City Council reduces rents on certain micro-apartment units in return for tax incentive

The Goldwater Institute is suing the city of Phoenix over the use of a controversial tax incentive on the property behind it. The tax incentive, known as GPLET, was recently changed by the state legislature. (Nathan Thrash/DD)

By Daniel Perle and Kevin Lane

Phoenix City Council voted Wednesday to mandate an affordable housing component as part of an agreement for the use of a tax incentive for a 19-story micro-apartment development near Roosevelt Row. The decision is a small victory for community activists pushing for more workforce housing downtown.

The agreement grants the Amstar/McKinley LLC, developer of Derby Roosevelt Row, a 25-year tax incentive worth an estimated $11.3 million with the condition that 10 of the 211 400-to-500 square foot units be rented out at a lower rate. District 2 Councilman Jim Waring and District 6 Councilman Sal DiCiccio voted against the agreement.

Most of the debate revolved around the affordability of the development, located on the northwest corner of Second and McKinley streets.

Stephen Earl, who addressed the council on behalf of the developer, said rents for the 400-square-foot micro-units in Roosevelt Row Derby would cost a minimum of $1,200.

Downtown Phoenix activist Sean Sweat created a petition last week asking City Council to mandate that the price for five percent of the units be cut in half in order to create more workforce housing in the downtown area.

“What I’ve learned from this petition is that many people think that five percent is too small,” Sweat said. “Someone said that if they want a taxpayer subsidy, 75 percent of the units should be made workforce housing. While that may not work, it tells you what the public sentiment is when it comes to this kind of public service.”

RELATED: Community petitions for affordable housing on micro-apartment project before vote on use of incentive

Amstar/McKinley will benefit from a reduced property tax bill through the use of the tax incentive, known as the Government Property Lease Excise Tax. GPLET agreements are based on a provision in Arizona’s tax code that exempts land owned by governments from property taxes. GPLET allows the city to take over the rights to a piece of land and lease it back to the developer at a significantly reduced rate that replaces the normal property tax.

Unlike normal property taxes, which are based on a property’s value, GPLET rates are based on the size of a property and the buildings on it. For the first eight years after the development is completed, Amstar won’t have to pay any property taxes.

RELATED: GPLET tax incentive draws developers but may also hurt small businesses

Christine Mackay, Phoenix community and economic development director, said the GPLET agreement was sought in this case because of the cost of construction. Amstar needs expensive building materials due to the size of the project, which would drive up the cost of both parking and rent.

Most of the Phoenix residents who spoke voiced their approval of the project, but agreed with Sweat’s position that five percent of the units should be workforce housing.

Earl proposed a compromise between the requests of the residents and developer. Earl said for the first five years the GPLET was in effect, the price of ten of the units in the apartments would be capped at $840.

Bramley Paulin, a local commercial real estate agent, voiced his opposition to the project. Paulin said GPLET agreements shift the burden of the property tax the developer isn’t paying onto the residents in the surrounding area.

“If twelve people go to a restaurant and one person doesn’t pay, somebody has to make up the difference,” Paulin said.

Paulin said there was no public benefit such as a grocery store, preservation of a historic space or even affordable housing in exchange for the use of the GPLET.

A 2014 Downtown Devil report found non-GPLET property owners in downtown had been helping subsidize the discounted tax rates GPLET developments paid because of a change in the formula used to calculate state funding for school districts. According to the revised state law which passed in 2009, GPLET properties are included in a district’s taxable value, potentially reducing the total state assistance provided for districts with many GPLET properties by a significant amount.

The net effect was that property owners paid for the portion of the district’s budget that GPLET properties were not paying.

RELATED: Micro-apartment project may receive property tax incentive

Mackay has previously disputed claims that this GPLET agreement would drive up the property taxes of residents living in the Phoenix Elementary School District. She said the effect on surrounding property owners’ taxes was likely small, based on analysis that her office had done on other developments. She said her office was unable to do a specific analysis of the Derby project on surrounding property owners because of the development’s location.

Mackay said the developer signed an individual contract with the school district agreeing to pay $372,000 over the 25-year agreement. In addition, 73 percent of the excise tax the developer would pay to the city would go to the school district as well.

Mayor Greg Stanton justified use of the GPLET by saying that an agreement must first be reached between the Phoenix Elementary School District and the developer that there be no shortfalls to the district budget as a result.

Stanton said the debate in Phoenix should focus on more affordable housing as opposed to high-end development had changed through the years.

“It wasn’t too many years ago that the concern of the community was that too much of the development was in the affordable category, and we weren’t getting as much market-rate units in our downtown,” Stanton said.

The development’s proposed parking arrangements also drew criticism.

Earl said there will be one parking space for every two micro-apartments, which raised concerns regarding a lack of parking. Amstar/McKinley will pay $30,000 to the City of Phoenix to assist in creating a parking study or solution for downtown parking as part of the agreement.

Downtown Devil staff reporter Agnel Philip contributed to this story.

Editor’s note: Government Property Lease Excise Tax agreements are a complex topic that the Downtown Devil broke down extensively in a previous report. If you’d like to learn more about GPLET you can read the report here.

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