City goes all in on business incentives downtown - Inside Tucson Business: News

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Posted: Friday, May 10, 2013 12:00 am | Updated: 8:38 am, Fri May 10, 2013.

The Tucson City Council voted Tuesday to move forward on an incentive deal that when finalized would waive the property taxes for a multi-million dollar downtown development.

The deal, a Government Property Lease Excise Tax Incentive (GPLET), would exempt the developer of the 196-unit downtown student housing development The Cadence from paying property taxes for eight years.

“It’s an investment in the future,” said City Councilman Steve Kozachik.

The Cadence, 350 E. Congress St. at the east Broadway entrance to downtown, stands at the site of a former Greyhound Bus depot. The city purchased the property in 2004 and had been using it as a parking lot.

The property is under development now through a partnership with developer Jim Campbell. Construction and related costs are estimated at $34 million.

The essence of the agreement involves an ownership swap to allow for the property tax abatement. The city would assume ownership of the properties for eight years during which time it would be exempt from property taxes.

The city would take no role in the management or care of the property during the term of the deal, however, rather it would maintain ownership solely for tax purposes.

The benefit to city lies in the increased value of the developed properties that in the long-term would demand more in property taxes. In the short-term, the project would provide jobs and spur sales-tax generating retail activity.

“We’re getting something for an investment of zero,” Kozachik said.

The deal looks to signify the start of a new era for Tucson marked by strengthening the city’s ability to incentivize economic development.

Numerous incentives available

“We are entering a new phase,” said Michael Guymon, vice president of regional development with Tucson Regional Economic Opportunities. “It’s not only more inviting from a business perspective, but it gives the city more tools in its economic development incentives tool box.”

In recent years, city leaders have adopted new several incentive programs to help increase economic development and to begin to shed the perception of Tucson as unfriendly to business. The GPLET program was adopted by the city council in June 2012.

The city has also passed a Housing and Urban Development loan program, now called the Tucson Community Development Loan Fund. The program can be used for gap financing for projects that create jobs for low and moderate income people and seek to eliminate blight.

The council also adopted a primary jobs incentive program, which provides up to 100 percent credit of construction sales tax toward expenses like job training, infrastructure improvements and offsets to impact fees. Waivers of building permits also can be used.

In another matter last year the city approved an overlay district in the Main Gate area west of the University of Arizona campus.

The Main Gate Overlay District was envisioned as a way to promote

transit-oriented development, coupled with development of the Sun Link modern streetcar line going through the area. Transit-oriented development is essentially more urban and walkable mixed-use areas of development. In this case, the overlay plan allows for higher building heights and reduced setbacks.

The city also has a downtown infill incentive district and downtown core infill incentive district.

Officials also have initiated numerous ways to streamline the development process by changing the requirements for certificates of occupancy in already occupied buildings and creating an ombudsman program so developers with ongoing projects don’t have to navigate through multiple points of contact during the permitting and construction processes.

“They’re starting to use some of the tools that have been available across the state for some time,” said Mike Varney, president and CEO of the Tucson Metro Chamber.

While not necessarily prepared to say the city has lost its bad reputation, Varney said the recent changes make for a good start.

“We certainly see it as a positive,” Varney said.

How the deal comes together

Certain criteria would have to be met prior to the city council giving final approval for The Cadence tax abatement deal.

Developers of projects like The Cadence interested in qualifying for GPLET deals have to first undergo an initial screening with city economic development, finance and attorney’s office staff members. If city officials determine the project meets the initial screening criteria, they then forward a proposal to the council for preliminary approval.

Given council approval, the applicant has to pay a $5,000 fee. The city then commissions a financial analysis conducted by an independent analyst.

Following that, the council will review and approve, modify or deny the proposed tax-abatement deal.

In addition, any GPLET arrangement must meet certain requirements established in state law.

For instance, a GPLET has to be located within a designated central business district that lies within a slum or blighted area.

Improvements to the property must increase the property value by at least 100 percent. The economic benefit the government receives from the deal must exceed the benefit to the developer.

Late to the game

“They’re absolutely essential,” said Michael Keith, CEO of Downtown Tucson Partnership.

Keith said public-private partnerships like the GPLET under consideration for The Cadence project provide a needed jumpstart for development in urban core areas. He said developing projects in a dense setting like downtown and the additional requirements that cities often attach to urban projects can add more than 30 percent construction costs.

Those higher costs make attracting development difficult, especially in a place like downtown Tucson that, despite increased interest recently, lacks any critical mass.

“If we’re going to get housing downtown, we’re going to have to have incentives,” Keith said. “We’re far from being in spot that there’s enough interest to not need to have these (incentives) in place any longer.”

While Tucson’s urban revitalization lags well behind many regions, the city’s efforts to incentivize downtown development fall years behind those in the Phoenix area.

“Tucson is late to the party,” Varney said.

He noted that GPLET projects have been used on scores of developments throughout the Phoenix area and other parts of the state for more than a decade.

The Arizona State Legislature enacted the GPLET law in 1996. In the years that followed, the Phoenix area in particular began to utilize the incentives at a rapid pace.

By some accounts, properties with a cumulative value of more than $2 billion throughout the valley have been exempted from property taxes under GPLET agreements.

More deals on the horizon

One reason Tucson hasn’t used GPLET to foster development was that a blighted central business district was never defined. Now that the council has done that, and waited the requisite one year before entering into agreements, more GPLET opportunities likely will arise.

If approved, The Cadence project would mark the second GPLET the city has used to try to stimulate economic development downtown.

Last month, the council approved a tax abatement plan for the One East Broadway project under construction downtown at Broadway and Stone Avenue.

The mixed use project will include office, retail and residential components.

Redevelopment of the former Armory Park Apartments, at 12th Street and Fifth Avenue, is another project awaiting final approval of a tax abatement deal. The team developing the project, a partnership of Peach Properties and Holualoa Companies, say the nearly $9 million redevelopment will include 144 studio and one-bedroom apartments.

Developer Scott Stiteler also has applied for a tax abatement deals for a proposed downtown hotel project and the Rialto Block.

The proposed 130-room hotel would be at Fifth and Toole avenues. Its estimated construction cost is $25.7 million.

Improvements to the Rialto Block, the 500 block of East Congress Street, are expected to exceed $11 million.

Stiteler also has requested the city consider site-specific tax incentives for each property.

A related development across from The Cadence property, the Plaza Centro Retail, has applied for Tucson Community Development Loan Fund financing in addition to the GPLET.

In addition, two primary jobs incentive deals await council approval.

B/E Aerospace, 1851 S. Pantano Road, and American Tire Distributors, planned construction at 6720 S. Alvernon Way, have both applied for incentives.

Combined the two companies would create an estimated 420 new jobs that pay at least $60,000 with the companies covering 75 percent of employee health premiums.

The two jobs incentive deals would be the first for the city since adopting the incentive in August 2011.

Not without critics

Incentive deals, particularly GPLETs, have come under scrutiny.

The Goldwater Institute published a report critical of the practice among Phoenix-area cities in 2010.

The report, titled “Shifting the Burden: Cities Waive Property Taxes for Favored Businesses,” noted that the deals offering potentially unfair advantages to some businesses over others. It said the cumulative effect of GPLETs was to shift the costs of government to residential property owners and owners of commercial properties that weren’t involved in GPLET deals.

At the time, the Goldwater Institute estimated that GPLET properties in downtown Phoenix and Tempe cost those cities more than $31 million per year in lost property tax revenue.

Some of the deals were scheduled to last for up to 50 years.

Such extreme shifting of tax burdens probably won’t happen in Tucson, Guymon said.

“Nowadays, municipalities, counties and the state have become much smarter with how they package these deals,” he said.

For example, the Legislature in 2010 made changes to the GPLET law, reining in the value of benefits a private entity can receive. The duration of the agreements also was limited to eight years.

Cities also demand certain performance standards, Guymon said.

The potential loss of tax revenue hasn’t yet proven an issue in the Tucson GPLET deals.

The Cadence property was previously owned by the city and already exempted from property taxes. The city also owns the proposed hotel site downtown.

The same was true for the Armory Park Apartments, which were originally built for low-income housing and also exempted from taxes.

Only the One East Broadway site was paying property taxes, which it now will be exempted from. The 2012 tax statement for the property showed a total tax bill of $18,716.

“We’re not talking about massive amounts of money,” Guymon said.

Contact reporter Patrick McNamara at pmcnamara@azbiz.com or (520) 295-4259.

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