Item 493/2024
Final
City of Garden Grove
INTER-DEPARTMENT MEMORANDUM
To:
Lisa L. Kim From: Ursula Luna-Reynosa
Dept:
City Manager Dept: Economic Development and
Housing
Date: 11/26/2024
Subject: Consideration of a Restrictive Covenant Agreement between the City of Garden Grove and GWGG, LLC. (Action Item)
OBJECTIVE
For the City Council to hold a public hearing for the consideration of a Restrictive Covenant Agreement ("Agreement") (Attachment B) between the City of Garden Grove ("City") and GWGG, LLC ("Owner").
BACKGROUND
In 2010 the former Redevelopment Agency of the City of Garden Grove entered into the First Amended and Restated Disposition and Development Agreement (“DDA”) with GMXD, LLC, a Colorado Corporation, an affiliate of the Owner (“Owner’s Affiliate”), to cause the Owner’s Affiliate to develop a 603 room waterpark hotel resort in Garden Grove at 12681 Harbor Boulevard (“Waterpark Hotel”). The Owner’s Affiliate entered into a franchise and management agreement with Great Wolf Resorts (“GWR”) dba Great Wolf Lodge Southern California (“GWL So Cal”) to brand and operate the Waterpark Hotel as a Great Wolf Lodge.
The GWL So Cal opened in 2016, and quickly became a significant revenue generator for the City, contributing over $52 million to the general fund through Transient Occupancy Tax (“TOT”) since its opening. To date, 2019, remains the hotel’s best-performing year, after which revenue began to decline. This downturn can be attributed to three key factors:
1. Market Diversion: The opening of the GWL in Manteca diverted business from the Bay Area trade area, historically the third-largest market for GWL So Cal, to the new Manteca location.
2. COVID-19 Pandemic: The COVID-19 pandemic forced the closure and significantly reduced capacity of GWL So Cal for approximately 18 months, resulting in significant revenue losses during that period and a need to utilize capital reserves and an infusion of significant Owner capital for operations.
Item 493/2024
3. Brand Standard Changes: Shortly after the opening of GWL So Cal, GWR implemented changes to its brand standards. These changes provided newer properties, including the Manteca location, with a competitive advantage as they had enhanced attractions and food and beverage amenities.
In response to these challenges, the Owner is proposing a major renovation to enhance the Waterpark Hotel to bring it up to current GWR brand standards and has requested the City participate in a public-private partnership to make such investment feasible. The renovation includes adding new food and beverage dining options, enhanced resort pool and entertainment activities including new “dry attractions”, updated rooms, and updated common facilities throughout the resort. The estimated cost to enhance the Waterpark Hotel is $40 million.
Summary of Improvement Requirements:
1. Scope & Quality : Renovations will adhere to a $40 million budget and adhere to current GWL brand standards (similar to the Great Wolf Lodge in Centralia, WA). Hotel operations will continue with phased closures of certain areas as necessary to complete the improvements.
2. Design & Budget Approval: The Owner will submit final design and capital budget for City review. The City has reasonable approval rights, and approved designs will be considered the "Final Design."
3. Construction Compliance: Construction costs must be no less than 5% of the approved budget and include all elements shown in the Final Design.
4. Post-Construction Standards: The hotel must main tain the quality of facilities throughout the Covenant Consideration period, accounting for normal wear and tear.
DISCUSSION
The City of Garden Grove is committed to fostering job creation and retention within the community. To support this goal, the City has the opportunity to utilize AB 562 (codified as Government Code Section 53083), a statewide economic development tool that enables local jurisdictions to promote economic growth and sustain jobs. Pursuant to Government Code Section 53083, the City Council must hold a noticed public hearing and, prior to the public hearing, provide certain information in written form and avai lable to the public through the Estimated Hard Costs 19,233,000.00$
Estimated Soft Costs 18,643,000.00$
Contingency 2,124,000.00$
Total Estimated Renovation Costs 40,000,000.00$
Estimated Renovation Costs
Item 493/2024
City’s website regarding a proposed economic development subsidy. The requisite notice was published in a newspaper of general circulation and the requisite report (“Subsidy Report”) was posted on the City’s website for a public hearing to be held on November 26, 2024. The Subsidy Report is attached as Attachment C.
In order to induce GWGG, LLC and GWR, a minority owner, to invest $40 million to enhance the Waterpark Hotel, the proposed Agreement includes a provision to share 40% of TOT for a period of 10 years. Based on certain projected Average Daily Rates (“ADRs”), the 40% share is estimated to generate a subsidy of $27.7 million over the 10 year sharing term.
Critical to the analysis to justify sharing 40% of TOT is the expected outcome that if the Waterpark Hotel is not brought up to brand standards it is likely to lose the GWR brand and associated marketing and booking platforms resulting in an independent, limited service hotel with a separate waterpark. Projections and industry data indicate that an independent hotel will generate significantly less revenues than a GWR branded waterpark hotel. Keeping the GWR brand will result in higher ADR’s and occupancy effectively increasing revenue and corresponding TOT for the City. It is estimated that the impact of losing the GWR brand would be as much as a 45% - 50% drop in TOT. Preserving the GWR brand and corresponding revenue is in the best interest of the public to ensure the City maintains resources to provide public services and amenities.
In exchange for an amount equivalent to 40% share of TOT for 10 years, the City and Owner have negotiated a set of covenants designed to protect the TOT generated from the Waterpark Hotel for a period of 15 years. A summary of the covenants is contained in the Subsidy Report (Attachment C). Of particular note, to safeguard the Waterpark Hotel’s market share, the Agreement includes a 200 -mile radius restriction to the benefit of the City, preventing the development of another GWL in nearby cities such as Bakersfield or San Diego until 2041.
If a GWL opened in a nearby city, TOT revenue to the City would be severely impacted.
City Benefits
The Grove District/Anaheim Resort serves as one of Garden Grove's primary economic development engines. The hotel developments within the Grove District collectively generate substantial revenue and provide significant employment opportunities, making them a cornerstone of the City’s economic vitality. Continued development and strategic expans ion within the Grove District are essential to supporting long -term economic sustainability citywide.
This proposed economic development subsidy is vital for sustaining and expanding economic growth in the City. It is expected that the enhanced Waterpark Hotel will attract more tourists, preserve and eventually increase tax revenue, and retain and create new jobs. The proposed renovation of the GWL So Cal is a vital component in ensuring its continued success as a premier family destination and a major re gional tourism asset. By aligning with the City’s broader economic development goals, this project supports a thriving hospitality sector while fostering job creation, enhanced public services, and community growth.
Item 493/2024
Key Benefits of the Project:
Increased Tax Revenue : Renovations will help attract more visitors, boosting Transient Occupancy Tax (TOT) and sales tax revenue to support City services. The renovation is expected to generate $94 million in net TOT revenue over 15 years, significantly exceeding the $27 million subsidy.
Job Creation and Retention: The project will sustain existing jobs and create new employment opportunities across construction, hospitality, and ancillary industries. Enhanced Tourism Appeal: Upgraded amenities will solidify the GWL’s position as a leading family-oriented resort in the region, increasing its competitiveness and drawing visitors from a broader market.
Support for Local Businesses : The increased foot traffic from resort guests will positively impact surrounding businesses in the Grove District and citywide. Improved Infrastructure : Investments in the hotel’s facilities contribute to maintaining high standards in the district, reinforcing its reputation as a world -class destination.
Strengthened Economic Resilience : By prioritizing renovations and long -term operational guarantees, the project aligns with Garden Grove’s strategic goal of fostering a diversified and stable economic base.
This investment extends beyond the revitalization of a single property, offering broa der economic benefits by supporting job retention and catalyzing growth in surrounding retail, dining, and entertainment sectors. It ensures Garden Grove's competitive standing within the Southern California tourism market while strengthening its position as a vibrant hub for family-oriented attractions.
By adopting this forward -looking approach, the City of Garden Grove reaffirms its commitment to economic development, sustainable growth, and community prosperity. The proposed A greement not only secures i mmediate gains but also lays the foundation for enduring success, further solidifying Garden Grove’s reputation as a visionary and economically resilient city.
FINANCIAL IMPACT
The proposed Agreement involves sharing an amount equivalent to 40% of TOT generated for 10 years with annual payments based on the preceding year’s performance. A 15 -year analysis (reflecting 10 years of revenue sharing and a 15-year restrictive covenant ensuring a GWR waterpark hotel remains operational) indicates that the City will receive an estimated $94 million in net TOT, with the Owner receiving approximately $27 million. The City’s revenue share exceeds the Owner assistance by nearly $67 million, supporting the economic development subsidy. Furthermore, the net TOT received by the City under this Agreement is approximately $22 million more than it would be under an independent limited service hotel (see Attachment C for additional analysis).
Item 493/2024
The City will provide payments to GWGG, LLC for 10 years, starting upon construction completion (anticipated to be 3rd quarter of 2026). Therefore, the General Fund impact of the Agreement won’t occur until Fiscal Year 2026 -2027 and for 10 years thereafter. The payment amount to the Owner included in this staff report and the Subsidy Report are based on certain revenue projections. Actual amounts will be based on revenue performance.
RECOMMENDATION
It is recommended that the City Council:
Open the public hearing and receive testimony on the consideration of a Restrictive Covenant Agreement between the City of Garden Grove and GWGG, LLC; and
Adopt the attached Resolution making certain findings, approving the Agreement between the City and Owner, and authorizing the City Manager to execute the Agreement, including minor modifications as appropriate, and any other pertinent documents necessary to effectuate and/or implement the Agreement.
ATTACHMENT(S)
1. Attachment A - Resolution
2. Attachment B - Restrictive Covenant Agreement
3. Attachment C - AB 562 Report