the lost TOT because of mismanagement, meaning the city has to start all over and assumes the cost of lost time, is substantial. This oversight allows the developer to assume 100% of the project’s benefit and assigns the majority of the risk on the city’s general fund.
Awful, anyway you slice it.
Good discussion, glad to see that someone with an appropriate lens is looking at this.
August 31, 2013 at 9:19 am
Grant Henninger
An 8% interest rate isn’t abnormal for a project this size. Large real estate development projects like the GardenWalk hotels carry a great deal of risk. They default on their loans regularly. Lenders make up for this higher default rate by charging a higher than average interest rate. So while it might be true that the developer wouldn’t need help from the City if he could get an interest rate of 5%, it’s doubtful that he can. There is simply too much risk in the project. However, this is a very separate discussion from that of the discount rate that the City uses for their net-present value calculation, which is what we had been talking about.
I don’t get the argument that says it’s not the government’s role to pick winners and losers in the market. I didn’t understand it when the Republicans were attacking the Obama Administration over green energy loans, and I don’t understand it here. The City of Anaheim has had a long-standing policy of helping hoteliers through the use of Economic Assistance Agreements. The Agreement for the GardenWalk hotels is not the first one in the City and it won’t be the last. This is a program that is open to any developer within the Resort District. That’s not picking winners and losers, that’s providing an economic development program to anybody who wants to take advantage of it.
And now, on to opportunity costs.
1a) The cost of doing nothing is what we’ve been talking about this entire time. From my analysis of the deal (and I did my own instead of rely upon the City’s), the City is in a slightly better position with the deal than without it. (See the time-value of money discussion above.)
1b) There is a fairly big advantage to a four-star hotel over a three-star hotel. It’s not that we’re losing guests to places along the coast, which is often discussed. The biggest advantage is that it will raise the average room rate in the city, which will help make future developments easier to finance without subsidy. There is another way to do this as well, one which the City has been working on for a long time, which is to close down the low-rent motels. This removes the lower numbers from the numerator and shrinks the denominator of that average, both of which help increase the average.
2) The problem with trying to offer other investors the same GardenWalk Economic Assistance Agreement is that other investors don’t own the land where the GardenWalk hotels will be built. As I stated above, the City of Anaheim has a policy to offer these types of agreements to any hotel developer that wants one. However, they need the land to build a hotel on first.
3) These types of second and third order effects are very hard to determine. If we’re already disagreeing on the first order effects through the discussion of the net present value discussion, there is no way we’ll agree on all of the assumptions that we’d need to make to determine how the current construction and other ongoing changes to the resort will affect the desirability of the GardenWalk hotels as an investment or the future TOT the City can expect to receive with or without the Economic Assistance Agreement.
And finally, I’m not sure you understand the GardenWalk Economic Assistance Agreement. There is no risk to the City. If the hotels get built, and nobody shows up to rent a room, the amount of “lost” revenue to the general fund goes down. The City is only on the hook for if rooms are rented. The City will only rebate back the TOT after it has been collected. That means that this Agreement in no way will hurt the City’s general fund in real terms. If the developer gets a windfall, so will the City because it means the hotels are completely booked, which benefits the City in innumerable ways.
So no, it is not awful any way you slice it.
August 31, 2013 at 12:46 pm
Ryan Cantor
Again, good commentary, G.
The interest rate on the loan is what’s used to calculate either the cost of capital or the cost of debt to form a discount rate. It’s absolutely relevant. I’m not exactly sure how you could assume otherwise. In this case, 8% is significantly above norm for this type of investment. I’m all ears if you’ve got data that states otherwise, but I don’t think Hyatt or Hilton is borrowing at 8%. It has less to do with project risk than you’re representing. It has everything to do with risk attached to the credit applicant.
Your decision of the time value of money (1a above) is flawed. There’s no discussion on the table that states a dollar collected in 2020 is worth less than 30% of a dollar collected in 2018. None. There’s no analysis discussing if and when the private market would support a four star hotel on the site given the investment in the area. That’s basic investment 101. No excuse for that.
1b– no one is debating the potential benefits of a 4star vs. 3star hotel re: TOT. What NO ONE discussed was the potential benefits of a heavily subsidized vs alternate land use. Again, there’s no excuse for this.
Your point on item 2 is SPOT ON. This deal is 100% about bailing out a developer with good connections to the council because he made a bad investment on land he owns that he can’t make pay off. The market solution– sell it to someone with better access to capital. That’s what should have happened and a reasonable premise to use to conclude this is, in fact, a giant giveaway.
On item 3 above, no they’re really not. This is basic investment 101, again. It’s hard to accurately predict, but it’s not hard to estimate a potential range (Say p20 to p80.) The city should have examined a wide band of potential outcomes to overall TOT returns in the area by interfering with the market. It’s not hard to do, it’s actually pretty cheap to get someone to do this, but it wasn’t done because no one asked. Why didn’t they ask? Well, if you believe this is just a bailout . . . it’s self explanatory. If you believe this is an investment in the city’s future, there’s no excuse for not doing this.
RE: risk and GWEA, your understanding of what constitutes financial risk is flawed. We should be looking at potential scenarios that jeopardize either projected revenues from the project or potential market factors that undervalue the potential revenue capture from the agreement. Both are considered “risks.”
In this case, we have several instances of the city assuming the developer’s risk. The city is on the hook for significantly more than just the rooms rented. They’re on the hook (as you’ve stated) for the value of time associated with the project. If the project fails, as supported by the feasibility study– this project (still even with the city’s donation) does not meet acceptable pay out targets. If it fails, the city will lose the value of lost sales, property, and TOT revenue they would have received had the property been returned to the market rather than supported by government interference. On the flip side, the city is on the hook for any windfall gain the developer secures. Rather than return a subsidy that was never actually supported by a market deficiency, the developer would get to keep it. Given the city’s substantial investment, this condition shouldn’t have been allowed to persist.
Look, you can’t have it both ways. You can’t argue that the city benefits by securing an earlier return of TOT revenue and in the same breath state there’s no risk associated with a failing project, thus extending the time the city sees any revenue. The general fund assumes that risk by declining alternative cases for the parcel that weren’t even looked at. Furthermore, what happens if the state intervenes, just as they did with re-development, and declares all TOT collections go to Sacramento? How about when other developers who were denied the subsidy sue just like the other tenants at Gardenwalk did? Risk, risk, risk, risk and more risk. All very real terms.
The only foundation that supports this being a good deal is the one that accepts the premise that this was a choice between doing nothing and giving away the subsidy. That premise is false. As such, any conclusion reached based on that foundation is also false.
Finally, you and I have had more discussion on the financial pros/cons of this deal than the actual council did. I hope you’ll agree that’s rather sad.
August 30, 2013 at 11:13 am
Anaheim714
Ryan, quit trying to Monday Morning Quarterback the deal and look at the facts. There is no give away, the deal enhances the marketability of the Resort District, bolsters Convention Center business and increases city coffers in the long run.
August 30, 2013 at 11:40 am
Ryan Cantor
A) It’s Friday.
B) It’s a HUGE giveaway. Ridiculous in fact.
C) No, it doesn’t. No it doesn’t. And finally, no freaking way does it.
August 30, 2013 at 4:17 pm
Anaheimocrat
Ryan, you cannot give away what you don’t have. Absent the GardenWalk hotels, there is no TOT revenue to rebate back. When the GW opens its doors, the TOT revenue being rebated back was never really in the city treasury; it just passes through.
The great dishonest spin from GW opponents is that the TOT revenue being rebated is money that would otherwise go to libraries, parks and other city services. That is untrue, and you should recognize that is an untrue claim even as you oppose the subsidy itself.
August 30, 2013 at 5:31 pm
Ryan Cantor
No, that’s the dishonest spin. The foundation supporting that this is new money depends on the false supposition that the GW deal was a choice between getting no revenue or little revenue.
That’s just a bad evaluation of the decision and the only way to justify propping up a project that can’t pay for itself because of inadequate access to favorable loan terms (I.e., good credit.)
You also understate the risk to the general fund.
August 27, 2013 at 10:30 pm
Lifelong Anaheim Resident
Jason Young is not only a convicted identity thief and burglar when he’s not billing himself under Crescent Films as a “wedding videographer” is also a liar – having just commented recently that he shut down the libelous “no jordanbrandman.com”
So fine – let’s play Jason’s game and throw all of the resort and transit funds – which are not general fund programs and not the focus of the report – into the allocation for the South Neighborhood District. Give it all to them! It still debunks OCCORD’s attack on the city for single member districts that “the affluent Anaheim Hills” gets all the funding and everyone else gets the scraps. Nice try Mr. Young – but once again your attacks have zero credibility.
August 27, 2013 at 10:49 pm
CIty Employee
For what it’s worth, the city finance director, Debbie Moreno, was very clear in her presentation that the city pulled out resort based programs since they are not direct general fund programs and thus not specific to core resident services – even though residents in the South indirectly benefit. The finance director bent over backward to prevent any perceived bais in the report. The programs in the resort area being thrown out here for commentary come from revenue sources and economic programs that are not general funded core city services as specified in the report. It is also worth noting that none of the resort programs mentioned in earlier commentary benefit the hills so regardless, for purposes of refuting the OCCORD report, they wouldn’t negate the purpose of this article.
August 27, 2013 at 11:03 pm
nojordanbrandman
Lifelong Anaheim Resident – NoJordanBrandman.com no longer exists and it was fair from libelous. It simply pointed out his support for the $158 million GardenWalk Hotel giveaway. Something I think he is rather proud of actually.
It would be nice if you posted your name before defaming mine but it comes with the territory here on AnaheimBlog.net. Rather then debate the issues people get personally attacked.
The land ARTIC sits on was paid for via the general fund.
“While it has always been billed as a project that Anaheim wouldn’t have to pay for, the city is spending $32.5 million to purchase the land for the project and settle a months-long dispute.” from The Voice of OC
The point I am trying to make is that a disproportionate amount of investment is continually made in the Resort while the rest of the city is neglected. The City of Anaheim should look far better then its neighbors considering the economic engine that sits within it’s borders. Instead we have rampant graffiti, gang problems, slumlord owned apartments, parks full of homeless encampments, prostitution, etc. . .
TOT revenue was meant to go the to the neighborhoods, not to be continually tapped for projects that benefit the Resort.
August 27, 2013 at 11:24 pm
Matthew Cunningham
A few things, Jason. First, personal attacks are your stock in trade, so stop complaining when you get a taste of your own medicine.
Also, your getting all twisted up. The point if the report was to show the distribution on city services in different areas, and you are getting all wadded up about the city purchasing the land ARTICLE is on. Which is beside the point!
The point is the claims of the single/member district crowd that the flatlands get gypped in favor of the hills is bunk – and that is what this report shows.
August 28, 2013 at 7:07 am
Sick of Politics
The point is to debate the issues, not issue personal attacks. So you want people on here to abide by a rule that you refuse to?
None of us want the graffiti or gang issues. I do believe that there are some things Anaheim government should do to deal with those issues, however, how do you factor personal responsibility into that equation?