The Orange County Register
Disney Had No Choice but to Pull Back Plans for Anaheim Luxury Hotel
By Jonathan Lansner
Disneyland’s luxury hotel in Anaheim wasn’t a financial no-brainer to start with.
So a last-minute pullback of a controversial city tax break would, at a minimum, obviously force Walt Disney Co. to recalibrate its plans.
Alan Reay, who follows the hotel industry at Atlas Hospitality in Irvine, says the latest twist in Anaheim’s quest to add four-star hotels is no surprise.
“I’d have been shocked if Disney did go forward for now,” Reay says. “They were thrown a huge curveball at the last minute.”
As part of Anaheim’s desire to add a luxury-hotel component to its tourism district, the city and Disney agreed in 2016 that if a four-star hotel was built the company could for 20 years keep 70 percent of the hotel tax it would have otherwise paid.
Last fall, Disney announced fresh plans for the 700-room hotel site, at the western end of Downtown Disney, that included shuttering several high-profile businesses including the ESPN Zone in the process.
The construction tax break, also awarded to another hotel developer Wincombe, became a lightning road for critics of Disneyland and city government alike who thought luxury hotels didn’t need government assistance to be built. And on Aug. 6, Anaheim officially told Disney that because of those new plans the controversial tax subsidy was gone. Please note that the current city council is nowhere as wild about Disneyland as the group that previously approved the hotel deal.
That tax break, estimated to be valued at $267 million, comes from reduced hotel-room taxes generated by the new luxury lodge during its first two decades in operation. That means if the hotel’s never built, city coffers lose $113 million as well over 20 years, plus the chance to collect all hotel taxes thereafter.
The city’s change of heart put Disney — a publicly owned company with huge transparency requirements — in a tough spot, Reay says. So Disney executives had to step back quickly. Imagine a consumer being told just before closing a major purchase that a significant rebate was no longer valid; that shopper would likely walk away, too.
Reay expects Disney’s executives to diligently review the hotel project’s finances and construction plans assuming the tax credits are now gone. They’ll have to weigh those added costs as well if any legal and negotiation options are viable, too.
“Disney may very well say ‘No’, ” Reay says.
That’s because the luxury hotel game is the most difficult niche in the often unpredictable hotel business.
For starters, building a four-star luxury hotel — rooms plus high-end amenities, top-shelf dining and full-service meeting and convention facilities — isn’t cheap. They can cost two times, even three times, the construction expenses of a three-star, limited-service hotel, which is essentially just rooms. Reay guesses Disney could spend up to $1 million per room to build the new hotel.
Sure, luxury hotels in Anaheim could command room rates of at least $500 a night — perhaps twice what three-star hotels can get. But the steep price tags come with costs: higher and more volatile vacancy rates and operating margins — income minus expenses — half of their lower-priced competitors.
Yes, Disney has the luxury of putting its new hotel practically at Disneyland’s front door. “It doesn’t get any better,” Reay says.
Still, there’s plenty of competition. In Orange County alone, three new hotels opened in the first half of the year with 72 more in the works.
“The hotel market is as strong as it ever been in my 20-plus years in the business,” Reay says. “But we did not see developers jumping into Anaheim to build a luxury product without incentives.”
Ah, Disney and Anaheim in another family feud. So what else is new?
But this time, with hundreds of millions of construction dollars at risk and a reconstituted city government talking tough, no quick solution is about the only guarantee that can be made.