2014: GPLET tax incentive draws developers but may also hurt small businesses

Downtown Devil
Agnel Phillip
Wayne Rainey thinks his property taxes are too high.

As MonOrchid’s owner, he estimated that property taxes are the second or third largest expense associated with running the art gallery. Elsewhere in downtown, large-scale projects have been given a tax incentive that significantly reduces their property taxes in an effort to promote redevelopment. However, Rainey could not get that incentive because of the costs associated with its approval process.

“It’s unfair, competitively, to expect small businesses to supplement the larger ones,” Rainey said. “It’s choosing winners, really.”

Twelve downtown properties have had their taxes reduced through Government Property Lease Excise Tax agreements, which last between 8 and 99 years. Supporters said GPLET helped to spur development, but critics said the incentives are only available to big corporations and now leave other property owners picking up a larger share of the tax burden.

The difference between GPLET payments and normal property taxes is significant, especially considering that the total market value of these properties is more than $1.1 billion or nearly 20 Hyatt Regency Phoenix hotels, according to data from the Maricopa County Assessor’s Office website. Instead of paying a total of more than $36.6 million in property taxes in 2013, some properties, including Renaissance Square and the Collier Center, paid a reduced GPLET rate while others, such as CityScape, paid nothing.

Some GPLET supporters said that while small businesses do need more help, the incentive was crucial for downtown’s redevelopment.

“The projects that got GPLET assistance would not have happened but for GPLET,” said Scott Sumners, deputy economic development director for the city of Phoenix.

Architect John Glenn, who is on the Central City Village Planning Committee, said GPLET was key in drawing developers initially, but that it is no longer as necessary.

“It’s proven to be a good tool to kick-start downtown redevelopment, especially pre-light rail,” Glenn said. “I think it’s just time for a discussion of the evolution of it.”

The foundation for GPLET is a provision in Arizona’s tax code that exempts land owned by governments from property taxes. GPLET allows the city to take over the rights to a piece of land and lease it back to the developer at a significantly reduced rate that replaces the normal property tax.

Unlike normal property taxes, which are based on the land’s value, GPLET rates are based on the size of a property and the buildings on it. For agreements signed before 2010, the GPLET rate will actually decrease over the duration of the lease.

Downtown properties, which are in a “central business district,” do not have to pay these taxes for the first eight years of the lease.

Examples of GPLET properties include office buildings like the One North Central tower, hotels like the Renaissance Hotel, residential complexes like Roosevelt Point and mixed-use properties like CityScape.

Because of the complicated nature of GPLET, small businesses cannot easily get the incentive. The legal fees associated with the process are typically around $100,000 because leases are negotiated on a case-by-case basis, according to Grady Gammage Jr., a land-use lawyer who was involved in two GPLET agreements downtown.

Businesses looking to get a GPLET agreement have to hire a lawyer who understands the law and another consultant who can explain its effects to a bank before they can negotiate with the city.

“I think it’s ironic that the corporations and the investors with the most capital and the most economic strength and capabilities are getting the biggest breaks,” Rainey said.

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Downtown small business owners have seen their property taxes rise in recent years, a trend some attribute to GPLET. However, the greatest impact GPLET has had on property tax rates has little to do with the incentive itself.

A recent legislative change that affected school finance calculations has led to a 20 percent higher primary property tax rate in the Phoenix Elementary School District for the current fiscal year, said Randie Stein, vice president of Stifel, Nicolaus & Company, Inc.

The change, which was passed in 2009 by the Arizona Legislature, made GPLET properties part of the calculation that determines the amount of state aid a school district receives.

Their inclusion raised the total value of the taxable properties in the school district, which reduced the money that the state would provide the schools. The difference was paid by non-GPLET property owners.

The effect of this change on a school district’s tax rate depends on the number and value of GPLET properties in that district. For property owners in school districts with many GPLET properties, like Phoenix Elementary, rates increased significantly. While property tax rates will reduce at the conclusion of GPLET leases, many of them will not end for 20 years or more.

For the current fiscal year, the Phoenix Elementary primary property tax rate was estimated to be 72 cents higher than it would have been prior to the change, Stein said. That means a business’s property valued at $500,000 paid about $700 more in taxes as a direct result of this change.

But supporters said GPLET was instrumental in attracting many of the large projects downtown.

Downtown Phoenix Inc. CEO David Krietor said the cost of land and high commercial property taxes forced Phoenix into using GPLET to encourage development on vacant lots.

“I just don’t think it benefits anybody to have an urban core that is dominated by land speculation and one vacant property after another,” said Krietor, who was involved in many of these development agreements as a former employee of the city.

Unlike other states, Arizona’s tax code does not allow cities to lower property tax rates for an area to encourage growth. As a result, cities were forced to lease out public land to developers on an individual basis to draw big projects, Krietor said.

Billy Shields, a consultant involved in the Freeport McMoRan and Luhrs block GPLET agreements, said small business owners should not criticize GPLET as a tool because they benefited from the growth of downtown. GPLET’s success has, in many ways, led to the success of small businesses, he said.

“You shouldn’t just say, ‘GPLETs are bad for small business and they’re bad public policy,’” said Shields, who also invested in the Luhrs project.

GPLET also allows cities to have control over the location and type of development built. In many cases, cities are able to get a developer to build either mixed-use projects, which are hard to build without incentives, or bigger buildings that increase urban density, said Eric Johnson, city of Phoenix economic development program manager.

“A developer could afford to build four stories,” Johnson said. “But, maybe, with GPLET we can get them to build 10 stories. Or, instead of CityScape just being an office building, it became a mixed-use project.”

The Luhrs block is an example of the positive impact GPLET can have, Shields said. The city stipulated in the development agreement that the Hansji Corp., the developer, had to restore the historic buildings in the block while also building a new Marriott hotel, he said. The money saved as a result of GPLET also allowed Hansji to lease out space in the buildings to local businesses rather than large chains.

Since its creation in 1996, GPLET has changed multiple times, including in 2010 after pressure from groups like the Goldwater Institute.

Among other changes, this reform capped leases at 25 years and raised the rates both at the beginning and over time. However, agreements signed before the reform went into effect were not impacted. For downtown, that meant 10 out of 12 GPLET properties were not affected by the reform.

After the 2010 reform, GPLET has become much less effective, Shields said.

Jennifer Stielow, vice president of the Arizona Tax Research Association, said the changes were necessary, but did not go far enough. The ATRA lobbied for the reforms in 2010 and is in favor of repealing GPLET.

“The only way (GPLET reforms) would go far enough is if we got rid of GPLET altogether and put all those properties on the tax rolls,” Stielow said.

Rainey said GPLET is a slippery slope; once you give an incentive to one business, others will want one as well.

“If you paid the guy next door to build, how come I’m not getting paid to do something here?” Rainey said. “I contributed. I’m doing a lot, right?”

Contact the reporter at aphilip3@asu.edu
http://downtowndevil.com/2014/05/02/58254/phoenix-gplet-development-pro…