tempe property tax
Property Tax

Tempe Property Tax Breaks for 2 Developments Under Scrutiny By Attorney General

(Source: East Valley Tribune): Wayne Schutsky –  The Arizona Attorney General is investigating the city of Tempe in connection with a Tucson area state legislator’s claims that it improperly used the Government Property Lease Excise Tax to benefit two developments.

Republican state Rep. Vince Leach requested that Attorney General Mark Brnovich investigate GPLET benefits the city gave Graduate Hotel, 225 E. Apache Blvd., and the Bank of the West building, 1625 W. Fountainhead Pkwy., claiming they were not entitled to the tax breaks.

GPLET is a development tax incentive established by the state in 1996. It allows developers to temporarily hand over ownership of a property to a local municipality in order to temporarily replace a structure’s property tax burden with an excise tax.

Tempe said the tax incentive for Graduate would turn a once-blighted property into a community asset and that the one for Bank of the West would help it create by June 500 jobs paying an average $75,000 annual salary.

GPLET also allows the city to award an eight-year abatement of that excise tax.

Under statute, Leach and all state legislators have the authority to request an investigation by the Attorney General if they believe a local government has issued an ordinance, regulation or order that conflicts with state law.

The Attorney General is required to complete the investigation within 30 days of the request.

Leach initially had sent a letter to Tempe officials in early December outlining his complaints. They had planned to meet with Leach on Jan. 11 to discuss his concerns prior to the congressman’s request for an investigation.

If found to be in violation of state law, the city faces the loss of state funding.

In a letter to the city last month, Leach asserted that Tempe improperly applied tax rates to both Graduate Hotel and Bank of the West that state law reserves for projects started before June 1, 2010.

Projects that began after that date are subject to higher excise tax rates, according to Arizona statute.

Leach has asked the city to cancel both deals and rewrite them to use the post-2010 GPLET rates.

In development agreements with both projects, Tempe stated that Resolution 2010.76 – passed by the City Council in 2010 – allows the city to grandfather both properties into the old rates.

“As it is allowed to do under state law, the Tempe City Council in 2010 passed a specific Resolution that expressly grandfathered (the Graduate Hotel property) for future use of GPLET,” according to an official statement from the city of Tempe. “This was before the Arizona Legislature had made its latest changes to how GPLETs can be used.”

In part, the statute allows for the lower GPLET rates if a “lease of a government property improvement was entered into before June 1, 2010, or if a development agreement, ordinance or resolution was approved by the governing body of the government lessor before June 1, 2010.”

In his letter to the city, Leach argued that Resolution 2010.76 contains only a generic reference to GPLET and does not include specific language pertaining to either property in question, as required by the Arizona law.

Leach also argued that Tempe failed to consult the Arizona Department of Revenue to determine whether the GPLET agreements complied with the law.

However, Tempe stated that it had sent the required documents to ADOR for the Bank of the West project and had received “a written preliminary determination that the city’s agreement with Bank of the West complies with state law.”

The city added that it had not yet finalized a lease with Graduate Hotel and that it will seek ADOR approval upon execution of a lease.

Leach also singled out Tempe’s treatment of the Graduate Hotel property as a 47-year-old structure because the original certificate of occupancy for the property – then a Howard Johnson hotel – was issued in 1970.

Leach argued that for the purposes of GPLET, the city should mark 2017 as the year for the original certificate of occupancy because that is when Tempe took ownership of the property.

The language in the Arizona statues governing GPLET regarding certificate of occupancy is unclear. The statute makes a reference to “original certificate of occupancy” but does not define what that means.

At issue is the excise tax amount to be levied on the property. The statute governing GPLET calls for the tax amount to scale down over time as the property ages away from its certificate of occupancy.

For example, under the pre-June 2010 rates, a property that is 10 years away from its original certificate of occupancy would owe 80 percent of the original tax rate.

A property that is at least 40 years but less than 50 years removed – such as Graduate Hotel – would owe 20 percent of the original rate.

The excise tax rate is zero for a property that is 50 years removed from its certificate of occupancy.

A land and improvement lease between Tempe and Graduate Tempe Owner LLC stipulated that the hotel would pay an annual administrative fee of $41,945 when the excise tax reaches zero.

This is not the first time Leach has butted heads over the GPLET.

In 2017, he sponsored a GPLET reform bill that passed the State House and Senate with unanimous bipartisan support before being signed by Gov. Doug Ducey last March.

The legislation closed what some lawmakers considered loopholes in the GPLET, including limiting the length of GPLETs from 25 to eight years.

“It ought to be the marketplace that picks winners and losers, not local governments,” Leach said in a press release following the bill’s passage. “By closing loopholes in GPLET, we’ll put an end to these tax giveaways to developers and direct the savings where it’s more needed: K-12 education.”

In its response to Leach’s letter, Tempe stated that neither the Bank of the West nor Graduate Hotel projects will receive property tax abatements under the current deals.

“That’s because there is more than one way in state statute that GPLET is defined – Bank of the West was granted the type of GPLET that does not involve waiving property taxes… Again – as with Bank of the West – The Graduate’s version of a GPLET does not include the abatement of property taxes,” according to the statement.

Rather, both properties will benefit as the amount the projects will pay in excise tax is less than what they would pay in regular property tax.

Additionally, the city argued that both properties will benefit Tempe residents in the long run.

The Graduate Hotel project would turn a once-blighted project into a community asset.

“When a given development comes back on the property tax rolls, it brings in substantially more property taxes than it previously did when the site was a vacant parcel or underdeveloped building…” according to Tempe’s statement.

Meanwhile, the Bank of the West building is slated to bring 500 jobs to Tempe with an average salary of $75,000 by June, according to the development agreement.

Ultimately, Tempe expects the project to bring 1,000 high-paying jobs to the city. The development agreement also includes language to drawback incentives if Bank of the West does not create and maintain those jobs.