Disney promised a luxury hotel and Anaheim offered $267 million in tax breaks — but a growing feud has plans on hold

Walt Disney Co. has put a hold on plans to build a luxury hotel in Disneyland Resort’s shopping district, citing a feud with Anaheim officials over tax subsidies that the Burbank media giant was expecting to get from operating the hotel.

The dispute centers on a $267-million tax break that the Anaheim City Council approved in 2016 for a 700-room hotel — the fourth hotel at the Disneyland Resort and the first high-end property built in 20 years.

But since the tax break was approved, Disney has changed the location of the hotel. The city now says the subsidy applies only to the project as it was proposed at the previous address.

Disney says the project may not be financially viable without the tax break.

“You have given us no other choice than to put construction of the hotel on indefinite hold as the resort reevaluates the economic viability of future hotel development in Anaheim,” according to a letter dated Wednesday from David Ontko, chief counsel for Disneyland Resorts, to Anaheim City Atty. Robert Fabela.

The clash highlights a growing rift between Disneyland Resort and Anaheim, which previously had approved several tax breaks and development projects to benefit the company. But that cozy relationship has since soured, with unions, some elected officials and many residents objecting to financial favors given to a profitable, publicly held company.

Asked to respond to the latest dispute, Disneyland Resort representatives said the resort’s position is made clear in Ontko’s letter.

“Disneyland’s decision to halt development of their fourth hotel is a devastating blow to Anaheim and a direct result of the city’s increasingly hostile actions towards our local economy,” Todd Ament, president of the Anaheim Chamber of Commerce, said in a statement.

But Anaheim Mayor Tom Tait, who has opposed the subsidy for the hotel project, said Disneyland Resort has the option to build the project without a subsidy from the city.

“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.”

The Anaheim City Council is scheduled to discuss the dispute behind closed doors Aug. 28, Fabela said Thursday in a follow-up letter to Disney.

(Swetha Kannan / Los Angeles Times)

The hotel was originally proposed for the site of a parking lot on the north end of Disney’s property, at 1401 Disneyland Drive. But since the hotel project was announced and the 20-year tax break was approved, Disneyland Resort has changed the hotel location to a larger site within Downtown Disney, a shopping district adjacent to the resort’s Disneyland and California Adventure theme parks. The new address, about 1,500 feet south, would be 1601 Disneyland Drive.

The ordinance approved by the Anaheim City Council in July 2016 gave the proposed hotel a 70% break on the city’s transient occupancy tax but specified that the subsidy go to a luxury hotel built at 1401 Disneyland Drive, near the north end of the resort — not for a luxury hotel in the shopping district.

Under the tax break, Anaheim would reimburse the resort for 70% of the transient occupancy tax for 20 years. After 20 years, the city would collect the entire tax, which is 15% of the overnight rate.

When the city approved the break for Disneyland in 2016, it also voted to give similar tax breaks to two other four-diamond hotels: a 634-room hotel on West Katella Avenue and a 580-room hotel on South Harbor Boulevard.

Hotel experts say a luxury hotel adjacent to the popular theme park would be economically viable, considering a surge in travel demand since the end of the recession and growing consumer confidence. But the elimination of $267 million in tax breaks could throw Disney’s overall financial plan for the project into chaos, they say.

“I think they have a lot to look at to see if the project without those tax credits still pencils out,” said Alan X. Reay, president of Atlas Hospitality Group. “It may be that a company like Disney now has to look at do they instead put that money overseas, maybe in [Disneyland] Paris, or somewhere else.”

Fabela, the city attorney, outlined the city’s position in a letter dated Aug. 6 to Ontko, saying the public hearing and the language in the city legislation involving the tax break specifically described the location of the hotel. A hotel in the new location would not qualify for the subsidy, he said.

“Because this proposed site is inconsistent with the site intended in the agreement, it is the city’s position that Disney would not be entitled to the tax rebate were it to move forward under its current hotel construction plan,” Fabela’s letter said.

In addition, Tait said the tax break was adopted after an economic impact study was completed by the city on the project at the original address, the site of a parking lot. The project at the new site will eliminate several existing businesses and require a new economic impact study based on new conditions, he said.

The dispute threatens to delay the scheduled opening of the hotel in 2021.

Disney has yet to break ground on the hotel but has closed several businesses in the shopping district — including the AMC Theatre, Rainforest Cafe, Earl of Sandwich and ESPN Zone — to make way for the hotel.

An Aug. 20 meeting of the city’s Planning Commission was scheduled to consider the final site plan for the proposed hotel. Disneyland Resort does not need further approval from the council to begin construction.

Ontko’s letter said the city’s position that the hotel no longer qualifies for the tax break “has put at risk more than 1,500 construction jobs and 1,000 new permanent jobs, as well as more than $25 million in incremental revenue to the city’s general fund in the hotel’s first five years of operation.”

Ontko also complains in the letter that Anaheim officials knew about the change of address for several months but failed to bring it up earlier.

To resolve the feud, the Anaheim City Council could vote to amend its 2016 tax subsidy ordinance or adopt a new tax break to apply to the hotel at the new location.

But it is unclear whether the council would be willing to take such actions because the makeup of the council changed several months after the subsidy vote, with the election of several new members who have been critical of the tax break.

Councilwoman Kris Murray, who supports the subsidy plan, said the council could — if the majority was in agreement — easily end the dispute by amending the previous ordinance to allow the tax break to move ahead on the new hotel location.

“It’s a political question, not a legal question,” she said.

Anaheim and Disneyland Resort have in the last few months taken a lot of heat over the subsidy vote. A coalition of unions representing resort workers collected enough signatures to place on the November ballot a measure to pay a living wage to the workers at all major hospitality companies — including the resort — that accept a subsidy from the city.

Disneyland Resort and the Anaheim Chamber of Commerce have complained that the measure to raise wages could scare away new development and siphon business taxes needed to pay for city services such as police and fire protection.

[email protected]

To read more about the travel and tourism industries, follow @hugomartin on Twitter.

UPDATES:

4:45 p.m. Aug. 16: This article was updated with information about a city council meeting.

12:35 p.m. Aug. 16: This article was updated with additional details about the subsidy and reaction.

4:30 p.m. Aug. 16: This article was updated with the news that the Anaheim City Council will consider the matter Aug. 28.

This article was originally published at 6:50 p.m. Aug. 15.