By Brenna Goth| April 17th, 2017
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Phoenix is weighing an estimated $9 million tax break for developers of a massive high-rise project near downtown’s Roosevelt Row, even as a lawsuit over a similar incentive has stalled construction on another residential tower nearby.

For years, Phoenix has used the incentive, known as a government property lease excise tax, to spur development in the urban core. But the practice has come under fire both locally in the courts and through statewide legislation recently signed by Arizona Gov. Doug Ducey.

Under the proposal, three large residential towers of 29 stories, 25 stories and 19 stories would add to Phoenix's skyline at Third and Pierce streets. The buildings also would have street-level commercial and retail space.

The City Council will consider the project April 19.

Meanwhile, work has stopped on a planned 19-story micro-apartment unit tower at Second and McKinley streets after a nearby business sued the city over the $8 million in tax breaks planned for the Derby Roosevelt Row project.

Sidewalks torn out by the developer were later re-poured and reopened because the construction suspension is indefinite, Phoenix Planning and Development Director Alan Stephenson said.

The lawsuit, filed by the Goldwater Institute, argues the city violated several parts of Arizona’s Constitution, including rules requiring equal taxation of equal properties and a clause barring gifts to private interests.

But the lawsuit did not affect Phoenix’s negotiations on the new project proposal, Community and Economic Development Director Christine Mackay said. The tax incentive is necessary to build the types of projects Phoenix leaders envision but that the market doesn't yet support, she said.

"We're creating the downtown we want today," Mackay said.

Tax break for workforce housing, non-profits

The roughly $175 million  project under consideration at Third and Pierce streets is unnamed, but would transform what was most recently a parking lot and credit union into an active downtown hub, according to a proposal submitted to the city. Developer CA Residential declined to comment to The Arizona Republic on the project.

Plans include 612 apartment units, 646 parking spaces and nearly 25,000 square feet of retail and mixed-use space. Clark Street Holdings, LLC, recently purchased the roughly 1.3 acres of land for $6.62 million, according to a press release from JLL, the firm that represented the seller.

The proposed deal would let the developer transfer the land to Phoenix, which doesn't pay property taxes.

The City Council will consider entering into three lease agreements that align with the construction phases of the project. Together, they will save the company about $9 million compared to what would have been paid in property taxes, Mackay said.

Each tower would have an eight-year period without property taxes. The first phase, the 29-story tower, would continue its 20-year lease with an excise tax.

The other two buildings would return to the tax roll. The city would also receive $10,000 a year in lease payments for each tower.

In return, the project will designate 5 percent of units as “workforce housing,” rented at reduced rates. Half of the ground-floor retail space would go rent-free to incubators, merchant “pop-up” spaces, non-profit organizations and artist lofts for two years.

That component will quickly fill the ground floor, Mackay said, and help to grow local businesses.

In its proposal, the developer said market rents in Phoenix “do not support a high-rise development” without support from the city. Mackay agreed, citing costly construction compared to low-rise buildings that are easier to build.

Once the land owners start paying property taxes, the city expects the site to generate nearly 13 times as much revenue than if the developer constructed a more typical four-story apartment complex, she said.

Lawsuit suspends high-rise 'micro-unit' tower 

When weighing the deal, Phoenix should consider the constitutional issues raised in the recent suit against the Derby Roosevelt Row incentives, said Jim Manley, senior attorney for the Goldwater Institute, a conservative watchdog group.

Manley said he wasn’t familiar enough with the new proposal to determine if he saw potential problems, but noted that Phoenix didn’t reference the group's objections to the other project in its public agenda item.

“Just the fact the city is not raising those issues, that’s troubling,” Manley said.

In the Derby Roosevelt Row deal, Phoenix approved a 25-year lease agreement for the 211-unit apartment tower. The developer pitched "micro-units" averaging 400 square feet and renting for $1,300 a month.

The Goldwater Institute filed the complaint March 1 in Maricopa County Superior Court on behalf of Angels Trumpet Ale House and nearby landowners. It targets Derby Roosevelt Row but could impact all government property lease excise tax deals, Manley said.

The complaint argues that surrounding landowners bear the burden of lost revenue when a landowner stops paying property taxes. It says the tax incentive is an “impermissible special law.”

The plaintiffs also are challenging the city classifying the Derby Roosevelt Row's parcel as being in a slum or blighted area. That designation is required to let developers abate an excise tax for eight years.

In Phoenix’s answer to the complaint, the city denied those allegations with little elaboration. It argues the plaintiffs “failed to state a claim on which relief can be granted.”

Representatives of Derby Roosevelt Row team Ascentris and Transwestern declined to comment.

Ducey approves tax-break reforms

Phoenix waited to move forward with the Third and Pierce streets proposal until Ducey signed into law last month reforms to the tax-incentive program, Mackay said. The Goldwater Institute, Arizona Tax Research Association and Councilman Sal DiCiccio were among supporters of House Bill 2213.

City staff was neutral on the final version of the bill, according to a recent meeting agenda.

Now, government agencies are required to maintain a public database of lease agreements. Agencies also are responsible for calculating the excise tax they're owed, instead of depending on the lessee. A 16 percent delinquency interest rate is applied for payments not received on time.

Additionally, the excise tax can only be abated for eight years, and there's extra accountability for leases grandfathered into the current tax rates updated in 2010.

Rep. Vince Leach, who sponsored the bill, said the changes close loopholes in the law. He said in a statement the incentives take tax revenue from school districts and force other taxpayers to make up the difference.

“It ought to be the marketplace that picks winners and losers, not local governments,” he said.

READ MORE:

Phoenix sued over tax break for Roosevelt Row micro apartments

Would you pay $1,300 to rent 400 square feet in downtown Phoenix?

Ducey signs bill to block Phoenix Roosevelt Row district

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