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Property tax exemptions may be next battle in subsidy war

November 12, 2014

The next shoe to drop in the legal fight over special tax breaks and subsidies for developers could be over the 100 percent tax exemptions ponied up for high-profile projects such as ASU SkySong in Scottsdale and enjoyed by professional sports teams.

That action could come after the Arizona Supreme Court decides whether a $97 million tax break for the CityNorth mixed-use development in northeast Phoenix is constitutional under state law. A judgment in that case isn’t expected before the end of the year, but those opposed to developer subsidies already are strategizing for future battles.

The first is a lawsuit expected to be filed over government property lease excise taxes, or GPLETs. These funding mechanisms allow government entities that own land to lease it back to private developers and businesses, which then pay lower-than-normal property taxes. The Goldwater Institute and Arizona Sen. Ken Cheuvront, D-Phoenix, said they plan to file suit to do away with GPLETs.

Cheuvront wants to sue to try to stop the tax breaks. Clint Bolick, attorney for the Goldwater Institute, said the conservative think tank also is looking at other tax arrangements to determine whether they are legal.

“We’re just beginning to burrow deeply into GPLETs,” Bolick said. “To the extent that lease rates are below market after tax benefits are taken into consideration, it may represent an illegal subsidy, and also may violate equal protection of the law if similarly situated tenants are paying more in private buildings.”

As that case works its way through the courts, the same skeptics want to go after entities including SkySong, the Arizona Cardinals, the Phoenix Suns and the Arizona Diamondbacks, which pay no property taxes because they lease their facilities from city or county governments.

None of those arrangements are considered GPLETs, though that mechanism has been used extensively for downtown Phoenix developments including the Colliers Center, Arizona Center and Renaissance office towers. The new Cancer Treatment Centers of America hospital in Goodyear also is a GPLET.

Real estate developers and business interests say striking down the CityNorth subsidy, GPLETs or other tax incentives would discourage investments and economic development.

‘Attacks will continue’

Grady Gammage Jr., a partner with Gammage & Burnham PLC, is representing developer Thomas J. Klutznick & Co. in the CityNorth case. He expects the GPLET and property tax battles to be waged on the political front, with restrictions proposed by the Arizona Legislature. He said critics of tax breaks and special incentives will continue to look for ways to bring the issue to the forefront.

“I think the attacks will continue,” he said.

Arizona doesn’t have traditional tax help to spur investments, such as tax-increment financing, so city governments created a variety of incentives and assistance programs, which often are criticized.

Gammage said some projects, such as development around Tempe Town Lake, might not have gotten built without GPLETs or other incentives. He also said getting rid of incentives would hurt Arizona when competing for projects that could go to other states that offer special financing.

Tim Lawless, Arizona Chapter president of NAIOP, a national commercial real estate organization, said property tax incentives need to be on the table for redevelopment projects, especially those in blighted areas and those attracting high-wage jobs. But he addded that such tax breaks should be used judiciously so as not to require higher property taxes on others.

Bolick and Cheuvront argue that special tax arrangements are unfair because they benefit favored businesses or developers.

Never assessed

SkySong sits on land owned by the city of Scottsdale at the former Los Arcos Mall site at McDowell and Scottsdale roads. Scottsdale leases the land to the nonprofit ASU Foundation, but the foundation does not pay property taxes on the 37-acre parcel, according to city spokesman Pat Dodds. He and SkySong representative Tom Evans said ASU’s high-tech park is not a GPLET.

Maricopa County Assessor’s Office data shows the previous owners of the site, including real estate developer Steve Ellman, paid between $52,000 and $189,000 a year in property taxes on the Los Arcos site from 1993 to 2004.

Ellman sold the site to the ASU Foundation in 2005 for $41.5 million. The foundation then sold the land to the city of Scottsdale and leased it back for SkySong. The foundation is the nonprofit fundraising arm of ASU.

SkySong is being developed by the Plaza Cos. and Higgins Development Partners. Its tenants include Ticketmaster, Canon and law firm Squire Sanders & Dempsey LLP.

Ellman had wanted to build an arena for the Phoenix Coyotes on the site and then later add a big-box retail center, both of which likely would have been subject to property taxes. Those plans were rejected.

Don Couvillion, the ASU Foundation’s vice president for real estate, said the foundation has a 99-year lease with Scottsdale for the land, and when that lease ends, the buildings and other facilities will revert to the city. He said if the city or the county assessor ever decided to assess property taxes on SkySong, it would be the ASU Foundation that would pay them.

“We will pay our property tax when it’s assessed,” said Couvillion, adding he’s never had any contact with the assessor regarding SkySong. “We haven’t been assessed.”

Officials at County Assessor Keith Russell’s office did not respond to repeated requests for comment.

Hundreds of thousands in levies

SkySong isn’t alone. The Cardinals, Suns and Diamondbacks all might have to pay property taxes on their facilities — along with new projects going forward — if possible lawsuits challenging special tax breaks are successful.

If SkySong and sports facilities faced property taxes down the road, it would result in levies amounting to hundreds of thousands of dollars a year.

The Cardinals have never paid property taxes since moving to the Valley from St. Louis in 1988. The team’s headquarters and practice facility in Tempe were built by the East Valley city, and tax records show no property taxes ever being paid on that land.

Tempe spokeswoman Nikki Ripley said that’s because the Cardinals’ 15-acre parcel off Hardy Drive near Interstate 10 is owned by the city of Tempe. The Cardinals signed a 25-year lease in 1989. Lease documents obtained by the Phoenix Business Journal show Tempe could charge the Cardinals for some property or other taxes under the lease, but county tax data show no property taxes paid.

The Cardinals play their home games at the state-owned University of Phoenix Stadium, which also is not charged property taxes.

The Cardinals’ front office did not respond to requests for comment.

The D-backs, who play and have their offices at county-owned Chase Field in downtown Phoenix, also don’t pay property taxes, said team spokesman Shaun Rachau. The same goes for the Suns at US Airways Center, which is owned by the city of Phoenix, said team spokeswoman Krystal Temple Heaton.



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