Disney pulls the plug on its proposed luxury hotel in Anaheim, citing the loss of a tax break

The Walt Disney Co. has canceled plans to build a 700-room luxury hotel near its Anaheim resort, citing the city’s elimination of a tax rebate agreement that would have saved the media giant $267 million over 20 years.

The cancellation of the hotel — what would have been the fourth at the resort — highlights growing tensions between the Burbank company and the city of Anaheim, once considered a reliable business partner for Disney.

“While this is disappointing for many, the conditions and agreements that stimulated this investment in Anaheim no longer exist and we must therefore adjust our long-term investment strategy,” Disney spokeswoman Lisa Haines said.

The conditions changed in August when the city notified Disney representatives that it was killing an agreement made last year to rebate 70% of the hotel’s transient occupancy tax back to Disney over 20 years — worth about $267 million. The transient occupancy tax is 15% of the overnight rate.

Anaheim officials say Disney was to blame for ending the agreement by changing the location of the proposed hotel after the deal was struck and the economic impact studies were completed.

Disney objected, saying the new location — in the resort shopping district — was only about 1,000 feet from the old one. Disney representatives say they have not decided what to do with the site of the proposed hotel, where several restaurants and shops were closed to make way for the project.

Business leaders and others in Anaheim lamented Disney’s change of plans, saying it will mean the city will lose out on adding hundreds of construction and hospitality jobs and much-needed tax revenues.

“This unfortunate outcome underscores just how important it is for the business community to have good city partners who understand economic development and the consequences of bad public policy,” said Lucy Dunn, president and chief executive of the Orange County Business Council, a business advocacy group.

Mayor Pro Tem Jose Moreno, who has been critical of tax breaks for Disney, said the city had no choice but to end the tax incentive deal for the hotel project when the location changed. He noted that Disney had the opportunity to reapply for the subsidy deal but did not.

Moreno acknowledged that the city has changed its attitude toward Disney and is now asking for more in return for tax benefits to pay for programs that benefit city residents.

“When people say we have changed our posture, we have,” he said. “We are now saying, ‘What about our kids?’”

Councilwoman Kris Murray, who supported the tax break for the Disney hotel, said Anaheim will take a big financial hit from the loss of the luxury hotel and she wants the city to repair its relationship with its biggest employer.

“We need to figure out a way to have a constructive partnership,” she said.

Hotel construction has been strong in California as companies try to take advantage of strong demand for leisure travel.

In Orange County alone, three hotels with 445 rooms opened in the first half of 2018, with nine hotels under construction and another 63 hotel projects in various stages of planning, according to a report by Atlas Hospitality Group. Of the 2,400 hotel rooms being built in Orange County, nearly 1,800 are in Anaheim.

“2017 was a record-breaking year for California hotel development, and as we predicted, 2018 is on pace to eclipse it,” the report said.

Disney’s decision comes amid feuding in Anaheim over a “living wage” initiative that will appear on the Nov. 6 ballot. The measure has split the community into factions who clashed during a lengthy and loud city council meeting Tuesday night.

The initiative — Measure L — was the result of a successful petition drive by unions that represent Disneyland Resort workers. The measure requires hospitality businesses that accept a city subsidy to pay an hourly wage of at least $15 by Jan. 1, with an increase of $1 each year until 2022. Once the hourly salary reaches $18, annual raises would be tied to the cost of living.

When union members began collecting signatures for the initiative this summer, it was clear that the measure applied to the Disneyland Resort because of the 2016 hotel tax rebate agreement and because of another 2016 deal in which the city agreed not to adopt any entertainment taxes for 30 years in exchange for the resort’s promise to invest $1 billion in the site.

But weeks after union leaders submitted more than 20,000 signatures to qualify the initiative for the ballot, the Anaheim City Council notified Disney that its luxury hotel no longer qualified for the tax rebate.

At the request of Disney, the city later revoked both the hotel tax incentive deal and the gate tax agreement. Disney said it made the request to ease tensions in the city, but unions representing Disney workers said the company was trying to avoid being subject to Measure L.

Union leaders say the living wage initiative still applies to the Disneyland Resort because the city approved an agreement in 1996 to issue 40-year bonds to help the resort build a $108-million, six-story parking garage.

Under the deal, the city is paying off the bonds with taxes collected mostly from Disney but also from bed taxes from hotels throughout the city. Meanwhile, Disney collects the parking revenue from the garage — more than $35 million a year. Once the bond is paid off, the city has agreed to transfer ownership of the garage to the resort.

The bond agreement, union leaders say, fits the definition of a tax benefit for the resort, and therefore Measure L applies.

During Tuesday night’s city council meeting, City Atty. Robert Fabela issued his legal opinion that Measure L does not apply to the Disneyland Resort but it does apply to two other hotels under construction in the city and a retail area known as the Anaheim Garden Walk.

“It doesn’t amount to a tax rebate,” he said of the 1996 bond agreement with the resort.

Mayor Pro Tem Moreno disagreed, saying he thinks Measure L does apply to the resort and that he plans to support it.

His comments sparked angry responses from fellow council members Murray and Lucille Kring, who said Measure L would scare off future development around the resort.

“I think we are opening a can of worms,” Kring said. “I think this is going to be a disaster.”

Murray noted that the council had also received a letter from Richard McCracken, an attorney who helped write Measure L, saying that the measure does apply to the Disneyland Resort.

“When government gives a private entity money for its own use, that is usually called a subsidy,” McCracken wrote.

With the legal dispute raging, Councilman Stephen Faessel suggested at the meeting that a lawsuit by union leaders will likely be filed to settle the question. “This will likely see the inside of a courtroom,” he said.

hugo.martin@latimes.com

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UPDATES:

4:30 p.m.: This article was updated with information about the hotel industry.

2:30 p.m.: This article was updated with quotes from city council members Jose Moreno and Kris Murray.

This article was originally published at 12:40 p.m.