(Source: AZCentral): Jerod MacDonald-Evoy
A tax break that cities use to entice development has led to legal woes in Tempe.
Basically, Tempe became the owner of a luxury apartment complexalong Tempe Town Lake this year to give the developer, OliverMcMillan, a break on its property taxes.
However, nine builders claim San Diego-based OliverMcMillan hasn’t paid them, and they have placed liens against the property.
Since Tempe is the property owner, AP Southwest LLC and other contractors filed a notice of claim, which is often a precursor to a lawsuit, with the city to obtain the $5.6 million they claim they are owed.
“It would be funny if it wasn’t so horrible,” said Jim Manley, a senior attorney at the Goldwater Institute, which has long opposed these types of tax breaks.
An OliverMcMillan spokesperson was more dismissive of the predicament it puts Tempe in, saying the company is working with the contractors to resolve the issue. “The city is only involved as a technicality and has no financial obligation in the matter,” according to a written statement from the company.
In 1996, the Arizona Legislature passed Government Property Lease Excise Tax, or GPLET, to allow cities, towns, counties and county stadium districts to lease property they own to private parties and collect a lease excise tax since property taxes aren’t levied against government-owned property.
It is a way for cities to let developers pay lease excise taxes instead of pricier property taxes. To enter a GPLET agreement, the developer transfers ownershipof the property to the government, making the city the landlord and the developer the tenant.
As an additional tax break, the city can even forgo making the developer pay the lease excise tax for up to eight years if the property meets certain criteria. Such was the case for the OliverMcMillan/Tempe agreement.
Across the state, nearly half of 268 GPLET properties did not pay the lease excise taxes, according to a 2015 Arizona Auditor General’s Office report. In some cases, that was because a non-profit was leasing the government property. In others, it was because the building was in a blighted area or some other criteria for forgoing tax collections.
At the opposite end, Chandler has just two GPLET properties and both pay lease excise taxes; that brought in nearly $157,000 in 2016.
Phoenix has 110 GPLET properties and 62 did not pay the lease excise tax.
Tax breaks under fire
GPLET has faced legal challenges and heavy scrutiny from groups such as the Goldwater Institute.
Earlier this year, the Goldwater Institute filed a lawsuit claiming Phoenix’s use of GPLET to bring a 19-story “micro-unit” apartment tower to Second and McKinley streets is a violation of the Arizona Constitution’s gift clause, which restricts cities from subsidizing private business unless there is a comparable public benefit in return. The case is still moving through the courts.
“It’s a shell game to avoid property taxes,” Manley said. “It ends up costing everybody more.”
Goldwater’s aim is to have GPLET extensively reformed or repealed. It has seen some success.
Goldwater helped craft reforms that the Legislature passed and Gov. Doug Ducey signed into law this spring. The legislation reduced the term of GPLETs from 25 years to eight years, clarified how GPLET money is collected and who collects it, and worked to ensure better reporting of the collections.
The legislation followed the 2015 state auditor general report that outlined problems with GPLET properties.
The auditors randomly sampled a dozen GPLET leases and found $236,119 was not collected and disbursed from properties that had no abatement. Auditors found that many city and county officials didn’t understand GPLET laws and requirements.
Tempe situation may be a first
The Tempe notice of claim may mark the first time a city has been held responsible in this manner due to a GPLET agreement.
“I’ve never heard of this happening before,” said Grady Gammage Jr. of Gammage & Burnham law firm. “It strikes me as a fairly unusual circumstance.”
Bruce May, an attorney at Jennings, Strouss & Salmon who has worked with GPLET, said he doesn’t believe Tempe can be held accountable for OliverMcMillan’s alleged lack of payments. Neither May nor Gammage represents Tempe on this matter.
The city’s lease with OliverMcMillan notes the developer is held liable for any expenses in connection with ownership of the property.
“This is someone grasping at straws,” May said of the claim against the city.
When Tempe entered into its GPLET agreement with OliverMcMillan on April 10, one lawsuit had already been filed in Maricopa County Superior Court and several liens had been filed against the property.
Tempe spokeswoman Nikki Ripley would not address whether city officials had knowledge of the liens before entering the agreement, citing it as an ongoing legal matter.
GPLET agreements in Tempe are crafted by the community development team and reviewed by the city attorney before going to the Tempe City Council for approval. The GPLET agreements are executed once the project is built. In this case, the council singed off on the deal in 2013, and the mayor and city attorney signed the finalized agreement this past April.
A lack of incentives
Despite critics, the GPLET tax breaks have many supporters who see it as Arizona’s only way to compete.
May and Gammage say GPLET is one of the few tool cities have to create incentives for development.
“Arizona is pretty limited on our ability to incentivize development,” May said.
“You would not need GPLET if we had lower commercial tax rates,” Gammage said.
States such as Texas don’t use GPLET but instead set aside funds so they can “write checks” to companies moving to the state. However, this type of incentive would likely violate the Arizona Constitution, May said.
As for the Goldwater Institute, it sees GPLET as being just as much of a violation of the gift clause.
“The absolute nutshell of it is that the Arizona Constitution prohibits government subsidies,” Manley said. “The idea you need GPLET for development is false.”
Gammage isn’t so convinced.
“Would we have gotten all this redevelopment if we didn’t have GPLET? We really don’t know,” he said.
What’s next for Tempe
Tempe sent a letter to OliverMcMillan in May saying the city will take no action on the claim and encouraging the developer to handle the situation.
“Please understand that this very serious matter requires your immediate attention,” the letter from the City Attorney’s Office reads.
Although Tempe officials will not respond to the notice of claim, lawyers for AP Southwest could still move forward with a lawsuit against the city.