The Shocking Truth About the New Disneyland Resort
How much money is $267 million? It’s the fourth quarter revenue of Southwestern Energy, the amount of revenue the Backstreet Boys earned during their most successful year, the projected total of Neymar’s current football contract, and Britney Spear’s estimated net worth. In other words, it’s an almost incomprehensible amount of cash.
$267 million is also the amount that The Walt Disney Company stands to lose unless they can resolve their surprising skirmish with the city of Anaheim’s City Council. You’re probably wondering what’s going on, although you really don’t care about the specifics, just that Disneyland builds a new hotel. Alas, it’s a complex situation with a great deal of nuance. Here’s what’s going on with the new Disneyland resort at Downtown Disney.
What Just Happened?
In poker, bluffing is one of those skills that everyone admires in a player. When you have terrible cards but convince someone else that your hand is a winner, people gaze in awe. Yes, bluffing is great right up until you get called.
Currently, the city of Anaheim’s political leaders are playing a game of poker (or Chicken?) with Disney. One group is clearly bluffing. The other holds the winning cards. I’m honestly not sure which is which, though.
Here’s what we know. In 2016, Anaheim’s City Council voted to approve a massive tax credit for Disney development. The amount in question was $267 million. While cynics who preach against governmental overreach lash out at deals like this one, the council board had good reason.
Disney promised to create 1,500 temporary construction jobs for the project. Once the hotel became operational, they planned another 1,000 permanent jobs for Anaheim residents. The resort itself would become a revenue stream that Disney projected would add $25 million in incremental income to the city’s coffers. The estimate the corporation provided was for a five-year period, giving the new property expected revenue of $5 million annually for Anaheim’s general fund.
You should already appreciate the divisive nature of this development. At $5 million a year, this hotel could operate for 50 years without ever turning a profit on a $267 million tax credit from the city. The key is how to evaluate those 2,500 temporary and permanent jobs, a subject that economists fight to the death to settle.
But the Deal Was Done, Right?
Yes, in 2016, the council voted to authorize this massive tax credit. Disney’s always maintained a strong working relationship with local governments. Many historians feel that nobody would know about the city of Anaheim were it not for Walt Disney, and the same is true of Orlando, too. These were undeveloped areas whose fortunes changed when Disney built theme parks there.
Few elected officials want to butt heads with a company with the positive public relations mystique of Disney. Anaheim officials ceded to the corporation’s will, believing that the tax credit was for the greater good. There was only one sticking point, which we’ll discuss in a moment.
With the agreement in place, the Disney Parks Blog proudly announced the new Disneyland resort last October. Here is part of the description:
“The stunning 700-room hotel will feature a sophisticated design and be a game-changer for Anaheim, creating a dynamic dining, entertainment and hotel experience for resort visitors and local residents. Extensive landscaping and water elements will create a resort oasis, showcasing nature on every level of the hotel. The hotel’s location embraces the iconic Disneyland Monorail with a dedicated platform inside the hotel for direct transport into Disneyland park.”
Disney also revealed that this resort would feature gardens and landscaped walkways that served a second purpose. They would link the new hotel with the other three at Disneyland Resort, giving them a sorely needed connectivity. Just as importantly, the 700 new rooms would deliver some much-needed inventory to Disney at the Happiest Place on Earth.
With only three current hotels, the company desperately needs more options here. They hadn’t added a new hotel in the area since Disney’s Grand Californian Resort & Spa in 2001. The new resort is a no-brainer.
Hasn’t Disney Already Started Working on This Hotel?
One of the other important tidbits involved Downtown Disney. This new property would provide breathtaking views of the entertainment district below it. In order to create these views, Disney would have to shut down some stores and restaurants.
Downtown Disney opened in 2001, and several popular locations have anchored it over the past 17 years. Some favorites had to go to create the requisite space for the new hotel, though. Earlier this year, Disney closed ESPN Zone, AMC 12 Theatres, Rainforest Café, Alamo Rent-a-Car, Earl of Sandwich, and a Starbucks to make room for the Downtown Disney hotel.
In this way, Disney is pot-committed toward the new development. They’re losing out on all of the revenue that these businesses would have earned. With them no longer in operation, construction must progress on another revenue-generating business in the same space. That business is supposed to be the new Downtown Disney hotel.
On August 15th, 2018, the OC Register scooped everyone with its announcement that Disney had stopped their construction. They reported that the project is “on hold indefinitely after Disney and the city could not agree over the terms of the development.” Disney chose to stop all forward momentum on the project, at least until they received clarity on the tax credit. Importantly, they have not broken ground on the next hotel yet.
Wait, Didn’t They Already Agree to Terms on the Development?
The devil’s in the details here. Disney’s stuck with some nitpicky fine print that has really screwed them. They initially listed their construction at 1401 Disneyland Drive. That’s the request that the city council agreed to give the giant tax incentive.
During development, park planners realized that they could better achieve their goals by building the new resort at 1601 Disneyland Drive. This location is 1,500 feet south of the other space. That’s 0.28 miles apart. Amazingly, the council has the power to renege on the entire tax incentive since it’s a (very slightly) different construction location. Stuff like this is why nobody wants to deal with bureaucrats.
The city council could update the agreement to reflect the two-block change in construction sites. They’re not willing to do that, though. The explanation involves the sticking point I mentioned earlier. Disney earned a vote of approval from the 2016 city council. The members of this group are up for re-election from time to time, same as any other elected official.
In some circles, the tax credit for Disney wasn’t popular. A few people ran for city council in Anaheim, and their primary platform was to oppose this agreement. Some of them got elected, turning previous ‘yes’ votes into ‘no’ votes. If the city council still had the same composition, Disney could easily reach an agreement on the new build site. With strong opponents on the council, they’ve reached a standstill with these negotiations.
Frankly, Disney hasn’t helped itself with a couple of local labor battles in the area. Their popularity in Anaheim isn’t as high as one would expect for a company that once turned orange groves into a tourist mecca. Even Anaheim’s mayor, Tom Tait, has demonstrated a bit of political expediency by opposing the tax credit. His quote reveals the precise nature of the stalemate:
“It’s a matter of law, and legally the city cannot pay the subsidy because it’s a fundamentally different project,” he said. “If Disney wants to build a luxury hotel, they should build it with their own money.”
Maybe Tait is bluffing. Maybe Tait holds the winning cards. It’s impossible to say from the outside. What’s clear is that he’s correct with his wording, at least from a legal perspective. Disney doesn’t have an agreement to receive a tax incentive for their build at 1601 Disneyland Drive. It’s a problem.
What Happens Now?
August 28th is the next crucial date. Disney officials will meet behind closed doors with Anaheim city officials. The cynical among us would believe that this is when all the bribes get handed out. The realists would maintain that everyone involved with this meeting has incentive to protect the best interests of the city of Anaheim. A new Disney resort in the Downtown Disney area is most assuredly a profitable venture.
Corporate executives and city officials don’t have to resolve anything in August, though. Since Disney hasn’t broken ground yet, they’re not under duress to force the issue. They’re losing money on the opportunity cost of the closed businesses, of course, but that’s small potatoes compared to $267 million.
If push comes to shove, they could wait until the 2020 Anaheim city council elections and attempt to stack the board with their own candidates. The only sticking point at the moment is that Disney promised this hotel would open in 2021. With Star Wars Land scheduled for 2019, hotel inventory in the area will be at a premium. The corporation would love to have those rooms ahead of schedule, not long after the projected date.
For this reason, I view a resolution as likely over the next few weeks. Should that fail to transpire, however, the Downtown Disney hotel could get mothballed for a while. We should have a better idea of the situation next week. Root for an equitable solution. Disneyland really needs that new hotel.