Garden Grove City Council members recently paved the way for construction of a new hotel with an indoor water park – with officials set to devote at least $69 million in public funds and land to subsidizing the private project.
The Great Wolf Lodge is set to house 600 hotel rooms and 18,000 square feet of retail space, in addition to an indoor water park and play area. The hotel would be built along Harbor Blvd, about a 10-minute drive south of Disneyland in good traffic.
“It’s basically a way for us to get on the map,” said Councilman Chris Phan, in addition to bringing tax revenue for the city.
As part of a 2010 deal, city leaders agreed to give $5 million to Colorado-based developer McWhinney Enterprises upfront, and another $42 million soon after the hotel opens. Additionally, officials plan to give public land worth about $22 million to McWhinney.
Council members approved its “implementation agreement” last week, setting the stage for construction to start in December. It was passed without discussion.
Taxpayer advocates often criticize such one-time subsidy deals, saying they create an unfair advantage for politically-connected businesses and rarely pencil out for taxpayers.
“In general we find that taxpayers believe that government should not be in the business of picking winners and losers in the business community,” said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association.
Cities “should concentrate on making the business climate friendly to all, and that’s the way to bring about prosperity. Not picking certain businesses for subsidies, which means that if one business gets” a subsidy, others don’t, Vosburgh added.
City officials, meanwhile, say this deal is a smart investment for taxpayers.
“It’s a return on investment. It would propose to yield about $8 million a year in terms of bed taxes,” said Phan. “So over the period and the lifetime of the water park, I think we will make much more than we will spend out initially.”
As for government staying out of the free market, Phan said that experience didn’t work for the city.
“It was really, bad hotels, seedy hotels that existed there for so long,” said Phan. “And without government getting in there, what you see now as the Marriott, the Sheraton, and the Embassy Suites - that may never have happened if Garden Grove officials didn’t step in to force the issue and make it happen.”
How exactly the city came to that $8 million revenue figure, however, isn’t explained in this week’s staff report, nor the 2010 staff report for the financial deal.
City staff say the estimate is based on a $350 average daily rate for rooms at the hotel, with 70 percent occupancy across a given year.
After the hotel is built, a second phase of the project could route 50 percent of tax revenues from the 200 extra rooms back to the developer, according to city consultant Horwath Hospitality and Leisure.
If the city’s $8 million projection pans out, taxpayers would break even on their investment after eight-and-a-half years.
Asked for a copy of their study on projected revenues, staff pointed to a one-page breakdown of projected hotel revenues, which does not include the projected revenues.
Vosburgh said that at the very least, city leaders should have commissioned a study that explained how they arrived at their revenue projection.
“One would think that their due diligence would be to have some kind of a forecast of the economic impact,” said Vosburgh. “By becoming a bank for the developer, is there any return for the average taxpayer down the line either through better services for the community or lower taxes?”
For most of the $47 million, the city is set to issue bonds and then, to pay off the debt, tap a pot of money set aside for leftover redevelopment projects.
Okereke said the bonds payments will come out of the county’s tax trust fund, where officials are holding all of the property tax increment money that previously went to redevelopment agencies before the state ended them in early 2012.
He also took issue with calling it a subsidy.
“The hotel deal, the way it’s done – we don’t think about that as subsidy. It’s a question of how you structure the deal,” he said.
The finance director said there are normally two ways to go about a hotel deal – either the government gives part of the tax revenue back to the developer, or it directly contributes to the construction costs upfront.
According to city records, the city didn’t conduct an environmental impact study specifically for the project, which would analyze impacts like traffic, noise and construction emissions.
A council resolution states the project falls under the environmental impact reports for the 2002 Redevelopment Plan Amendment and 2008 General Plan Update.
“No subsequent environmental impact report is required for implementation of individual components of the General Plan and/or Redevelopment Plan,” the resolution says of the project.
Vosburgh pointed out that council members across California often award lucrative subsidy deals to their campaign contributors.
In Garden Grove’s case, a quick review of campaign reports shows that the developer contributed at least $8,000 to council campaigns.
McWhinney and its subsidiary gave $5,500 to Mayor Bruce Broadwater’s campaign fund, $1,000 each to Councilman Steve Jones and former Mayor William Dalton, and $500 to Councilman Kris Beard.
And much of the money in those campaigns – at least $15,000 – was transferred between the candidates.
Construction on the hotel is scheduled to start in December, with completion by June 2015.
Pham said that while there are risks, he expects the project to be a success.
“In all investments you never know when the market will go belly-up, but when you do do investments, you hope for the best, and so far based on what you see with the current existing hotels, they made the right call then,” said Phan. “I don’t foresee why it wouldn’t be the right call now.”