From the OJ Blog:
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.
Read the full story here: